Essex Property Trust Inc (ESS) 2006 Q3 法說會逐字稿

Operator Good day ladies and gentlemen and welcome to the Essex Property Trust Third Quarter 2006 Earnings Conference Call. My name is Candy and it will be my pleasure to be your operator today. [OPERATOR INSTRUCTIONS].

I would now like to turn the call over to the President and Chief Executive Officer, Mr. Keith Guericke. Please proceed, sir.

Thank you. Welcome to the call. Typical housekeeping issue, first, we will 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 will 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 you to review them.

Joining me on today's call is Mike Schall, our COO, Mike Dance, our CFO and John Eudy, who runs our Development group and they each have things to say. On the Web site you will find our expectations for market ramp performance for 2006. Also on the Web site is a schedule titled, new residential supply, which includes total residential permit activity for the larger U.S. metros as well as information on meeting home prices and affordability as compared to the Essex mark. To get those details go to our Web site under analyst resources.

Last night we recorded another strong quarter with core FFO increasing 14% per share. For the quarter the portfolio grew revenue at 7.7% greater than the same quarter in '05 and 3% on a sequential basis. As we have talked about before I think everyone is quite aware that the West Coast markets are performing well.

As is typical I’d like to spend a few minutes talking about the fundamentals that are driving that performance by market. Starting with Seattle. We had strong job growth across all sectors and regions in the Seattle market. Year over year growth in industry jobs was 42,000 or 3% through September. Seattle has a strong demand momentum. The region has added 112,000 jobs over the last three years, or a 2.7% annual growth rate. The new total supply forecast for '06 remains unchanged at 13,300 units of single-family and multi-family, or 1.2% of total stock. We've increased our Seattle rent forecast. We now expect effective rent growth of 8.5% which is a 250 basis point increase from the Q1 forecast and 75 basis point increase from last quarter.

Low unemployment and strong job growth are fueling income growth thus keeping rents relatively affordable versus income. Speaking of affordability, it remains in our favor. Rent is approximately 45% of the cost of owning the median home in the market and average rent as a percent of median income is 14.7% which is significantly below the historical levels. Commercial absorption remains strong and we expect construction to increase as vacancy continues to fall.

In Northern California job growth continues to gain momentum. For September year over year growth in industry jobs was 46,000, or 1.6%. Unemployment rate for Q3 was 4.5%, down from 5.1% last year. During this period the labor force growth was flat. Commercial activity in the region remained strong. Office industrial vacancy grates peaked in '03 at 17%. Currently vacancy is down around 10%. We expect new construction to begin across the region. New total supply forecast for '06 remains unchanged at 17,000. Total single-family and multi-family units, or nine-tenth of 1% of total stock. Home prices have begun to recede from their peaks. We expect these trends to continue.

However, mortgage payments will keep homes relatively unaffordable. Again, affordability remains in our favor. Rent is approximately 40% of the cost of ownership of median price homes in this market and average rent as a percent of median income ranges from 16.8 percent in San Jose MSA to 19.8% in the Oakland MSA and San Francisco being at 25.4%. This is compared to historical averages for the region of 24%. We've increased our expectations for rent in the Northern California markets. We increased our effective rent expectations to 8.5% in San Francisco, 8% in San Jose and 7% in Oakland, a 100 basis point increase cross each market.

Going to Southern California, September year over year industry job growth was 75,000 or 1.1%. Unemployment rate for Q3 was 4.6%, down from 4.8 last year and labor force grew two-tenths of a percent. Forecast for total new supply for the region remained at 45,000 units, or eight-tenths of existing stock. We are increasing our expectation for rent growth in this region to 3.5% to 5% in San Diego and LA, which is a 50 to 75 basis point increase from last quarter and we are maintaining our forecast in the Ventura and Orange at 4.5 and 5.5 respectively. The affordability metrics in this market is as follows -- rent is approximately 40% of the cost of ownership of the median home price in the market and average rent as a percent of median income is approximately 22% compared to the historical percentage of 23.5.

In summary, we expect rent growth to continue at these levels for at least two more years driven by strong job growth, supply less than 1% of stock in all regions, and Seattle at 1.2%, all below demand levels, and affordability in our favor when compared to home ownership and rent cost as a percent of median income.

