Essex Property Trust Inc (ESS) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2006 Essex Property Trust earnings call. My name is Colby, and I will be your coordinator for today. At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] And as a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Keith Guericke, President and CEO. Please proceed, sir.

Thank you. Thanks for joining our call today. This morning we're going to be making some comments in the call which are not historical facts, such as our expectations regarding markets, financial results, and real estate projects. These statements are forward-looking statements, which involve 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. Joining me this morning on the call is Mike Schall, our COO, Mike Dance, the CFO, and John Eudy, EVP in charge of Development.

Just a couple other things quickly. On our website you're going to find revised expectations for market rent performance for 2006. Also on the website is a scheduled titled "New Residential Supply" which includes total residential permit activity for the larger U.S. metros, as well as information on median home prices and affordability, and that information is all compared to our Essex markets. To get those details, go to the website under analyst resources.

Last night we reported another strong quarter with core FFO increasing 10.2% per share. For the quarter, the portfolio grew revenue at 6.3% over same quarter in '05, and 1.8% on a sequential basis. Everyone is aware the West Coast markets are performing very well. It's been on many of the calls.

I'd like to spend a few minutes just talking about the fundamentals that are driving that performance. During the second quarter all of our regions experienced job growth at or above our expectations. The most recent June industry survey indicated that our markets had added 208,000 jobs, or 1.7% on a year-over-year basis. In addition, the household survey revealed a second quarter unemployment rate of 4.3% in our markets, down from 4.9% last year. And during the same period, the labor force has grown by 1.3%.

Effective rent growth in Seattle and Northern California continue to accelerate in the second quarter. Growth in these regions is greater than in Southern California as well as in most of the other U.S. metros. Parts of Southern California generally are growing and exceeding our forecast, which I'll talk about later.

In addition to improving labor employment trends, our apartment markets are continuing to benefit from high home mortgage payments versus rents, and the affordability of rents in our markets, and improved population growth. We expect that these trends, along with steady job growth could continue for some time. Let me talk about each market quickly. Seattle continues to be a jobs engine. Year-over-year grow in industry jobs was 58,000, or 4.1% through June.

Growth is strong across all job sectors and geographic locations. Total new supply forecast for 2006 remains unchanged at 13,000 units of single-family and multi-family units, or 1.2% of total stock. The ratio of job growth to supply is the highest in the nation. We've increased our Seattle rent forecast. We now expect effective rent growth of 7.5% for the remainder of the year.

In Northern California, June, year-over-year growth in industry jobs was 1.4% or 41,000 jobs. The unemployment rate for the end of the second quarter was 4.3%, down from 5% last year. And during this period, labor force growth was flat. Total new supply forecast for 2006 remains unchanged at 17,000 units of single-family, multi-family supply, which is nine-tenths of 1% of the total stock, and job growth continues to exceed the supply growth. We have increased our expectation for the apartment markets in Northern California as well. We now expect 96% occupancy or better for each of the markets.

We've increased our effective rent growth forecast in San Francisco from 6% to 7.5%, in Oakland from 5% to 6%, and in San Jose from 4% to 7%, the biggest increase of the group. All 3 of these markets are now growing faster than Southern California, and most of the other U.S. metros. Commercial absorption rates over the last year are significantly higher than current job growth. However, there remains significant commercial space to support new jobs with availability in excess of 15%. In addition we expect to see commercial construction pick up from its current modest pace.

Going to Southern California, June job growth was 1.2% or 86,000 new jobs. Unemployment has fallen there, as well, down to 4.3% from 4.7% a year ago. And labor force growth is approximately 1% for that period. New supply for the region remains at 45,000 units, or eight-tenths of 1% of the existing stock.

Rent growth in this region, we're maintaining our prior expectations of 3% to 4.25 % for San Diego and L.A. However, we are increasing forecasts in Ventura from 3% to 4.5%, and in Orange County from 4.5% to 5.5%. We expect Southern California region to remain strong. However the region does have some attributes -- doesn't have all the same attributes as Northern California.

