Essex Property Trust Inc (ESS) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2006 Essex Property Trust earnings conference call. My name is Sarah and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. Keith Guericke, CEO. Please proceed, sir.

Welcome to our first quarter earnings call.

This morning, we will be making some comments in the call which are not historical facts such as our expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements which involve risks and uncertainties 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 to you review them.

Joining me on today's call are Mike Schall, our COO, Mike Dance, our CFO, and John H. Joining me on today's call are Mike Schall, our COO, Mike Dance, our CFO, and John Eudy, who is EVP of Development. Last night we reported another strong quarter of FFO of $1.13 per share for the quarter the portfolio grew revenue at 5.4% greater than the same quarter in '05, and 1.3% on a sequential basis.

Just briefly, on our Web site you are going to find our expectations for market ramp performance for 2006, which has been updated so please look at it. Also on the Web site is a schedule titled New Residential Supply which includes total residential permit activity for the larger US metros, as well as information on median home prices and affordability as compared to our Essex markets. To get those details, go to our Web site under analyst resources.

Talking about our markets now a little bit, our outlook on our markets is based on continued strong GDP growth and improved job growth at the national level. The improvement in the national economy has translated directly into our markets. The industries surveyed indicated our markets added 185,000 jobs over 1.5% as of December, '05. Recent data through March shows year over year growth of 230,000 jobs, or 1.9%. Unemployment in our markets continue to fall. Household survey revealed last quarter an unemployment rate of 4.7% in our markets down from 5.4 last year. During this period the labor force grew 1.1%. Much of this improvement has come from northern California and the Pacific Northwest.

Let me touch each of the markets now. In Seattle, we continue to see strong job growth. Year over year growth in industry jobs was 52,000 jobs through December, '05. In March it had increased to 58,000, or 4.3%. This growth was helped by 7,000 new Boeing jobs plus an acceleration of hiring at Microsoft. New supply forecasts for 2006 remains low at 11,000 single-family and 2300 multi-family homes. That includes condos, for a total supply of 1.2%. The ratio of job growth to supply for this market is the highest in the nation.

We have increased our Seattle forecast. We now expect market occupancy to increase to 95.5%, that's a 25 basis point increase, and effective ramp growth of 6%, which is a 200 basis point increase. In northern California, we've seen year over year job growth of 30,000 jobs through December of '05. As of March, that had increased to 43,000 jobs, or 1.5%. The improvement has occurred across all three MSAs.

The unemployment rate for first quarter '06 was 4.5%. Job growth now exceeds new apply. The forecast supply for the region is 10,000 single-family and 7,000 multi-family permits, again includes condos, for a total supply of, increased supply of 0.9% of the existing stock. These markets -- also we've increased expectations. We are expecting occupancies to actually remain in the 95.5 to 96% depending on the sub market but we've increased effective rent growth forecast in San Francisco from 4.5% to 6%. In Oakland, from 3.5% to 5%. And we are maintaining our expectation of 4% effective rent growth in San Jose.

Northern California still has room for considerable growth. The public tech sector continues to show strong growth in profits. There remains significant commercial space to support new jobs. The combined MSAs have 34.3 million square feet of office space, 30.1 million square feet of R&D space and 35.7 million square feet of industrial space available. Given that, we don't anticipate a job explosion like we saw in the late 90s.

Going to Southern California, year over year growth in industry jobs was 75,000 through December of '05. As of March that had increased to 102,000, or 1.5%. The improvement was strongest in LA and San Diego counties, the unemployment rate for the region was 4.6%, forecast supply for the region is 26,000 single-family units and 19,000 multi-family units which accounts for 0.8% of existing stock. We are maintaining our expectations for rent growth in this region at the 3 to 4.5% range depending on the sub market.

Just an update on cap rates from an acquisition standpoint. In Southern California, I think the range is somewhere between 4.75 and 5.25. Northern California continue to be very aggressive at 4.25 to 5% and Seattle is, I think, fairly consistent with numbers we talked about in the past, 4.5% to 5. Given the aggressive cap rates on the acquisition side, we are seeing development cap rates make a lot more sense today. On today's rents and today's expenses, again trying to keep apples-to-apples, we are seeing cap rates on developments in the 6 to 6.5% range. And if you compare that to the acquisition cap rates, we think that the risk premium is there and to be more aggressive on the development side. If you compare a 6.25 cap rate on a development today versus a 5 cap rate on acquisition, that represents a 25% premium. So clearly there is a development premium there.

