Essex Property Trust Inc (ESS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Essex Property Trust earnings conference call. My name is Sharrell, and I will be your facilitator for today. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. I would now like to turn the presentation over to Keith Guericke, President and Chief Executive Officer. Mr. Guericke, you may proceed.

Thank you. Welcome to our call this morning. We will be making some comments on this call which are not historic fact such as our expectations regarding market 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 you to review them. Joining me today on the call will be Michael Schall, Michael Dance and John Eudy. On our web site you will find our market forecast for 2007. We will discuss the highlights in the market section. 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 median home prices and affordable as compared to the Essex market. To get those details go to our web site under analysts resources. Last night we reported another strong quarter with core [inaudible] increasing 11% per share. For the quarter, the portfolio grew revenue 7.7% greater than the same quarter in '05 and 1.3% on a sequential basis. For the full year, we achieved 11.9% increase in FFO which is the strongest increase we have seen since 2000. The strong performance is driven by the fundamentals in our supply constrained market as well as management team. Our management team gets it, it understands what it means to be aligned with our shareholders. I'm very proud of the team and the results they have achieved.

Let me just touch on single family for a second. Clearly, the overheating in the for-sale housing market is ending. Sales of existing home price -- home sales were down 11% nationally in December with median prices flat during this period. In addition, the fourth quarter 2006 US DVP Report showed the value of residential development down 13% from the previous year. Finally, total single family permits in 2006 were down 15% from the previous year. These trends have been similar across most of the larger metros. We believe there will be a reduction in existing median home values across the U.S. in '07. However, this decline will be moderated by sharp reduction in new home deliveries indicated by the slowing permit activity. In addition, we expect the nonresidential sector of the economy to be strong and jobs will continue to grow near the average of the last several years. The existing home price depreciation will be largest in those markets where new supply remains high. We do not expect sharp declines in interest rates. Thus, for our markets, the affordability of single family homes will not change significantly. Renting will still be very attractive. Let me just give you a couple examples of those values in our markets. And starting in Seattle where the median home price is $392,000. The net mortgage after tax savings is $1974. When you compare that in that market to a three-bedroom, two-bath at about $1295, which is 66% of what it costs to own a home. San Jose where median home price is $743,000. Net mortgage after tax savings is $3260. Compare that to rent for a three-two at $2050. Again, rent is about 63% of the mortgage. And finally, in Orange County, where the median home price is $724,000, the net mortgage after tax savings is $3180. Compare that to rent, $2270, again about 71% of mortgage. We think this is going to help us going forward.

Overall our regions have performed about as we expected in 2006, with respect to job growth. In all of our markets the low unemployment rates are driving stronger income growth. We expect overall portfolio market rent growth to be approximately 150 basis points below the strong numbers we experienced in '06. This forecast is based on our expectation for market fundamentals going forward. Our expectation for job growth and total supply is marginally lower than we experienced in 2006.

Now, let me touch each market quickly. In Seattle the strong expansion will continue in 2007. Market as a diverse mix of industries that are performing well. The Seattle metro continues to show remarkable strength across most industries including manufacturing. Labor force is going very strong while unemployment continues to fall. As expected multi-family supply is increasing, but still very low by historical standards and as a percent of existing stock at about .9%. We forecast market rent growth at about 7.5% with market occupancy at 96%. Rents are still affordable in this market despite the the strong rental increase in 2006 because of the growing income levels. Seattle is the strongest housing sector in our markets. Sales were down about 15% in December from the previous year, but prices were up about 13% during the same period. Residential supply will be flat from last year, so there will be no significant job losses.

In Northern California, job growth rebounded strongly in '06. For December, year over year growth in the industry jobs was 52,000 or up about 1.8%. Unemployment in the fourth quarter was down to 4%. More importantly, the labor force growth has returned to Northern California and was 0.9% in the fourth quarter. This is after several years of declines as we have talked about in the past. We expect 55,000 new jobs, or 1.9%, in 2007. And this is going to probably affect San Jose and Oakland to a greater extent. New total supply for 2007 is forecast at 16,300 units, and that's multi-family and single family -- or about 0 8%. And that's about the same as 2006. We forecast market rent growth at 6.75, with market occupancy at 96%. Breaking that down, that will be 7% growth in San Francisco and San Jose, and 6% in Oakland. Commercial activity in the region remains strong. Vacancy rates are falling towards 10%. We expect construction activity to increase sharply from virtually 0 growth over the last several years. The single family market has performed better than expected. In December, sales activity was down 20%, but median prices were flat. This trend was consistent across the region. We expect to see some minor declines in home prices in 2007, though.