Just a couple of additional updates. Fund II, we had some additional development deals approved during the quarter, plus several acquisition transactions that are currently in contract, and will close in the third quarter. With that activity, the fund will be 90-plus percent invested, and we will close it out in the third quarter. Again, a quick update on acquisition cap rates. Southern California, our cap rates are ranging in the 4.75 to 5.25 range. North California and Seattle are both in the 4.25 to 5% range.

Despite these aggressive cap rates, we've been able to source several transaction and cap rates better than the above stated. We continue to be active in pursuing acquisitions, and despite the low cap rates, it now looks that we're -- like we're going to get close to achieving our goal of $300 million of acquisitions for the year.

If I could just quickly summarize my comments. The West Coast markets are continuing to operate and have strong and improving fundamentals. As noted in my comments we're seeing rent growth improving, 6 to 7.5% in Northern California and Seattle. And I think what is more important is we've been able to convert that rental strength into very strong FFO growth of 10.2% for the quarter, and we expect that level of FFO growth to continue through the rest of the year.

Now I'd like to turn the call over to John Eudy, who runs Development. He will give you a little color on what we're seeing with land, hard costs, and in our development pipeline.

Thanks, Keith, I'm going to keep my brief comments focussed on those, and a minor update on our existing construction activity on Northwest Gateway, the development we started in Q1, 275 units. We started site improvements, and we are fundamentally through the foundation and starting to go vertical with concrete. We're on budget, and anticipate initial occupancy still in fourth quarter of '07.

During the quarter, we closed - although we reported on them in the last call - 2 deals in into the Fund, Studio City, 149-unit deal down in Studio City, Los Angeles. And a 127-unit deal [inaudible] just north of the central business district in Seattle. We have 1 additional transaction that we committed on during the quarter, but it will not close until the end of Q3, beginning of Q4, for 119 units in Southern California. Those activities will close out our obligation of the Fund on the development side, and all future deals will be dedicated to the EPLP, the REIT.

On activities going forward, in terms of market penetration, our pipeline stayed fairly constant with last quarter's reporting. We have been besieged with numerous opportunities, more than I've ever seen in the last 20 years I've been here, because of the slow-down in the condo activity in the market. There are a lot of retool deals. However, being retooled, I mean, instead of going into condo price, they go at a number that will work for us. On the apartment side, there is a bid [inaudible] spread problem right now, but eventually I think that pressure will tend to give us more opportunities this next quarter than we have seen this past quarter.

On costs, we reported last quarter, the upper pressure that we've seen over the last 18 to 24 months, have not seen it wane yet. We have seen in, at least the Southern California and the Northern California markets, a trend to have a lot more bid activity from subcontractors and GCs, which usually ultimately will end up in helping take the pressure off the pricing side of the formula, albeit on the commodities side, raw materials we haven't seen that happen yet. The one area that is an exception is the Seattle, Pacific Northwest area.

There is so much activity across the board, not so much residential, but more so in the other activities for office and retail, that that is one area where I do see future increases to continue in an amount greater than the 10% forecast that we are using internally on a go-forward basis. And I think, Keith, that probably rounds out my comments.

Good.

Thanks, John. Today I will discuss the second quarter results, the recently completely preferred stock offering, and provide details to the increase to our funds from operations guidance for 2006. Funds from operations for the quarter totaled $37,200,000, or $1.45 per diluted share.

After adjusting for non-routine items, FFO increased by $0.11 per diluted share over the same quarter last year, or a 10.2% increase. Year-over-year, same property net operating income increased by approximately $3,400,000, compared to the same quarter last year, or a 7% increase. The growth in year-over-year net operating income was driven by the increase in the same-property schedule of rents of approximately $4,300,000, and over $350,000 in other property income.

The impact on rent increases has had limited impact on our financial vacancies. This increase was offset by the reduction in our same-property concessions. Same-property year-over-year operating expenses increased by 5.1%. The increase in operating expenses over our second -- over our first quarter guidance was primarily caused by higher than expected property taxes in the Pacific Northwest, increases in our property insurance premiums, and the changes to our accounting for utility reimbursement that I discussed in last quarter's call. The midpoint of our revised FFO guidance assumes operating expenses continuing at a 5% rate for the second half of 2006.