Now I would like to turn the call to John Eudy.

Thank you, Keith. During the quarter we've been very busy delivering some of our predevelopment activities into the active development phase. By year end 2006 we will have delivered into the construction phase over 200 million in starts. We also have expanded our development pipeline from 792 million last quarter to over 900 million this quarter.

On our existing developments I have the following updates. On Northwest Gateway in Los Angeles we are nearing completion of all on-sites including shoring, foundation and a structural portion of the garage and we’ll start framing in December. This is a complicated high density modified Type 5 wood frame construction deals much like Palermo, Fountain Court, Rivermark and Mirabella deals which we developed in the past. And I'm pleased to report we are on time and our buyout is within budget. Opening is scheduled for December, 2007.

During the quarter we started construction on Lake Union in Seattle. We have substantially completed site excavation and shoring and should be pouring our garage slab in the next 45 days. Having hit the bottom of the hole in the garage we have obtained our winterization development permit from the city which categorically exempts us from any possible shut down by the city of Seattle. In Seattle, there is a very, very tight window to get grading and shirt [ph] work done, late June through October in good years. We beat the weather, which in Seattle at times can be like winning the Lotto. We are scheduled to open 1Q '08.

During the quarter we upgraded two deals from predevelopment into the development pipeline line, Chatsworth, 119 unit development in Los Angeles and 100 Grand, a 230 unit and 7,300 square foot retail to ground floor in Oakland.

Other projects TRS activity we continue to keep our exposure to a minimum and currently only have 68 units in the development construction completed stage. Our strategy in this business is to maintain flexibility to either sell or rent the completed units depending upon markets conditions at the time of delivery. Our fall back rental strategy yield returns on our other TRS business to produce a cap rate yield in the low four to low five range. We do not expect to increase our exposure dramatically in this business much beyond our current exposure.

At this time I would like to give you an update on what's happening in construction costs. Two quarters ago I reported on the rapid rise we saw over the prior 18 months in the 20 to 35% increase range depending upon the specific type of construction and which region the deal is in. In the prior quarter, we started to feel the pressure being taken off a bit on price increases in general and this trend seems to be continuing into our favor in this quarter. We have been budgeting hard cost increases in the 10% per annum range up to our anticipated start dates.

This increased assumption on our estimating strategy seems to be more than adequate at this time. In the near term even though we do believe prices on the upside are waning, we are going to hold our 10% per annum increase assumption. It would be nice to predict a drop in cost, but as is evident in our experience costs tend to go up, yet very rarely go down. Given the unprecedented upward move in hard cost increases we saw over the last 24 months coupled with domestic demands scaling back due to the dramatic fall on the for sale home construction starts, we do sense the near term pressure is off. We have evidence of this in our recent buyout activity on several deals and the number of subs on each job seems, does seem to be increasing. We would not be surprised if the pricing trend continues in our favor during the next couple of quarters but we have assumed the price escalation will continue.

At this time I would like to turn it over to Mike Schall.

Thanks, John. And thank you everyone for joining us on the call. I'm going to report as usual on the operations section. And as expected, operating conditions have continued to be strong on the West Coast reflected by Essex's 7.7% increase in same property revenues for the quarter. At 3% for the quarter the company's sequential growth is the best that it's been in over five years. Further, nearly all of that sequential growth was driven by rental growth as occupancy for the quarter only increased 0.1% compared to the second quarter of 2006.

One factor that helped us drive revenue growth is increased lease expirations which we intentionally scheduled to occur in the more active summer months. For the quarter annualized turnover was 63% versus 57% in the second quarter of 2006 and unchanged from a year ago. In prior calls I've discussed the transition from an occupancy based approach to focusing on increasing rent and I want to report that that transition has now been completed.

As you know, same store revenues reflect rent increases only to the extent of renewals and new leases during the quarter. The portion of mark up rent increases 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 an annualized basis without regard to concessions. During the quarter, loss to lease which is indicated on page F seven on the supplement decreased to 20 million or 5.7% of revenue from 22.7 million or 6.3% of revenue for the quarter ended June 30, 2006.