Finally going to Southern California. Job growth in the fourth quarter in our Southern California markets was 1%, which was below our expectations. The weaker growth came primarily in Orange and San Diego Counties. In 2007, our job forecast is about 100,000 jobs, or 1.4% growth. Forecast for total new supply for the region is 42,500 units or 0.8% of existing stock. This is down slightly from last year. Most notable changes in single family supply in the San Diego area from 9000 units down to 7500. In addition, the other thing that's hard to sort of sort out when we talk about these numbers is that the majority of these single family units are being produced in the far north part of L.A. County, which is not part of our in-field location. We expect the apartment market in Southern California to remain about the same as '07, expecting rent growth of 3.5 to 5% depending on the sub-market with the lowest growth in San Diego. We expect continued improvement in Ventura. The single family market performed as expected in '06. In December, sales activity was down approximately 20% with median prices flat for the region. If you go to the sub-regions, prices were actually down 6% in San Diego and Ventura, up 3% in Orange and up 7% in L.A. County. Afford ability remains extremely low in each of the Southern California markets.

Let me just touch quickly on cap rates. Starting in Seattle, cap rates remain very aggressive, A and B properties range from 4% for the best A's to 4.5% for the B's. Northern California, the spread is slightly wider at 4 to 4.75%. And Southern California is slightly wider yet at 4 for the very best stuff to about 5%. So in summary, we believe Southern California is going to continue on its current healthy growth path through the foreseeable future. The good news is Seattle and Northern California -- we believe these apartment markets are going to have an extended period of above average rent growth going forward. Now I would like to turn the call over to John Eudy.

Thank you, Keith. and good morning everyone. I will give brief update on our recent development activities. First of all, on the development acquisition front. In San Jose, we closed escrow on a 14.2 net acre site currently improved with a four building campus containing 262,500 net rentable square feet. The buildings are only 15 years old and in great shape. We controlled the site since June of 2005 and closed after obtaining a general plan amendment allowing multi-family residential density of 55 to 90 units per acre. The purchase did include a lease back from the seller for two years plus two six-month extension options. The cap rate on the lease over the obligated term is approximately 5.5%. We are in the process of obtaining our project specific approvals.

In Seattle, we entered into an agreement with a landowner to enter into a joint venture to develop a property into a mixed use residential retail development. The deal will have approximately 280 to 320 residential units and 20,000 square foot of ground floor retail. The project has zoning for development, and upon obtaining project specific approvals ,which we anticipate in early Q3 of this year, we will start construction. After approvals and prior to construction start, the landowner contribution partner has the option to either enter into a joint venture with us, wherein we will be paid development fees and property management fees and at closing we will match the land value with a cash investment. Or the partner can choose not to go forward with the development, and we have an option to purchase the land at a fixed price.

In Los Angeles community of Chatsworth, we closed escrow in December on Chatsworth, a fund two asset consist being of 119 units with a construction scheduled start date of June of this year. On our construction progress, we added to our construction pipeline in December $100,000 located in the upper Lake [Merit] neighborhood of Oakland. This will be a 238 unit residential building plus approximately 7500 square foot of ground floor retail and is scheduled for completion in 4Q '08. I might add that our cost per unit on that transaction was $16,500 a door for the residential portion. On Northwest Gateway in Los Angeles we continued on plan and on budget on our 275 unit development. We have completed a garage and the type-one construction and have started framing. We are scheduled for an early first quarter '08 opening. Our land cost on that transaction was $29,545 per unit. On our Lake Union deal in Seattle a fund two asset we have survived all time record setting rain in the fourth quarter and have managed to only slip in our schedule approximately three weeks in the process. 50% of the garage is complete and we are scheduled for a January '08 opening. Our land cost on that transaction was $39,800 per unit.