With our recent issuance of $150 million of convertible perpetual preferred stock, our current exposure to variable rate debt is limited to $187 million of tax exempt bonds. Historically, the fluctuation in interest rates on these variable rate, or tax exempt bonds is less sensitive to changes in short-term interest rates. The preferred stock has a 4 and seven-eighths coupon, and is convertible into common stock at a conversion price of $136.66.

This offering was executed to lock in a cost of capital for our growing development pipeline that will be accretive to our shareholders. The short-term accretion that will result from interest savings on paying off the LIBOR-based debt will be offset by the additional shares that are included in our total share count, as a result of using the treasury method of accounting for the 2005 exchangeable bond offering. The current stock price of approximately $117 per share will increase our projected share count for the third and fourth quarter by approximately 261,000 shares.

The increase in our range for FFO guidance for 2006, the $4.90 to $5 even per diluted share compared to our first quarter guidance of $4.75 to $4.87 per diluted share, reflects the strong momentum in rental growth achieved in San Francisco Bay area and the Pacific Northwest. The midpoint of the revised range assumes that the second quarter's 7% net operating income growth continues through the second half of the year. This 7% net operating income growth assumption results in a 10% growth in the recurring FFO.

At the end of June, we recognized $8.2 million in promote and other fees earned from the sale of our asset located in Anaheim, California, owned by an unconsolidated joint venture. The FFO earned from this transaction was offset by an impairment charge on our Houston, Texas asset of $800,000. These 2 transactions netted $7,400,000 in non-recurring FFO, which exceeds our original guidance of $6,400,000.

As Keith mentioned in his comments, the acquisitions for Essex Value Fund II will end in the second quarter. This is earlier than we expected. When the funds -- in the third quarter, excuse me. When the fund acquisition period ends, our asset management fees will be reduced to 1% of invested capital, versus 1% of total subscribed capital, which in our 2006 guidance, we assume that the acquisition period and the full asset management fees would be earned for the entire year. The midpoint of this quarter's increased guidance assumes an early end to the acquisition period and a reduced asset management fee beginning in the third quarter.

That concludes my remarks, and now I'll turn the call over to Mike Schall, our Chief Operating Officer.

Thank you. And that was obviously Mike Dance. I think we went a little bit out of our normal sequence. Thank you for joining us. I want to give you some color on the operations part of the business. I'll start with some global comments.

As expected, property operations have been strong on the West Coast. Southern California continues its consistent growth, while Seattle and Northern California accelerated as we expected and as we've talked about in the prior calls, consistent with economic conditions we suggested over the last several quarters that our rental revenue results would improve as we changed our basic management strategy from an occupancy based approach to focus on growing rents.

That transition continued during the quarter, and we expect to be completed by the end of the third quarter of this year. Northern California and the Pacific Northwest had success in driving both occupancy and rents, leading to 3-plus percent sequential revenue growth. During the quarter, our results reflect a 6.3% increase in same-property year-over-year revenue, which includes a 0.1% decline in occupancy. Sequentially, our same-property revenues grew by 1.8%, which includes a 0.3% increase in occupancy.

As you know, same-store revenues reflect rental increases only to the extent of lease renewals and new leases during the quarter. The portion not recognized in the financial statements becomes loss-to-lease, which we define as the difference between market rents and scheduled or in-place rents, which is expressed on annualized basis without regard to concessions.

During the quarter, loss-to-lease, per page F7 of the supplement, increased to $22.7 million, 6.3% of revenue, from $19 million or 5.4% of revenue for the March 31st, 2006 quarter. Sequentially, the largest increases in loss-to-lease came from Southern California, which went from 5% at the end of Q1 2006, to 6.1% in the second quarter, and Northern California, which increased from 6.2% in Q1 to 7.4% in the second quarter. As reflected in the supplement, concessions are only given on a very -- on a short-term basis to deal with some local issues in the marketplaces. Otherwise, concessions are not common in the markets at all.