Starting with this quarter's supplement package we are expanding the detail on our development pipeline to be more consistent with our peers' reporting. The pipeline has, I guess the point I would want to make sure is this pipeline has been building for the last two or three years. The only thing that has changed is the amount of information we are disclosing. Given that, I have asked John Eudy, who runs our development group to join the call today to give color on what we are seeing in the market as well as how we underwrite our projects.

I will now turn the call over to John.

Thank you, Keith. For the last 20 years, development has been a significant part of our strategy. Development yields produce an attractive external growth within our targeted supply constrained markets. The accretive spread on development yields is significant and worth the inherent risks. Our job is to mitigate the risk and measure to narrow the investment exposure to a minimum until the date we have secured entitlements and construction start date is imminent. We manage our exposure very carefully to market changes. As always, we are investors first and developers second.

In modeling current economic cap rates to the targeted stabilization date, we use an average of 5% growth on rents, 3% on operating expenses, and 10% on construction costs. These assumptions drive our stabilized yields to the 7.25 to 7.75% range. I will expand on the issue of rising construction costs later in my comments. Also in our supply constraint markets will also create better results in our core average income growth and lower average core operating expenses in the future. With the aging rental market in general, the strengthening national and regional economic outlook and the affordability gap widening for homeownership all bode well for rental development.

Our objective is to build communities in true West Coast markets, focusing on the San Francisco Bay Area, Seattle metro, Southern California urban markets, where rents are steadily increasing reason at historical lows when it come to the alternative cost of homeownership. We don't go to outlying areas for development like the Inland Empire, Sacramento, Sacramento valley or outs of Seattle metro area to capture an additional 100 to 150 basis points in yield which would be inconsistent with our supply constrained market strategy and would produce misleading yields mixing supply constrained markets with nonsupply constraint markets.

Over the long run, superior growth rates always come from supply constrained markets and while an anticipated going-in better yield may be short term attractive, we think it is a slippery long-term slope. Currently our development and free development pipeline is $678 million for a total of 2523 units. Of this amount, 154 million is in three projects totaling 551 units which are in active development. The balance, 523 million, totaling 1,972 unions are in free development.

Our definition of development pipeline is limited to deals where we have closed on the land and have secured entitlements and are either under construction or in the final working drawing stage to pull building permits. Free development projects on the other hand, are deals where we control the lands and are in the process of getting our entitlements.

Simplistically, predevelopment deals give us the option to expand our pipeline in the future while containing our development risk to a bare minimum, until we obtained the entitlements and are ready to start construction. The predevelopment time line from the inception of going to contract until contract commences is usually between 18 and 36 months give or take depending upon the circumstances of specific transactions. Our current pipeline has been in the works for the last 24 to 36 months. You can find the details of our pipeline in our disclosure schedules and page S9 of our financial supplemental package.

A concern we and all of our competitors have had recently is the recent eighteen-month spike in construction material and labor costs, producing a gross increase between 20 and 35% on the gross depending upon which type of construction and the specific exact location. We have factored these increases into our numbers. The magnitude and unprecedented nature of the increases surprised everyone in our business and was the result of the worldwide commodity price increases for raw materials and more localized increases due to heated demands for qualified labor resulting from the bulge in for sale housing inventory starts.

We do see a slow down in starts in for sale permits with rising interest rates in the affordability issues in general. We have also seen a slow down in raw material costs acceleration of the last 6 months. The spike may be waning. However, with the recent dramatic increases in oil and we know that cost for materials are related to energy costs, we fully expect to see that trickle down into our materials costs soon. In any event, we are projecting an annual 10% increase in construction costs to the date we start construction.

I would now like to turn this over to Mike Schall, our COO.

Thanks, John. Welcome everyone. Thank you for joining us this morning. I wanted to start by making a couple of broad comments on our overall results and make some more specific comments later on about each major market that we are invested in. As you know, as indicated in the press release, revenue growth was 5.4% year over year and 1.3% sequentially. These results included declines in occupancy of 0.1% year over year and 0.6% in the sequential results.

There were two specific factors that influenced these results. First we continued our transition from an occupancy based management approach to an approach that maximizes rents as opposed to occupancy. The impact of this approach was apparent in the quarter as we no longer have the highest occupancy among the peer group than we had the previous year. In addition, unit turns in Q1 are managed to be light relative to the summer months providing us with fewer opportunities to book the market rent growth. We believe that the merits of our maximized rent approach will become apparent in the next several quarters.