There were two primary components contributed, contributed to the decline in loss of lease. First, aggressive rent increases and higher lease expirations during the quarter allowed to us convert loss to lease into rental revenue. In addition, toward the end of September increases in availability at roughly 25% of our portfolio led to us scale back rent increasing activities which, and that in turn affected the market rent numbers that are reflected in loss to lease. This we believe is typical of the seasonally slower period that occurs following the summer months.

As reflected in the supplement, concessions were $231,068 per turn and are only provided on a short-term basis to deal with local availability issues. As of October 29, 2006, our physical occupancy of the stabilized portfolio was 96.5%, ranging from a low of 95.6% in Northern California to a high of 97.4% in San Diego. Again, as of October 29, 2006, our net availability was 5.4%, ranging from the weakest of 7.5% in Santa Clara to the strongest of 4.5% at Seattle. At 5.4% our net availability is up from 4.6% as of the second quarter call which we attribute to pushing hard on rents particularly in Northern California and Seattle and the seasonal slowdown that occurs following the strong summer months. I do not believe that this reflects an overall slowdown in the markets.

I would like to make some specific comments on each major part of our portfolio. Starting in the northwest. The data on Seattle continues to be very positive as demonstrated by its 4.5% sequential growth and 11.2% year over year growth in revenue. Seattle generated the best overall performance of the company and that momentum is being carried into the fourth quarter and beyond. As of October 29, 2006, physical occupancy is net availability of 4.5. In Portland occupancy was 95.8 net available of 6.1%.

Comment on home purchase activity, which slowed in Seattle but not as significantly as in California. As you know increased mortgage rates and higher price homes have reduced move outs due to homeownership and that's reflected in this following data. In Seattle homeownership represented just under 20% of our move outs for the quarter compared to 22.4% a year ago. In Portland almost 24% of our move outs were to buy homes versus almost 33% a year ago.

On to Northern California. Northern California was very strong, also during the quarter; and it was led by the San Francisco metro and Santa Clara and Santa Clara County. Although occupancy and availability continued to be relatively strong they are influenced by seasonal issues as we head into the fourth quarter. As of October 29, physical occupancy was 96.4 with net availability of 6.2% in the San Francisco MSA and that comprises Marin, San Francisco, San Mateo Counties. In, let's see, in Santa Clara County occupancy was 95.3, net availability of 7.5%. And for the East Bay, occupancy and net availability were 95.1 and 7.1% respectively. Data with respect to home purchases, it was 11.5% of turns for the quarter compared to 17.6% a year ago.

And finally, on to Southern California, which continues its steady performance. A very positive note for the quarter was a significant improvement in our Ventura County portfolio which reported sequential growth of 3.7% and year over year growth of 6.4%. We attribute this to, to basically altering the balance between pushing rents versus higher occupancy, essentially striving for higher occupancy to a greater extent than pushing rents. And actually I think that that, altering that balance has also helped us in the San Diego market as well, where I just read the availability in occupancy numbers -- they are very high there and it reflects that rebalancing effort. Physical occupancy as of last Monday in LA Ventura was 96.9. Net availability of 4.6% and Orange County occupancy was 95.7, net availability of 5.7%, and again in San Diego, occupancy was 97.4, net availability of 4.8, which is a pretty substantial improvement from last quarter, last couple of quarters. Move out activity attributable to home purchases in LA Ventura, it was 9.3% for the quarter, compared to 13.6% a year ago. In Orange County, it was 10.4% versus 16.9% a year ago, sorry about that -- and move out activity attributable to home purchases in San Diego was 7.9% versus 9.1% a year ago.

Also I wanted to report that we are in the process of migrating nearly all of our accounting and management systems to a platform based on Yardi. We expect to begin the actual conversion process beginning in the first quarter of 2007. Our objectives in that conversion effort include enhanced resident communications via Web site, better information in tools such as revenue management which we have not utilized as much as we will in the future as to the past.

That concludes my comments. I would like to turn the call over to Mike Dance. Thank you for joining us.