As of July 30th, 2006, our physical occupancy of the stabilized portfolio was 96.7%, which was a range of a low of 95.6% at San Diego, to a high of 97.9% in the San Francisco MSA. Again, as of July 30th, 2006, our net availability was 4.6%, ranging from the weakest of 6.5% in San Diego, to the strongest of 3.3% in Seattle.

A couple comments on rehabs. I'm sure you know that Essex excludes its major rehab transactions from its same-property results. And we continue to expand our redevelopment activity. Subsequent to the quarter, and what could be reflected in the next supplement, we've approved 2 additional redevelopment deals after June 30th, which is going to increase our estimated redevelopment expenditures to approximately $40 million per year.

In addition to that, aside from redevelopment, property operations has started its enhanced unit turn program, which had negligible impact during the quarter. And that will not be segregated from our same-property results going forward. This program seeks to upgrade kitchens and baths at properties that can be expected to generate an average additional related rent increase of approximately $125 a month, from an average investment of approximately $8,000 per unit. By year end, we expect to be completing 150 units under that program per month.

Now, I'd like to make some specific comments on each major component of our portfolio. Starting in the Pacific Northwest, the data, from the economic data, to on the ground and what's happening operationally continues to be very positive. As of July 30th, physical occupancy in Seattle was 97.4%. Very tight availabilities, at 3.3%. Portland also had a very good quarter in occupancy, 95.8, net availability of 4.2.

Home purchase activity continues to be a larger factor in the Northwest due to the strong local economy, and affordability that is better than our California markets. As you know, increased mortgage rates have reduced our move-outs due to home ownership, and that's reflected throughout our portfolio. For example, in Seattle, home ownership represented 18.5% of our move-outs for the quarter, compared to 25.2% a year ago. Portland 27.5% of our move-outs were to buy homes, versus 33% a year ago.

Turning to Northern California. We previously noted that the strongest MSA within Northern California was San Francisco, followed by Oakland, and finally, San Jose. For the quarter, Santa Clara County or San Jose, Silicon Valley area generated the highest year-over-year growth, 8.2%, tied with Seattle, and the highest sequential revenue growth, 4.1%.

As you know, we have a substantial presence in Santa Clara County and the improvement in that market is very welcome. Looking at occupancy and availability, again, as of July 31st, 2006, physical occupancy, 97.9%, and net availability of 3.8% in San Francisco. The San Francisco MSA, actually. In the East Bay, occupancy and net availability were 97% and 5.7% respectively. And in Santa Clara, occupancy was 97.6, net availability 5.2%. Similar to Seattle, move-out activity attributable to home purchase declined in Northern California. 13.8% of our turns related to home purchases versus 16% a year ago.

Finally, Southern California. Orange and L.A. County continued to be the strongest part of our portfolio operationally, followed by Ventura and San Diego County. For the quarter, the strongest results were in Orange County, where we reported year-over-year and sequential revenue growth of 7.4% and 2.3% respectively. A couple of occupancy-related issues at several large assets negatively affected our performance in our L.A. County portfolio.

These issues have been largely addressed and will improve the performance of L.A. County beginning in Q3. Overall, our Southern California results reflected lower occupancy, which was down 0.6% year-over-year and 0.1% sequentially. And that again, is one of our key objectives for improving in Q3.

Physical occupancy in Southern California and availability, L.A., Ventura County 96%, net availability 4.5%. Orange County, occupancy is 96.9%, net availability of 4.9%. And finally San Diego, occupancy 95.6%, net availability of 6.5%. Move-out activity, once again, following a similar pattern. L.A. Ventura, 11% versus 13% a year ago. This is related to home purchases, again. Orange County, 12% versus 22% a year ago. A pretty significant decline there. And finally in San Diego, 10% versus 8% a year ago. That concludes our comments. And now we'd like to give you the opportunity to ask any questions you might have. Thank you very much for joining us.

[OPERATOR INSTRUCTIONS] Dave Rodgers, RBC Capital Markets.