Second, we accelerated the pace of rehab work on properties that do not satisfy our criteria for being removed from the same property pool. There are many examples of this, but the largest are Wimbledon Woods project in northern California, Windsor Ridge, in northern California, Woodland and Foothill in Seattle, and three properties in southern California, Cochran, Park Place and Harstow. Turning to the method for the revenue growth piece, the other impact of revenue growth was show in our loss-of-lease, which was shown on page S7 of the supplement, again we haven't talked about loss of lease for some time but once again it's starting to become a very large number.

For those of you who haven't followed our discussion on this in the past, we define loss of lease as the difference between market rents and schedule of our in place rents and we ignore concessions in that calculation. Overall loss to lease increased 18% during the quarter to 19 million, or 5.4% of rental income versus 14.5 million, 4.6% of rental income as of December, 2005. The largest increase in loss of lease was the northern California, which increased 32% from 4.7% to 6.2% of rental income.

On to occupancy, updated as of last Monday. Physical occupancy for the stabilized portfolio was 96.7%, which was, which ranged from a low of 95.7 in Portland to a high of 97.7 in Santa Clara. Again, as of last Monday, our net availability was 4.5% and the weakest on that, in that range was San Diego, 6.7%, the strongest part of our portfolio was Seattle at 2.2%.

Now I would like to make some specific comments as to each major region of our portfolio. Starting in the Pacific Northwest, traffic data, Seattle traffic was up sequentially 42% due to the seasonal declines that we typically experience in Q4. Year over year traffic was down 20%, actually you will see market by year over year traffic is for the most part down down. We attribute that to reduced concessions, more rental growth and less home buying activity.

Anyway I will go through the statistics real fast, in Portland, traffic was up 23% sequentially and 3% up year over year. On May 1sy, physical occupancy in Seattle was 97.3, net availability of 2.3%. Portland's occupancy was 95.7, net availability of 5.1%. Key concern in the Northwest has been the level of home purchases and its impact on apartment operations. Home purchase activity for the quarter represented 19% of our move outs in Seattle compared to 25% a year ago in Portland, 24% of our move outs were to buy homes versus 25% a year ago.

The strongest sub market in the Seattle MSA is downtown, followed by the east side near Microsoft, and then north of Seattle near Everett. Everett is the home to Boeing's wide body plant. South of Seattle, including the city of Kent and southern Renton are still in a recovery mode.

In northern California traffic was up 31% sequentially, down 2.1% year over year. Move out activity attributable to home purchases accounted for 12% of our move outs for the quarter versus 15% a year ago. Physical occupancy and net availability as of last Monday were 97.5% and 4.4% in the San Francisco MSA San Francisco MSA consists of Marin, San Francisco, and San Mateo counties. In the east bay, which is Alameda, Conta Costa counties occupancy and net availability were 96.6 and 4% respectively. And finally, in Santa Clara county occupancy was 97.7% and net availability was 4.4%.

And then finally turning to Southern California, again traffic in LA Ventura was up sequentially 20%, down 5.3% year over year. Orange County, 25% sequentially and down 6.8% year over year. And finally San Diego, traffic was up 22% sequentially and 5% from a year ago. Physical occupancy as of last Monday in the LA Ventura market was 96.1%, net availability up 5.6%, Orange County occupancy at 96.6 and net availability of 4.2, and finally San Diego, occupancy 95.5%, net availability, 6.7%.

Move out activity in Southern California related to home purchases, LA Ventura was 11.6% for the quarter compared to 15% a year ago. Move out activity for Orange County was 14% of move outs versus 19% a year ago, and finally in San Diego 8% versus 9% a year ago. In Southern California the strongest markets continue to be, are included downtown LA, the tri-cities. In coastal Orange and LA County, although there are some pockets of softness, most notably around Playa Vista in LA County, which we believe is short term in nature.

San Diego has continued to have troop deployments affecting occupancy, and the overall strength of the rental market. Although our overall military resident base has not changed significantly in the last quarter. And finally, Ventura county, where we have a significant concentration, is just generally a step behind the LA and Orange County in terms of its overall strength. So overall, everything I think looks good up and down the coast. And I think will you see that strength continues to build as a momentum business. And as the quarters continuing to buy I think you will continue to see a strengthening results on our portfolio.

Now I would like to turn the call over to Mike Dance. Thank you.