Thanks, Mike. Yesterday we reported funds from operations for the quarter of $1.26 per diluted share, or $0.07 above consensus estimates of $1.19 per diluted share. These results include noncore items of $1,650,000 or approximately $0.06 a share. The non-core items include $1 million, or $0.04 per share, in promoted interest from Fund I, and $465,000, or $0.02 per share, in income generated from condo sales. Year over year same property net operating income for the quarter increased by approximately $4 million, an increase of 8.4% compared to the same quarter last year. The growth in year over year same property net operating income was driven by the continued strength in our core markets, as indicated by an increase in same property scheduled rents of over $5 million.

Third quarter expenses were approximately $1 million higher than forecasted, due primarily to increases in insurance premiums and changes in the reporting of utility expenses that I've discussed in previous conference calls. In addition, controllable expenses in San Francisco and Seattle increased as we introduced a new incentive program which rewards our leasing agents and property personnel to increase rents and reduce the number of days a unit stays vacant.

We have increased our 2006 Funds from Operations guidance to 4.98 to $5.02 per diluted share. Our revised guidance assumes that the growth in year over year same property net operating income for the fourth quarter will be consistent with our third quarter results of 8.4%. We are forecasting noncore items in the fourth quarter of approximately $200,000 relating to go condo sales. We do not expect any further promoted income from Fund I as we expect it to be fully liquidated in early 2007. Revised 2006 guidance has total non-core Funds from Operations at $10 million compared to our original 2006 guidance of $6,400,000. The commitment period for Essex Value Fund II ended in October and the fund will be approximately 95% of its capacity after it closes on the Chatsworth development project disclosed in our supplemental schedule. Our Asset Management fees will be reduced to 1% of invested capital versus 1% of total sues described cap much the reduced Asset Management fees will be offset by increases of the development and redevelopment fees paid by the fund.

Consistent with 2005, G&A expenses tend to be slightly back loaded as we accrued management bonuses during the year based on the original budget approved by the Board of Directors. With the better than forecasted results, the Compensation Committee of the Board may approve bonuses in excess of the original target. Accordingly we expect the total G&A expenses for 2006 to be consistent with our original estimate of approximately $21 million.

Another significant change to our 2006 and fourth quarter guidance is the cost of capital. Our original 2006 estimates did not adequately consider the prolonged flatness in the yield curve and we underestimated the cost of our variable rate borrowings.

Lastly, the impact of applying the treasury method to our exchangeable bonds will increase the share count used to calculate diluted Funds from Operations per share.

We are encouraged by our third quarter results and believe these results are sustainable through 2008. The increase in our range for FFO guidance for 2006 to $4.98 to $5.02 per diluted share will exceed managements goal of growing Funds from Operations by 10%. We will provide 2007 guidance in early February as part of our fourth quarter conference call.

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

[OPERATOR INSTRUCTIONS]

Gentlemen, your first question comes from the line of Alexander Goldfarb with UBS. Please proceed.

Good morning out there.

Good morning, Alex.

Just a quick question. I want to go back to the TRS. You mentioned the rental, if I understood correctly, the rental fall back cap rates of 5 to 5%. Does this mean the cap rates that you would get if you sold these properties as rentals or that's the yield would you earn if you had to put these properties into services rentals?

That's the yield we would get if we put them into service.

Okay. So you don't, do you not see a bid for those properties as rentals?

Well, it hasn't been in the business plan. The one property, the Tracy property is something that we considered selling since it's a little bit out of our core but a lot of these properties are literally across the street from existing properties. So frankly they would be melded into existing operations and be operated fairly efficiently. So there's really no reason to necessarily sell them.

Okay. And then switching to the non-core income, I think originally you guys had spoken about potential of upwards of 15 million that you could harvest. I realize that there is the, I think it's the City Heights deal, the second Japanese deal that may potentially be harvested next year. Can you just quantify the amount of potential gains or fees that you guys could realize outside of the City Heights?

Are you talking about in '07 or this year?

In the next 12 months.

You know what, Alex, we are going to give you guidance in early February. Could we just hold off on that? Because there's a bunch of things floating around out there that we are trying to be rational about. So I think it would be best if we put that in the guidance and deal with it that way.

Okay. Then I will ask a simpler line item question then. The G&A of 21 million, does that include any additional bonus for non-core things?

No.

So there's the potential for the G&A to be over 21 million?

Well, no, 21 million is our projected G&A. If there's a specific bonus relates to do a taxable REIT subsidiary it will reduce the taxable REIT subsidiaries income.