Maybe first question for John. As we look at the development pipeline in your supplement, could you just run through with me, I see the TRS activity and the additions to Fund II. But perhaps you could run through what percentage,or what portion of that is condo-related, what might be merchant build, and then what is going to be -- including the fund, what is just going to be apartment rentals?

Are you talking about the TRS activity, or all the activity?

I guess all the activity. Will the developments in the Fund be rental, or will they have another exit strategy?

On the Fund they're all rentals.

Okay. And then I guess the question comes back to the TRS, there was a note in there about condos. Is that all condo? Would that be some merchant build?

It is all condos.

When do you expect that to begin delivering?

Some of them are in the delivery stage right now, because they're conversions, 2 of them. And then 1 is about to start the sale program in about 60 days.

And actually, let me --- I can add to that. It is page S-9 of the supplement for everyone. And a couple of the conversions -- certainly, everyone knows about East Ridge and East Bay. The nature of that, we sold through a converter, and we have a receivable on a participation which tends to be back-end loaded. And my guess, I think that we're anticipating that that is primarily a 2007 event, although we had originally assumed that some of that was going to come into 2006, some of those sales have slowed, and we think it is now 2007 event by virtue of the participation being back-end loaded.

Excluding that participation, was there a contribution to earnings in the quarter from condo sales?

No.

When would those contributions, aside from East Ridge, or the sales of the JV, or a certain JV or partner like that, begin to occur?

Starting later in the third quarter, but most of it will be in the fourth quarter.

In your reported FFO guidance, how much of that is related to condo income?

We have condo income and some additional promote fees that we're expecting from Fund II of about $1.5 million.

In the fourth quarter?

Yes. I'm sorry, promote fees from Fund I. Keith is reminding me about it.

And then I guess also on the Fund while we're there, the development that you're doing in the Fund, do you stand to generate additional up-front fees for the development on top of your asset management fee?

No, there is a developer fee. It's paid pro rata, or pro rata as we build the building. So it will come in over the next several years.

Okay. And I guess, final question on the developments. Where are you or where would you quantify your average development yield on the total pipeline for the rentals today?

High 5s to low 6s on today's current economics. On stabilized, high 6s to low 7s.

And final question maybe for Mike Schall, with the increase in the redevelopment and the redevelopment spending, maybe more units coming offline, do you anticipate dilution from that? And where would the peak or plateau of the increase in spending for redevelopment hit?

There is some and I have not calendared it out. I think that the run rate -- we've gone from a run rate of 25 to 30 million to about 40 million. So the incremental increase of that, I don't think is going to have a big impact on dilution, anyway. But the other comment I would make is in the redevelopment program,clearly as you're scaffolding buildings and otherwise doing a lot of work, it is disruptive to the rental base. But we have been successful at keeping our rental projects 90 to 95% full by essentially discounting rent and so forth.

So we'll continue to do that. Again, I don't think you're going to notice the impact significantly, because it is not that great a run rate impact.

Okay. Thank you.

Richard Paoli, ABT Investments.

I was just wondering if perhaps we could just step back for a minute and just go through the major components of the estimate revisions from your prior guidance, or guidance provision, if you will, to where we are now? And perhaps you can quantify some of the line items a little bit more sharply for us. In particular, the management fee line, you mentioned that's going down.

Is that a formulaic level, where you can kind of be a little bit more precise in where that is going? And also, on the promote side, what do you expect? And how much of the raise was from just overshooting or -- I don't want to call it overshoot, but better than expected results on what you booked to date?

Oh, yes, the first question as to the management fees from Fund II were also as a result of just a [point] sale, we're losing our management fees on that, as well. So the combination of those 2 might be roughly at $0.02 or $0.03 a share.

Is that for the back half of the year, or annualized basis?

For 6 months.

6 months. Okay.

And then operations, we are expecting to continue to see about a 7% increase -- $0.07 a share increase from ops. But we do have some G&A expenses that we expect to occur on the back end, that would reduce that by about $0.05.

G&A is going to be $0.05?

We gave guidance of G&A of about $21 million, and that's still our guidance for the year.

Okay. And you're saying the property -- property operations is now running for the full year, $0.07 ahead? Or is that $0.07 of the upward revision in your guidance?