On predevelopment projects we expect to have two other deals which are shown in our F9 on our predevelopment schedule move into development phase by mid Q2. We should also start construction on two fund two assets Chatsworth and Studio City. On construction costs, last but not least, on construction costs we are continuing to see sub contract activity increase on our construction buyout process. It it does seem that costs are continuing to stabilize in the right direction as I mentioned in the last quarter call. We do however still assume 10% annual hard cost increases in our internal underwriting budgeting process. At this time, I would like to turn the call over to Mike Schall.

Thanks John. And welcome everyone. I'm going to follow the format of previous calls starting with some broad comments about the West Coast markets and ending with some factual details. We're pleased with the results of the quarter. Sequential revenue as you know increased 1.3% and that was net of a 90 basis point drop in financial occupancy and a $40,000 increase in same store concessions. That sequential revenue result followed a 3% sequential increase in the third quarter of 2006. The fourth quarter is seasonally our weakest caused by reduced traffic for the period beginning before Thanksgiving and ending on Super Bowl Sunday, while the fourth quarter followed its general pattern it was a significant change from the broad strength that we had in the second and third quarters of 2006. In Northern California and Seattle, which were our strongest markets through the third quarter, we initially tried to hold the line on rent given growing availability, and in that process we accepted more vacancy and month to month exposure. It became apparent that the seasonal slow down was more widespread than initially anticipated, and we altered that strategy accordingly. As a result we had had more sub markets that experienced occupancy issues in the fourth quarter leading to moderate and we believe temporary red declines in concessions. We have seen traffic patterns in Northern California and Seattle pick up in the last two weeks and occupancy is also firmed. I also believe that relationships between rents and gas prices affected sub markets that have greater concentration of commuters such as the [inaudible] empire.

We comment on loss the least each quarter, and the loss to lease amounts decreased by approximately $6.6 million as compared to Q3 2006. And now stands at 3.7% of scheduled rents. The reduction loss of to lease was focused mostly on Northern California and Seattle and reflects discounting of market rents that occurred at year end. On a per unit basis, the reduction amounts to about $22 per unit per month. The largest component of that number was a $55 per unit per month decrease in Northern California. We attribute this to the normal process of increasing rents upon these expiration and discounting market rent that occurred at year-end due to increased availability. As reflected in the supplement concessions were 271,000 for the quarter, $97 per turn. This result is increased from $68 per turn in the third quarter of 2006 and $70 per turn in the fourth quarter of 2005. As of February 5th, our physical occupancy of the portfolio -- the stabilized portfolio was 95.3%, ranging from a low of 94.7% in Orange County to a high of 96.7% in San Diego. Again as of February 5th, 2007, our net availability was 6.1%, ranging from the weakest part of our portfolio 7% in northern California to the strongest at 4.3% in Portland. At 6.1% our net availability increased 21% from the 5.4% that we reported on the third quarter call.

I'll now make some specific comments on each major part of our portfolio. Starting in the Pacific northwest. Seattle continued to lead the portfolio with 11.7% rental revenue growth year over year and 1.5% sequential growth. That sequential growth also reflected a 1.1% decline in occupancy. Overall, the strongest sub-market continues to be downtown Seattle followed by the east side and the weakest portion of the overall Seattle market is south of Seattle. As of February 5th, physical occupancy in Seattle was 95.2, net availability of 5%. And in Portland, occupancy was 96.5% with net availability of 4.3%. Home purchase activity represented 19% of our move-outs for the quarter, compared to 27, almost 28% a year ago. And in Portland, 25% of our move-outs were to buy homes, versus 45% a year ago. Traffic was down sequentially in Seattle, as expected, 23% and essentially flat from a year ago. Similar numbers in Portland.