Thanks, Mike.

Today I will briefly discuss the first quarter results and the revised Funds from Operations guidance for 2006. Funds from operation for the quarter totaled $28.9 million, or $1.13 per diluted share. After adjusting for non-recurring items, FFO increased by $0.05 per diluted share over the same quarter last year.

FFO guidance for 2006 has been revised to $4.75 to $4.87 per diluted share, compared to our original guidance of $4.65 to $4.85 per diluted share. The revised upward guidance reflects the strong momentum in rental income growth achieved in the San Francisco Bay area and the Pacific Northwest. Year over year same property net operating income increased by approximately $2.4 million. The growth in year over year net operating income was driven by the increase of same properties scheduled rents of approximately $3.2 million and over $400,000 in reduced concessions. As Mike mentioned in his comments, the impact on rent increases has increased our vacancies which reduced year over year rental income by $150,000. The revised 2006 guidance assumes same property year over year revenue growth will continue at 5.5% for the next three quarters.

The same property year over year operating expenses increased 5.8%. This increase was primarily caused by improvements to our estimation of accrued utility expenses. The change in estimate resulted in significantly higher first quarter utility expenses as a portion of the 2006 expense includes utility invoices related to 2005. This increase in property expenses is not expected to have an impact on year over year same property operating expenses in future quarters. The increased utility expense could also be partially explained by a reclassification in our financial statements for the resident reimbursement of their utility expense also known as [RUs]. Historically, RUs has been presented in our financial statement as a reduction to utility expenses but to be comparing to our REIT pairs, we have now reflected utility reimbursements in rental income.

The revised 2006 guidance assumes a 4% increase for the same property operating expenses for the remainder of the year. Our current exposure to LIBOR based variable rate debt is 6% of our total debt. The remaining variable debt of $186 million relates to tax exempt bonds and historically interest rates on this debt is less sensitive to changes in short term rates. On the fixed rate debt we have now hedged over 50% of the maturities through 2010. With ten-year forward starting interest rates swaps for amounts totaling $225 million. These derivatives qualify for hedge accounting so that the intrinsic value of approximately $7 million as of March 31, 2006 is not included in our Funds from Operations.

The revised 2006 guidance for non-recurring FFO is now at $7.1 million as a result of the $700,000 net gain from the sale oF Town and Country stock. The remaining 6.4 million in non-recurring FFO in our 2006 guidance includes the for sale projects reflected in our supplemental schedule S9 Included in the northern California region for sale projects are the townhomes in Tracey California, which are currently under construction and the East Ridge Mezzanine loan. The East Ridge Mezzanine loan shares 33% of the net proceeds of the condo conversion in San Ramon, California.

In the northwest region, we have added Peregrine Point to the development schedule as we have recently started the condo conversion of this 66 unit asset located in Issaquah, Washington. We are using the redevelopment resources in our Bellevue office to oversee the unit upgrade at Peregrine Point and we have outsourced the marketing of the condos to a third party. Other opportunities to generate non-recurring FFO are progressing as expected. For sale projects should begin to generate FFO in the second half of 2006.

That concludes my remarks. I will now turn the call back to the operator for any questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Brian Legg with Millennium Partners. Please proceed.

Mike, I appreciate your discussion on May 1st occupancy rates. Were you talk about what they were at the same time last year? Was there any material differences between your occupancy rates May 1st versus last year? And can you also talk about where your loss of lease might be today or at the beginning of May versus where it was at the end of the quarter, first quarter?

I don't have a loss to lease update. We actually do that calculation once a quarter because the process behind that is to make sure that the properties reflected in the computer system are correctly and we have a review process. That's a purely orderly process so I don't have an update there. With respect to occupancy, I don't have that number. I will try and find it as the call progresses and I will jump back on later.

Just in general we are going away from sort of an occupancy focused approach. I think if we were to continued to what we did a year ago which was a defensive management growth which focuses on occupancy and rents second, if we used that same approach just roughly I would think that our occupancy could probably be 100 basis points higher as of Q1, relative to what we actually reported. I think we gave up something there, and we picked up, certainly a portion of the units turned during the quarter and we picked up some rent, produced rental by following this different approach but not as much as the occupancy gain would have been.

I suspect that occupancy has not changed significantly year over year. I think in Q1 overall we had a 0.1% decline in occupancy. It wasn't hugely, it wasn't a huge difference and I would guess that as of the same time last year, occupancy was probably in the same range although the markets are significantly stronger. So I think that we could have had better occupancy and again with all the results given our strategy change.