That's in our guidance. We're assuming operations will contribute another $0.07 per quarter.

Okay. Anything else?

Those are the -- yes, the share count, as I mentioned in the comments, is offset by the accretion from the preferred stock offering. The 2 converts kind of wash.

Great. All right. And just one other bigger picture question here. And I know you guys don't want to go into '07 guidance, but how do you feel about the durability of being able to push the rents? It seems like if I comp you guys to some of your peers, your year-on-year rental rate increases are a little shy of what they've been doing. But it seems like your momentum is just accelerating. Is that a right way to characterize that, given what you said about San Jose?

I think that is right. I mean, obviously, we reviewed the other multi-family companies. And, I'll tell you, on some of them, we don't understand the relationship between the increase in rent growth and NOI, and what actually is getting driven to the bottom line, FFO-wise. We suspect that there is some significant investment amount in upgrading properties that is still flowing through the same-store.

We, of course, break out our redevelopments, or we pull our redevelopments out of same-store. So I think there is maybe a lack of comparability there. So I think that's part of it. And part of it is due to the, as we've talked about, this transition between pushing occupancy a year ago and pushing rents. And clearly this is a momentum business. You only turn -- we turn 57% of our units a year, and we've bumped some rents on renewals as well. But you only get a certain amount of that each quarter.

Our -- typically a lot of it happens in Q2 and Q3. And from that perspective, I think that Q3 is going to be a very important quarter. In Q3, we try to repair ourselves for a weaker Q4 by building occupancy. And I think the key issue in -- when I take a look at the results, is that especially in Southern California, we need to build a little bit of [inaudible]. The optimum portfolio operation occurs somewhere around 97% occupancy. We're a little shy of that in Southern California. I think that has hurt our comparisons a bit as we transition. Again, we were very focused on occupancy a year ago.

So we're picking up rental revenue, but we are not picking up occupancy dollars and many of our competitors are. So I think it is a combination of the extent of investment and accounting, really, for rehabs and unit turns.

I think part of it is occupancy and the change of management approach, which I think -- which I think will roll through the numbers. And there were a couple, in our case, there were a couple of large properties in L.A. County that had some occupancy issues that were remedied during the quarter. And I think that that is -- that weighed on those results, and they would be expected to improve. So I think it is all those things, Rich.

Right. Last point, and sort of on that, since you raised it. One of your -- it's more of a larger cap, but I'll call them a peer, calculates the number it's called return on invested capital, and they do it for same-store pool, and their acquisitions and in different years, if they were in '04, '05, et cetera.

Just to kind of point out what the growth in that number is, they do it on a same-store basis. And I think that would help clarify the point you're trying to make, Mike, that some companies have great same-store NOI growth, but their return on invested capital barely moves, which might suggest they're priming the pump, as you suggest. So you guys might want to point that out in your disclosure.

Yes, absolutely. We are -- how do we compare our 150 units a month in unit turns to others that are up to, I think, we saw one that was maybe, what, 17 or 1,800 units in the quarter or something like that? There is a stark difference. But, the capital costs associated with that, we're here to grow FFO per share. At least, that is our mission. That is what we are trying to accomplish. We're not here to necessarily grow same-property NOI. And so, you have got to take into account the capital, the capital costs, and ultimately the impact on FFO per share. So until we change the basic metric, you know where we're focussed and what we're trying to accomplish.

Great. Thanks for the time.

[OPERATOR INSTRUCTIONS] Alex Goldfarb, UBS.

I just want to go back to the G&A comments. The full year guidance, I think, was 21 million. But then you mentioned a $0.05 drag in the second half. Is that embedded in the 21 million, or is that incremental to?

That is included in the 21 million.

Okay, so there is nothing additional for any additional bonuses for any of this harvesting that's going on?

No.

Okay. Then the second thing is the $0.32 share promote, maybe you mentioned it in your comments, and perhaps I missed it. Does this relate to the 2 Japanese tax deals, or this is something else?

Yes, that was 1 of the 2. The other one is expected to earn us fees next year.