In Northern California, the Bay Area continues to perform well and overall results were led by Silicon Valley with 10.8% year over year revenue growth, representing a pretty dramatic turn around during 2006. While Northern California experienced sequential revenue decline of 0.2% that included a 2.5% decline in sequential occupancy, which we expect to correct here in the first quarter of 2007. As of February 5th, 2007, physical occupancy was 95.3% for Northern California portfolio and net availability was 7%. Within Northern California both the San Francisco, Santa Clara sub-markets are very strong while the East Bay, which represents both Alameda and Contra Costa County, have almost 9% availability and comprise much of the decline in same property occupancy. Traffic was down sequentially 9.3% and still up modestly from a year ago. Move-out activity related to home purchases was 13% of our turns for the quarter compared to 18% a year ago.

Now on to Southern California -- as Keith indicated -- Southern California has continued strong steady pace during the quarter and we believe is well positioned for 2007. We're particularly pleased with the 6.6% year over year growth in San Diego which I attribute to a good local management decision to focus on occupancy and availability rather than rents during the second and third quarters. Traffic for L.A. and Ventura County was down sequentially 30% and flat year over year. Orange County traffic down 24%, but up 25% from the year ago and San Diego traffic down 24% and up 11% from a year ago. Physical occupancy as of last Monday in L.A. and Ventura was 95.1%, net availability 6.2%. In Orange County, occupancy 94.7, net availability 5.9%. In San Diego, occupancy 96.7, with net availability 6.9%. Move-out activity attributable to home purchase was down in each of our Southern California metropolitan areas.

I also wanted to make a view brief comments on redevelopment which is a very important, which is very important to it us given our concentration of B-quality properties in A-locations. We have expanded the disclosure of our redevelopment efforts on page F 10 of the supplement. We typically save our redevelopment projects so that we complete property exteriors and amenities first, then follow up later with renovation of apartment interiors. Accordingly, we have not reached the point -- and you have to reference page F 10 for this -- for these comments to make sense, but accordingly we have not reached the point of completing unit turns on properties that do not report rehab vacancy loss on page F 10 of the supplement. On the remaining projects where we are completing unit turns -- there are seven of them -- we completed the rehab of 137 unit interiors, mostly concentrated at Palisade in Belleview and [Mirimonte] in the San Diego area. In addition to the redevelopment project, operations is also will completing some rehab transactions and those units -- rehabs remain in -- actually had a small negative effect on the results of our same store portfolio due to the vacancy during the rehab process. And the number of rehabs we have completed within operations during the quarter was 56. Now I would like to turn the call over to Mr. Dance.

Thanks Mike. My comments today will start with the highlights of our 2006 results and will finish with some comments on the 2007 guidance. Yesterday we reported funds from operations for the fourth quarter of $1.19 per diluted share, an increase of 21.5 % compared to the funds from operations per diluted share of $0.98 reported for the fourth quarter of 2005. We ended 2006 with funds from operations of $5.01 per diluted share, an increase of 11.9% over $4.48 per diluted share at the end of 2005. The 2006 year-end results are $0.01 higher than the mid point of our most recent guidance. Funds from operations in the fourth quarter was reduced by approximately $400,000 for damage caused by the December storms in the Pacific Northwest. Given the significance of these repairs we have excluded this expense from our same property comparisons. Excluding nonrecurring items, core funds from operations was $4.62 per diluted share, an increase of 10% over funds from operations of $4.20 per diluted share in 2005.

The year over year growth in funds from operations per share was driven by the strong increase in same property net operating income of 8%. 2006 NLY increase was primarily achieved with the increase of same property scheduled rent of $17.3 million or a 6.5% increase over 2005. In 2006 the same property vacancy loss increased by $1 million, which was offset by decreases in concessions and delinquent fees totaling $900,000. Other same property income increased by $1.4 million, or 9.4% in 2006, compared to 2005. Results for the quarter include nonrecurring revenue items of approximately $560,000 or $0.02 per share. The nonrecurring revenue items include approximately $200,000 of [inaudible] income from fund one and approximately $400,000 related to the sale of 17 condo units in Peregrine Point, which is net of taxes and allocated costs. In the fourth quarter of 2006, compared to the same quarter of 2005, same property rental income includes an increased in scheduled rents of $5.8 million, or 8.3%, a decrease in rental income caused by the drop in financial occupancy of almost 1% to almost 95.9% vacancy -- I'm sorry, occupancy, which resulted in a vacancy loss of $900,000 for the quarter, and other property revenue increased by approximately $500,000.