My final question is, if you guys could just comment on cap rates that you are seeing between the deals that you guys are looking at and sort of the B product and some of the nearby A product deals? We've seen you guys buy property and some of the other REITS buy property which have very different per unit values but just want to get a sense of the cap rate differential.

Sure. I mean cap rates -- let me start from the north, in Seattle, I think cap rates are 4.5 to 4.75. We are trying to buy in the five range. We haven't been very successful. We haven't bought anything up there for the last probably nine months. Bay Area, there was a huge amount of stuff traded hands here in the last year. We didn’t, in the 4 and 4.75 range which is the newer A kind of stuff, we didn't participate in any of that. We've been in the sort of 4.75 to 5.25 range on B product. We did the one big deal, Hillsdale deal on a 40 plus ground lease, $50,000 base fee going forward annually in the couple of hundred basis points above that.

In Southern California, we actually think there's some hope down there. We are seeing B product in the 5 to 5.25 range. I think A product down there is still in the 4.5 to 5 range. So again it's the prices on some of the A stuff in the very best markets are, as I said, being in the 4 to 4.25 range.

Okay. Perfect. Thank you.

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

Are there any plans for -- hello?

We’re here, Craig.

I'm sorry, it's Mark Barry.

Hi, Mark.

Is there a plan for a next fund on the drawing board?

Nothing on the drawing board. I think we've talked about this many times. I know some of our peers are talking about this is a fee generation business and we didn't look at it that way. We looked at it as a cost of capital alternative. And we did the Fund I and Fund II because we thought it was an advantage in cost of capital and there was a promote et cetera there. Right now, with our stock trading where it's at and our FFO yield, we think that we are better served to buy on balance sheet and that's the intent near term until something changes. Interest rates change, something changes. We like the funds business. We think it’s an effective way to operate, but there's no immediate opportunities or plans to do that.

Okay. And second question was, do you have any numbers on the percentage of leases that might have expired or rolled in the third quarter? And what might be coming up in the fourth quarter?

I don't have those percentages with me. I mean between -- it varies a little bit by market but between the second and third quarter we typically are trying to turn from 60 to 65% of our, trying to get 60 to 65% of our annual turnover within that period of time so the other 35 to 40% would happen between Q4 and Q1. So there are different variations on that basic theme but that's what we are trying to accomplish?

I wanted to get back to the condo question. What cap rates did you transfer those assets into the TRS at?

Well, Peregrine was built by the TRS. So it wasn't transferred in, and what else? Did we transfer any assets in, John?

No, Tracy --

No, they were all envisioned as TRS assets so they were transferred in more.

Okay. The other question was your employment forecast that appears at the back of the supplemental. Do those incorporate the revisions in the household survey for all the extra jobs that were created in the last year? That 1.6%?

As John Lopez is also here --

Those are just the standard, PLS data that came out for September, so incorporate everything that came out through those numbers.

Okay. Thanks.

Your next question comes from the line of Ross Nussbaum from Banc of America. Please proceed.

Hi, thank you, it’s actually [inaudible] here with Ross. Keith, your friends over at BRE yesterday commented that condos are coming back into the market in Southern California, in addition to some troop movements were having an impact on some of the sub markets there. It sounds like from your earlier comments that you are not worried but have you seen any similar patterns of weakness?

Mike Schall is probably a better guy to answer that.

I mean overall San Diego is the weakest piece of our portfolio and we have tried to deal with that by going back to sort of a more occupancy based approach and pushing rent-less which I think you saw, and I think it had good results. We do monitor the troop movement. I don't, and John Lopez, you may want to comment on this, but I don't recall troop movements being a huge factor in this quarter. In fact, I don't think it was. And so, but I'd say overall it's the weakest part of our portfolio. Overall it has caused us to be more conservative in management style relative to some of the other areas and troop movements have been sort of a long-term factor. I don't see anything this quarter that particular affected us. John do you want to add anything to that?

No, we don't think, especially there was any real increase in rotation of the troops that live outside of the camp bases. So that probably wasn't an effect on us in the third quarter.

I think in fact the next major troop movement is scheduled for early next year from what I understand. So anyway, that's our feedback.