I guess where I'm trying to go is you get to your 5.5% same store revenue growth just by capturing the loss to lease and that's not assuming any other occupancy gains or burn to concessions, it's just basically rental rate increases for the rest of the year that's really going to drive the same store revenue growth?

I think that's a fair way to look at it.

Are there any extension that can burn off?

There are some concessions but there were not heavy concessions during the quarter. And concessions that continue to be properties that for one reason or another have some local sub market issue. Like, for example I mentioned Playa Vista, we have a property there, they delivered a lot of single-family homes, a lot of condos in that market. So in the short term it's got that activity of housing deliveries in one specific market area we have some concession activity, but that would be the extent of it.

Okay. Great. Good quarter guys, thanks.

Your next question comes from the line of William Aikman with Merrill Lynch.

Yes, thank you. Could you let us know, on the predevelopment pipeline, the 6 to 6.5% yields that you are talking about, I mean are your rolling forward rents as well as construction costs on that and you still come up with 6 to 6.5% yield range?

This is Keith. What we are trying to say is when we are underwriting to the 6 yields that's the yield to date based on today's rents and today's expenses. As John was talking, we are expecting to see stabilized yields at completion of 7.25 to 7.75 and that's assuming rolling rents forward, rolling expenses forward and also rolling construction cost increases forward.

The problem we have is that there's too many people running around out there talking about 7.75 caps and it confuses the marketplace as to what's really out there. So we think that to compare apples-to-apples you have to say what's an acquisition because you can buy an acquisition today at five. The market is going to grow and have its growth the same. What we are trying to do is compare apples and apples today so you are talking about 4.75 quarters to 5% acquisition caps today to 6, 6.5 development. You grow the development, it's 7.5. Acquisition would have been 5.75 maybe. So I think that's the kind of information we are trying to deliver to you.

Okay. So that the 7.25, 7.75 is really based on expectations for rent growth along with some moderation in the increase in construction costs along the way.

Correct.

Okay. Regarding development fees, you have a development partner on most of these projects, correct?

No.

No?

No.

You don't? You are handling that in house?

Yeah. We primarily always have. We've been here 21 years and 95% of the deals we do internally.

On the two land parcels that you bought in April, I assume that those haven't been included in the predevelopment numbers, numbers in the supplement, right?

It just got moved up because of the timing, closing on April 3 and April 5, I believe.

So they are not in there yet.

No, they are in the development projects, that's the Lake Union deal. And the Studio City deal.

Both are owned by Fund Two. It says total costs incurred to date only $300,000. That doesn't include the land cost.

That's because I think it's tied to the quarter end and it closed the first week in April so they were included in here. We can give you the details if you want.

Okay. No, I understand. And since they are in Fund Two, the total estimated costs there, is that your share or is that the funds share?

That's the total share.

That's the total share of the deal?

And Essex will be 28.2% of that.

That's what I thought. Okay. Going back to the Studio City, I mean the land price there, $16.7 million per acre, that's a real eye opener.

Right.

But that was entitled land.

It's entitled. It's right across the Street from CBS Studios, it's a 110% location and it's a ready to go deal. It was being marketed just for your information, for a long time to condo people at about a $6 million premium to what we closed at.

Any idea what land in that area, obviously that's pretty special, what land in that area would go for in that area unentitled.

It's all over the map. It's hard to gauge that. Anywhere from $70 to $110,000 a door, it depends on specifics and the type of construction.

This works out to $140,000 per door. Okay. Any, you already told us the range of cap rates were in the different markets. How about the cap rate on the acquisition that you made in the quarter, acquisitions you made in the quarter? Are we in the 5% area and below?

I think they're about market cap rates so I think they are in the range that Keith discussed.

They were in essentially around five or 5.1, I think, to be specific.

Okay. Any way you could give us, you sold that little tiny RV park but just for educational purposes what does an RV park go on a price per site basis?

It's all over the map. I mean this was a real junker, honest to God, so I don't think it's, it compares -- for an RV park and it can have anything from true RVs traveling up and down the coast to mom and pop with a 20-foot trailer who parked it there and live there. So I would guess that will you probably get something from 15,000 a site to the better real mobile home sites in California along the coast 70 or 80,000 a site. So it varies and RVs are sort of a special cat.