Okay. Okay. And then also, there is another $1.5 million -- $1.4 million of gains in the fourth quarter. Correct?

That's right.

Okay. Now, when we look towards next year, of the items that may be, is the City Heights deal something that we may see? Because the gross asset value seems to be like $100 million to $150 million. Is that something you may harvest, and how big do you think it would be?

We are currently evaluating that, and current thinking is that is probably likely. But we're considering other options, as well.

And Alex, just to tie those together, that is the name of the other Japanese transaction, right?

Oh, that is?

Yes.

Okay. Perfect. Perfect. Okay. And then it's been about 6 months since the Town and Country bid. Are you -- how are you finding acquisitions on the East Coast?

We aren't. We have, you know, clearly -- we said we would -- again, if you sort of get back to why we did that, we did that because we thought it was an opportunity to get in at a very good price, and create an opportunity for ourselves. I mean, we're not interested in going back there and trying to pick off market deals at market rates. We're very comfortable and happy, as I in my comments I said I think, given we're out there shaking a lot of bushes and we're going to get close to our $300 million goal for the year on the West Coast in the markets.

If we can steal something on the East Coast, we're there. But frankly, we have to compete with a lot of people who are on the ground with better exposure, and better visibility to that market than we are. So it's going to be -- it is going to have to be a special opportunity for us to get there. And frankly, we haven't spent a lot of energy over the last 6 months in that marketplace.

Okay. So if I read your comments correctly, you would be thinking portfolio as opposed to asset by asset?

Yes.

Okay. And as far as the Met Life portfolio goes, I think you guys have spoken about maybe doing -- launching like a core fund, where you sort of buy at retail and partner up with some JV capital. Do you think something like the Met Life is something that you would consider?

That is a very big portfolio. That is probably bigger than something we would want to cut our teeth on, and the assets are quite old. So I'm not sure that that's necessarily what we're going to focus on. But, yes, I mean, we are --as Mike said, when -- his comments about FFO to Rich, we're here to create value for our shareholders. And we're not going to do something just to get bigger.

We want to make sure that it creates value. And we've been evaluating all sorts of different core funds and other value-added funds, and just what kind of capital structures are available to us in the marketplace. And right now, I'm not sure that our balance sheet isn't the cheapest form of capital we have. So we haven't made any decisions with respect to sort of our next big capital push.

Okay. So if I read your comments correctly then, you think right now the cost of financing off your own balance sheet is cheaper than using someone else's private capital funding?

Well, given that private capital has generally, historically looked at a lot of debt, and where debt rates are today, yes, I would think that's true.

Okay. Thank you.

William Acheson, Merrill Lynch.

Just to be clear one last time, the total non-recurring FFO in the second half is $1.4 million?

As a range, 1.5 is the midpoint of that range. It can vary from that to get from our low guidance to our high guidance. So for the midpoint, use 1.5.

Okay. East Ridge, the mezzanine participation you see getting pushed into '07, what was the former assumption for that?

We're thinking that would be primarily some in the second quarter, and in the third quarter. The buyer of that property had some issues with getting it through the Department of Real Estate, and there were some delays in the start of that.

Okay. So it is 2Q, 3Q '07?

No, the original was Q2, Q3 '06. We're now looking at Q1, Q2 of '07.

How much was included in your non-recurring FFO guidance for that participation in '06?

We have not given guidance on that. It was included in our $6.4 million total.

Right. I guess it's not proper just to back out the 1.5 from the 6.4?

Bill, we'll call you back. I don't think Mike has the breakdown of the 6.4. I think that's the issue, right? So and what you're asking is what portion of the 6.4 was represented by East Ridge, right?

Yes.

I think we need to get back to you on that.

And then just to be clear on the way you're going to be doing the FFO weighted average share count, using the treasury stock method, you're not going to be fully diluting for the convertible shares and then backing out the convertible interest?

For the -- that's the if-converted method?

Yes.

So that would apply to our preferred stock offering, but for the -- for the convertible or exchangeable bond offering, there is no add-back of the interest. It is just the additional shares going in the share count.