Okay, sure. And then following up on one of the earlier condo questions are you still looking at 15% margins on the sales price?

If we were to underwrite anything new, yes, that would be the underwriting standard that we would stick to.

Okay. And on the more traditional developments, should we still think of it as sort of 7.25 and 7.75 on a stabilized deal outlook?

Yes.

Okay. And then one last question I guess for Mike Dance. The CapEx of 77, I guess teach 770 per unit, is that likely to decline at all in 2007 just given the '06 numbers reflected some deferred maintenance that you guys were getting caught up on.

Actually this is Mike Schall, I’ll comment on that. I will tell you that I don't think it will decline and I want to reserve comment until we actually go through the guidance. But I think from my perspective having rotated in this division, I think we fell behind and I think we are still playing catch up and I think that will roll into 2007.

Thank you.

Your next question comes from the line of Karen Ford [ph] with KeyBanc Capital Markets. Please proceed, Ma'am.

Good afternoon. Did I hear correctly that you said when you were pushing rents in a few of the markets that you started having some availability issues? And if that was the case where were those? Was that Santa Clara County, you said?

Yeah, it's hard to differentiate what part of it is attributable to pushing rents and what part of it is attributable to getting through the summer months and going into sort of a slower period. So I'm not sure that I can sort of separate those issues. But it's where we push the hardest. You probably noted that in Santa Clara, for example, we pushed rents very hard. Our availability as of October 29 was up to 7.5%, the highest it's been in sometime. And so you can say, well, gee, what was that exactly and I’d tell you it's sort of the combination of us. So certainly we saw to a lesser extent in the Seattle market and I don't think we are pushing rents -- we are pushing rents pretty hard in LA and Orange County, less so in San Diego and Ventura as I commented. So I’d say that the availability issues were most pronounced in Northern California foreign, particularly in Santa Clara.

Karen Ford Okay. Secondly, revenue management and the other systems that you are implementing, that will be done by the end of first quarter, '07?

Michael Schall Well, we will be beginning the roll-out by the first quarter of '07. It will be a, we hoping to finish in '07. I don't know if we will completely get through that process, our schedule, we have a schedule that comes through essentially a whole year roll-out. So, and then there's a number of things that are sort of on the back end of that. I think that the first thing that we have to do is we have got to do the major conversion and then we will be looking at a variety of other sort of enhancements, technology enhancements to the business that we will roll them out afterwards.

Okay. And finally are you guys looking at any broken condo deals coming to the market, say, in southern California?

Yeah, this is Keith. I’d say this sort of on several levels. One and I will speak for John Eudy just since I'm jumping on this one, but he's seeing opportunities where condo developers had land tied up and that land is coming back to the market and so as it gets repriced does it make sense and so we are looking at some of that stuff. And on the actual broken condo where you've got constructed in place units, historically we've looked at that in some of our stuff in LA was purchased where there were broken condos with maybe 10, 15% actual ownership where we went then back in and bought the units back from the owners and converted back to a rental, 100% rental. We've done that in a couple of instances historically. We are looking at, going forward we are looking at opportunities.

We don't want to get into any situation where we've got significant ownership. Primarily what we are looking at is where situations were built, marketed, didn't sell anything, and taken them off the market -- so we are actively looking at that. And we are looking at a couple of situations where there were properties built in phases where the first phase may have been sold out and the market fell apart in phases Q through X haven't been sold and there would be no problems with ownership in there. So, yes, we are looking at it. No, we haven't come close to doing anything yet because I don't think there's enough pain in the marketplace but I think that there will in a couple of instances there will be some pain and there will be some opportunities.

Are those exclusively in Southern California or are they in any of your other markets as well?

Well, the land piece I think we are seeing opportunities even in that Northern California. But the broken condo existing units is primarily Southern California.

Thank you very much.

And your next question comes from the line of Stephen Rodriguez [ph] with Lehman Brothers.

Good morning. Two questions. First on the $200,000 you guys are expecting in the fourth quarter for condo sales did that include in your guidance?

Yes.

Yes it is, okay. On a separate issue, concessions, on page seven of your supplemental, with increasing demand it makes sense to have decreasing concessions, as you guys have. But why do you guys have increasing concessions in Southern California? Could you comment on that?