Okay. Last question, I think you already answered this, the category, other property income on page S2, went up $2 million sequential quarter. I'm assuming that that's that RUs figure.

That is right.

Thank you very much.

Your next question comes from the line of Craig Leupold with Green Street Advisors.

Good morning. I guess I am going to focus on the development stuff as well if I comment my first question, Keith, is how do you decide what goes into the fund versus what would be a wholly-owned Essex development as you are now ramping up the development pipeline?

Well, we've set forth -- we've attempted not to be in a position to be cherry picking. So the provision that we made -- essentially the fund has an investment period that ends in October. And anything that we can get to final position to start development in that time frame will go into the fund. If it can't, in other words if either it started before the fund, was available or is a two-year lead time to get to it development, the fund would be closed out and therefore it would go on to the Essex balance sheet. It's not an exact science but that's the intent to lineup anything that falls within the time frame or the investment time frame, the two-year investment time frame of the fund would go into the fund.

And what is your appetite for development? How much of the balance sheet might be exposed to development? Are we in a growth phase or is what you've laid out here on page S9 sort of where you want to be generally, trying to get a sense for that?

Yeah, I would say that we are going to be in this range maybe you might see another 75, maybe up to 750 million. I think it's kind of the range that we are feeling comfortable at today. These things change obviously from day-to-day and acquisition cap rates will change over time and the goal historically has been to do 25% of annual external growth from development, 75 from acquisition. I would tell you that going forward currently are going to be close to 50/50 or maybe 60% from development and 40% from acquisition and that's how we are looking at it and trying to deliver that 150 to $200 million from development in the future.

Does that primarily reflect the fact that cap rates have continued to trend down and development yields have not followed?

All the cap rates have trended down, development included. But what we are seeing and John has worked very hard over the last few years to find opportunities but if we can find cap rates on the development side, again comparing apples and apples today where we've got a 20 to 25% premium over acquisition cap rates that we think that that supports of risk of development.

And then on the four sale projects shown there, what appear to be the condo deals, does that reflect a ramp up in activity or is it just a change in presentation? Have these deals been around for a while? And I was a little confused by Mike's comments as to the East Ridge Mez deal in the northern California number of projects?

Yes, it is, and it's a little above. Probably some of it's presentation like Tracey was shown as development now it's shown as a for sale. So basically this is capturing items that were always on the balance sheet but is putting our TRS business in one place where you can see it.

Okay. And one last detail question. On the northwest Gateway project, I know previously that was shown as a JV whereas now, I'm not sure, is that wholly owned now or is it still a JV project?

It's wholly owned. We were the beneficiary of One good news on increasing costs that work in our favor on this deal. We closed in December when the bond deal closed, December of '04 and we got hit right in the middle of the cost increases at that time that were going on in the marketplace on hard costs. We had a capital call with our partner. They could not make it. We made it and we removed them from the partnership and took over 100%. So actually from a return perspective we are way better even netting out the increase in cost from the original numbers that we thought it was going to be.

Right. Thank you.

Your next question comes from the line of David Harris with Lehman Brothers.

Hi, guys. I wonder if I could draw you a bit more on comments regarding your view of the state of the condo market, specifically, is there a condo converter bid today? What's the state of the owner speculated bid reason and are any units coming back in markets that you're operating in?

I would say in general the competition from condo converter from a conversion product is much different today than it was a year ago. We found them to be very aggressive a year ago and as we looked as everyone knows we did a couple of deals, the Essex Lake Merit we sold to a conversion group and the East Ridge transaction we sold to a local converter.

And then later on last year we were marketing five properties in Southern California to condo converters and we have not sold any of them. So I think that reflects that the aggressiveness, the converters have got plenty of product and they started to be concerned about having too much product. Their financing sources were also starting to get cold feet a bit and as a result of both of those things they became less aggressive when it came to acquiring apartments for conversion purposes.

That is part of the reason or rationale behind why we decided to do approach Peregrine Point which is 66 units in Seattle ourselves, convert it ourselves as opposed to sell it for a converter. If the converter were going to pay a big number for it we would just as soon sell the asset to the converter and let them go through the brain damage and participate with them in some way, shape or form in the transaction. But absent that we will do it ourselves. So that is I think the summary of what has happened.