Okay. And it is 261,000. It's not the full convertible amount, which should be something in excess of 1 million shares?

Yes, that's the difference between the treasury method. The treasury method is what applies to the exchangeable bonds versus the if-converted method, which will apply to the preferred stock.

Okay. Given the level of conversion work that you're doing and the cautionary statements by a lot of other companies, and really just pick up the paper any day and you see bad press about it and deals getting cancelled, do you have any concerns about the projects that you're working on?

Bill, it's Keith. No, I mean, we've got 2 projects in Seattle, which that market is still hot. One of the projects is called Peregrine Point, which is 60-some units and that one is about half sold. Closings are going to start as -- in this quarter.

So we're thinking that thing gets blown out, the other deal is basically 22 lots, 24 lots. And it's going to be basically going to be more like townhouse, attached townhouse housing as opposed to really condos. And then the East Ridge deal is being sold as we're speaking, so I think the price point on that is fine. I think we're fine. We're not going to be pushing it very much beyond what we currently have cooking.

Okay.

And I think what we've got is pretty safe.

Okay. And you did mention that there has been some retreats, quote, unquote, in the condo market, and some of these things coming back as rentals. There is a difference of opinion on valuation at the current amount, and it might open up some acquisition opportunities for you. That -- those acquisition opportunities, that would be buying for the regular REIT, not the Fund?

Yes, we -- the Fund will be, as we said, closed out this quarter. It's essentially full. And so anything that we were -- would do, this point forward, until we look at some other capital source, would be on balance sheet.

Okay. Thank you very much.

Craig Leupold, Green Street Advisors.

It's Mark Barry. Can I ask you a question about the condo margins? Am I reading the development schedule right that, and in your comments, that each of the 5 for sale is a condo project?

Yes, for the most part, yes. But some of them, like one of the Northern California transactions is a piece of land that we are not under construction. So obviously we can sell -- there are a number of different plans that could possibly come out of those transactions. They're not all under construction.

Okay. What types of margins are you ultimately expecting out of those projects, after taxes?

Well, pre-tax, generally we're looking at a 15% margin on sales price. And then, depending on the TRS and whatever other kind of tax planning we can do with that particular TRS, taxes are pretty standard.

Okay.

Mark, just, once again, just they're not all the same. And so I know we're sort of -- we sort of generalize when it comes in page [S-9] of the supplement. But again, one of the deals in Northern California is a participation deal. We've already sold East Ridge to a converter for $48 million. That was reflected a year ago. We have a relatively small participating loan which is going through that line item, I believe. So they're not structurally all the same.

Okay. And then a question that goes back to your comments about the different markets and looking through to the strength of the Pacific Northwest and Northern California, and it looks like we're seeing some rotation of those markets, kind of to the top of the list and outperforming essentially, Southern California. Is that a trend you expect to continue into '07 and '08?

Yes. We view Seattle and Northern California as they had -- we had significant, as you know, Mark, we had significant declines in rents over the last 5 years. So one of the metrics we use is the relationship between the rents and the median income. So we viewed median income as essentially the proxy for -- or a proxy, an important proxy for what people can pay in rent. And when you hit that pain threshold. And our view is, Southern California is sort of at the historical long-term level or maybe a little bit above.

Northern California and Seattle are significantly below their historical relationship between rents and median incomes. Therefore, we should be able to get essentially the disposable -- the rate of increase on disposable incomes, plus capture some portion of this discount. And that should drive Northern California and Seattle well above Southern California for the next several years.

Up in Seattle, how close would you be today to your kind of peak rent levels?

Yes, actually John Lopez is here. John, do you have -- ?

Yes, we're probably still a good 10% below the peak level [inaudible].

The other factor, Mark, is you've got to look at what is happening to median incomes, as well. So what's happened in Northern California and Seattle, is median incomes didn't dip, and are higher than they were in the year 2000 and -- or in that time frame. And, therefore, it's the relationship that we spend a lot of time focusing on.

Thanks.

At this time, there are no further questions in queue.

Well, thanks for joining us, and hope to see you all next quarter. Thank you.

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