Again, it's a property by property decision. If we see their availability going up we will use whatever we need to do to try to maximize cash flow. And if granting a concession is part of that program then that's what we'll do. So this is, keep in mind these markets are fluid. You could have very strong conditions in one part of LA county and you can have some availability issues in another part. It's all sub market driven. They do not act uniformly. They are not in lockstep and as a result of that you can absolutely have variations market by market. We made the comment earlier that we are, we are trying to focus more on occupancy, building occupancy in a couple of the markets that we haven't had tremendous amount of success pushing rents, Ventura and San Diego would be the two key examples of that and trying to build occupancy, trying to increase net cash flow, and again, if concessions are a part of that equation then we will use that.

Okay, thank you.

And your next question comes from the line of Tony Paolone with JP Morgan. Please proceed.

Thank you. Can you refresh my memory on the redevelopment program what the current impact on the P&L is, if any?

Yes, redevelopment, does have an impact because we have -- those units are excluded from same store, so they are not running through same store for the most part. But they have -- there is a vacancy factor that relates to the units that are off-line which, I'm not sure I have the quantification. Mike, do you have a number for that?

No.

But are those units actually out of service where you are capitalizing cost or like the property taxes and things of that nature still running through the P&L?

We are capitalizing a small amount of interest on the unit turns, but that's the only thing we are capitalizing.

So it has a net negative affect. You can't capitalize a negative, you can capitalize interest on the basis I guess, but so it has a net negative amount. I don't have a number for you.

Okay. Second question, in the development schedule there's a footnote about four, I think it was four potential projects with the joint venture partner. Any elaboration on kind of, the magnitude of that and how those might be structured?

They range from land seller JVs to development JVs that we've got with someone that might have an option on a piece of property. And our intent is to have an opportunity to do the entire deal. As far as impacts, the amount that's shown there is the total amount exposure, a little over $8 million.

Be it those projects reach fruition, what would be sort of the size at that point?

They could be much larger. Like I said, whether or not we take it to the next level is yet to be determined. I don't have an answer for you that I can give you.

Okay. In San Francisco you noted that rents as a percentage of income I think was about 25% and historical average was I think 24% you mentioned. Do you think that has any limiting factor on your ability to push rents there?

Well, what I did is I gave you the individual regions and what their rent was and then I melded the whole thing into an average for the region. So actually, if you took San Francisco out individually their average rent or their historical average has been like 27. So the fact that they are at 25 now, they got a little, it's a little bit, they have a little bit of room to run. But I think that our -- we have a significantly greater portion of our portfolio in San Jose and the East Bay. We have quite a small portfolio in San Francisco. So we aren't affected by that as much as you might think.

Okay. And then last question, the Hillsdale Garden acquisition, just curious what the cap rate is there given the ground lease?

It's in the sevens on an economic basis. We have to get there, though. I mean, frankly we are starting out less than that but if you underwrote the rents, the way we underwrite rents, current market rents and then occupancy et cetera, the way it was under written it was in the mid sevens.

And then it actually had about a $3 million loss of lease, that came back [ph] from economic schedule.

Okay. Thank you.

Your next question comes from the line of Bill Crow with Raymond James. Please proceed.

Good morning or good afternoon, guys. I was interested in the change in the move outs due to home ownership. It seemed like it came down quite a bit in the quarter. Is that a trend that you saw accelerated during the quarter and do you anticipate that continuing to change or was that some seasonal impact in there?

I don't think so. I think it goes back to consumer confidence and whether people think buying a house is sort of a good investment, how motivated are they essentially to step in to buying a house and incurring some of the costs that are associated with it. Obviously, from the numbers Keith threw out, we think that rental is a bargain relative to home ownership. And the other thing that possibly tips that scale is that people think they are going to make money on their house.

So I think it reflects more of the overall condition of the marketplace, where just the expectation for homeownership is much less than it was a year or two ago and people are content as a result renting for a longer period of time. So I think that that general attitude is what you are seeing in those numbers. And an interesting question is, we are starting to see obviously a little bit of a decline in interest rates on the longer term. Whether that translates back into a little bit more demand for housing, I'm not sure. We haven't seen that yet. But obviously if the long-term rents go down significantly we would expect the interest in homeownership to start rolling again.