In terms of condos coming back, the only really significant condo inventory that we have up and down the West Coast is really I think in San Diego. And we have not seen a lot of condo inventory coming back as rental units at this point in time. And again, relative to and I am just anecdotally doing this, relative to Florida the condo inventory we have is a small fraction, so in any event, it's not going to have the significance of some of the other markets around the country. We do not see essentially condo units coming back on the market as being a significant issue at this point in time.

David, can I just add one thing? When we do our projections and we talk about new supply and talk about new supply as a percent of existing stock, I mean we generally include multi-family condos and single-family. Now generally, we do include all three in our projection.

So our markets are producing less than 1% of existing stock in all aspects, whether it's a condo, a single-family home or an apartment I think when you start thinking about that, if 0.2% of your existing new supply is a condo and your total new supply is 51% , if it all came back to the market as rental, I don't think it would have an impact on our markets again when you compare that to some of the other southern markets which you are talking about four, five and 6% of new supply being a percentage of new stock.

What's your sense of the health of the single-family house market in your inner markets? Is it slow, prices are falling or are still prices appreciating across and down the coast?

This is John Lopez, the first quarter data shows that appreciation has slowed considerably. We are probably up about 2 or 3% over the last 6 months in northern California and about 5 in Southern California but the number of transactions from the same last year is down about ten to 15%. The transactions are down sharply but prices are still up significantly from last year, still up a small bit from the last 6 months.

Okay. I have a question following the Town and Country episode, Mike and Keith, have you been adding to your [abiles] in the recent months?

I've been at home.

I think to answer that question, I think the world I think is actually significantly different as we sit here in May relative to what it was like in January and I think the key difference is interest rates has increased pretty dramatically here certainly on the short term rates but even the ten-year.

And we've enjoyed, I think from the time we went public in 94 through fairly recently, the benefits of positive leverage, i.e. having ten-year debt rates below cap rate then has flipped around on us and it has tempered our appetite on the acquisition is side by a lot. So I think that you are looking at that phenomenon and looking at how much rent growth you need to compensate yourself for the negative leverage environment is something that's concerning us.

Okay. I guess this is a space to watch if prices correct and then perhaps as more interesting opportunities open up perhaps in '07.

I think that. the one caveat is if acquisition deals that are miss priced for one reason or another where management is not get what they could get or what we think is available in the marketplace or other unique type situations. We are not giving up on acquisitions and as we've seen in the past , these conditions change rapidly and we could have a completely different take next quarter, pretty much like at the end of the first quarter call, or at the end of the year end call we were more aggressive I think on acquisitions than we are sitting here today. So it changes fairly rapidly.

Okay. Thanks so much, guys.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Ross Nussbaum with Banc of America Securities.

Good afternoon, it's Karin Ford. I wanted to go back to Peregrine Point. Was it one of the a five assets had you tried to sell to converters?

No, it was not. The five assets were in Southern California foreign. Peregrine point is in Seattle.

I guess it is a bit of a departure on strategy for you guys and you explained why you chose to do it yourself. Do you have any feelings about taking 100% of the condo sales risk given at what point we are in the condo cycle today?

Well, I guess there are a couple of comments to that. We had obviously a lot of discussion about whether to do it ourselves and the first comment I would make is that prior to going public we all had some exposure to for sale housing. So that was part of our activities before becoming a REIT so it's not completely foreign to us and we have a fair amount of experience in that area.

The second point is, the Seattle metro area, if you look at the relationship between median incomes and the median housing price it hospital a much lower median housing price and therefore does not suffer from some of the things you see here in the Bay area in Southern California where you are talking about median home prices of 625,000, in the Seattle market I think it's in the low 325 range, something like that. So it's a much different environment and we feel more comfortable with the prospects for Seattle.

And finally it's a 66 unit building so it's hard to imagine that a smaller deal size we are going to outsource of marketing component of it. It's not that complicated. So from our perspective, again as I said earlier, from our perspective a declining converter is going to pay a lot of money for it and when I say that we model it both ways as a condo and as an apartment. If we see the condo converter willing to place such that they are dealing with a gross margin of 10% or they less then we are likely to seal it to the converter. If it gets to the 15% range which is where it is right now, we are probably going to do it ourselves.

So it will or will be sort of a growing ongoing activity for you guys you think going forward?

Yes, back to the comments on for sale housing in general. I think there's still a lot of demand in California for properly priced for sale houses. It's not like the demand isn't there, it just has a price associated with it and a monthly payment capability associated with it. We are going to be careful about it.

At this time there are no further questions.

Well I thank everybody for joining the call, and hope you can all join us next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.