Mike, do you see on any increased move outs due to relocation, people just with the economy starting to slow, people moving to places where it's cheaper to live or other areas?

Not at all. I mean remember where we've come from, Bill, the last five years especially here in Northern California and Seattle we have, rents have declined, what, 40, 50%. So no, don't think that's been such a factor. I think in 2001, 2002 you had a lot of people take an early retirement, a lot of people moving out of the area, we had 200,000 jobs lost in Santa Clara County in 2001, 2002, so I think that's when you saw that. I think now we are enjoying at least for the moment some pretty good times here and we don't see that.

Okay, terrific. Thank you.

And your next question comes from the line of Dave Rodgers with RBC Capital Markets.

I wanted to follow up on the general economic commentary that you had. With stable supply and a stable job forecast you did increase the rent growth assumptions for the market. I mean, could that imply that we are getting to the top or the peak of rental rate growth more quickly? Can you comment on that? And then I have some other questions.

Are we getting that more quickly? I think that there is overall the way we look at the way, the way we try to look at the potential is affordability. And this metric that we follow is how much of the mean household income is being spent on rent. And we think it's important. I think there's two issues going on. Right now we have income growth still continuing. And we have rent growth accelerating. But I do think as I said in my comments I think we still have at least two years of these kind of rent levels going forward. So it's hard to -- sort of hard to split hairs. Are we three months ahead of where we might have been if we had stayed at 7%, I can't answer that.

Maybe on that affordability issue, and I don't know how much it matter to say your economic forecast, but what rate of home price appreciation or depreciation are you currently estimating in just call it maybe each of the three regions?

Probably right now we are looking at five to 10% depreciation in Northern California, and probably that type of number on the low end in Seattle and LA. And probably maybe a little more of the ten to 15% potentially in San Diego and Ventura and Orange, only because they had a much higher run. So even with all that said we still expect the affordability to be significantly lower than what traditionally it's been over the last 15, 20 years.

Okay. In terms of the development and redevelopment pipeline given the continued additions to those where do you think those go? I mean is there a certain level that you're comfortable with and given your reduction and your weighted-average cost of capital will acquisitions become a bigger piece of the overall mix?

Well, I think our goal is, first of all let me start with redevelopment. Redevelopment is we've got a portfolio of 127 million properties that we are going to go through and where we can benefit by improving those properties we are going to go continue on. I think we've gone a couple of years of this range of activity left just in the existing portfolio without any new acquisitions. With respect to the development pipeline, our goal is to, with cap rates so aggressive, is to really see more of our new external growth coming from development. And our goal is to deliver a couple hundred million dollars a year into operations from development.

The fact that the pipeline is now $1 billion or is because it's really about five-year pipeline so it's really about a couple hundred million dollars a year. And that's what we are trying to achieve there. And cost of capital as it affects acquisitions we struggle with that every day and we think about, should we be more aggressive and go out and buy lower cap rate things but we are trying to keep our focus and trying to keep our discipline and make sure that we have FFO accretion day one on our acquisitions. And even with our current share price our FFO yield is quite, it’s around four. But you layer on a little bit of debt and all of a sudden you’re back up to mid to high fours. And I think right or wrong we believe that we should be accretive day one coming out on these acquisitions. So we are going to continue to sort of hunt and peck and our level of activity. I assume we could continue doing a couple hundred million dollars a year. That shouldn't be a problem. But we’re not going to go out and load up the truck just because we have a little cost of capital.

On the development front that we haven't talked about for awhile and just to gauge your overall thoughts about condos, have you continued to pursue condo maps on the California development?

Yes. Every deal that we can unless there's a specific prohibition in the community that we are in, that we map everything.

And final question for Mike Schall or Mike Dance, do you have just a rough estimate of what the technology initiatives will cost you as you roll-out in 2007?

Roughly 2 million.

Okay, thanks, guys.

At this time there are no more questions in queue. I would now like to turn the call over to Mr. Keith Guericke for closing remarks.

Thanks for joining us today and we appreciate your interest. And we will talk to you in February. And in the meantime if anybody has questions please call us. We are here to help you. Thank you.

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