Year over year same property operating expenses were 1% higher than our 2006 guidance of 3.9%. This 1% increase was caused by our first quarter change in accounting for rough reimbursement as other income instead of netting it against the utility expense, higher than expected insurance premiums and an increase in turnover expenses. General and administrative expenses for 2006 totaled $22.2 million or $1 million higher than our guidance. The increase was result of increases in performance based compensation as the adoption of FAS 123 R resulted in higher than expected charges to earnings and cash bonuses were higher with the strong year-end results. As we look forward to 2007 guidance, we are starting the year with almost 96% financial occupancy, limited concessions and growing rents. We estimate that 2007 funds from operations per diluted share will range from $5.40 to $5.60. Our 2007 guidance assumes increases in consolidated same property revenues will range between 5.5% to 6.5%. Increases in operating expenses will range between 2.5 % and 3.5 % for an average increase in same property net operating income of approximately 8%. Mid point of the 2007 guidance assumes income and gain realized during the first quarter of 2007 will be approximately $25 million. Of this amount approximately $10 million will be included in funds from operations. Most of the $10 million represents fees earned from a land lease which has been accounted for as a joint venture. Certain fees from the land lease have been earned, but have not been recognized for generally accepted accounting principle and funds from operations and will be recognized when the fees are paid in the first quarter. The $10 million estimate also includes approximately $400,000 from the net proceeds expected from the sale of condominiums at Peregrine Point. The other $15 million in gains mentioned in the press release are are not considered funds from operations as both assets have been included as operating assets. We have postponed the sale of town homes at the [Tracey] development until the for-sale housing market recovers. We recently began marketing the 30 town homes as rentals which will be reported in our first quarter operating results with the other real estate assets reported on F7 in our supplemental reports.

The 2007 general administrative expenses will be approximately $24 million, of which $1.2 million represents allocation of cost for funds to development and redevelopment activities. The fees earned from the fund for managing these projects are recognized as revenue and associated cost to manage the projects are allocated to general administrative expenses and are not capitalized. The $300 million estimate for 2007 development activity should be approximately $150 million of construction costs, which includes fund 2 construction activities, $100 million on the predevelopment pipeline, which includes the San Jose acquisition that closed in January and $50 million of targeted new development projects.

We have not provided quarterly guidance for 2007. In lieu of quarterly guidance I will provide a brief reconciliation between our fourth quarter 2006 results and what we expect the recurring funds from operations without one time items will be in 2007. On F3 we have disclosed recurring funds from operation of $1.17 per diluted share. In my comments above and on F7 we have disclosed storm related expenses in the fourth quarter of approximately $400,000, which reduced funds from operations by $0.015 per diluted share. Adding $0.015 to the $1.17 is $1.185. This fourth quarter proforma results of $1.185 approximates the results achieved in the second and third quarter. This amount annualized, or $4.74 of funds from operations per diluted share is expected to increase by 8% during 2007 and will result in recurring funds from operations of approximately $5.12 per diluted share or a 10.6% increase over the recurring funds from operations in 2006. Most of this increase recurring funds from operation is expected to occur in the last two quarters of 2007 as we expect to see slightly higher occupancy levels in the first half of 2007 and then the increase in scheduled rents to market rents when the leases renew in the second and third quarter. This concludes my remarks. I will now turn the call back to the operator for any questions.

Thank you. [OPERATOR INSTRUCTIONS] First question comes from the line of Alex Goldfarb of UBS. You may proceed.

Good morning.

Good morning.

Just quickly on the guidance, the $10 million from City Heights and Peregrine Point, I believe that's at your mid point of the range.

That's correct.

Okay, so in order to get to the top of the range, sounds like there may be some additional gains or performance from the portfolio. If I think about just other items that you guys may have that would produce gains, can you just share with us what some of those items may be.

We're not assuming anything from a mezzanine level on East Ridge. We have, you know, the town homes at Pere -- Tracy that I mentioned. So there are other activities, tactual resubsidiaries that may present opportunities to generate funds from operation.

Okay. And do you care to comment on on what that, what those potential contributions could be at some point?

No plans to do any of them, so I don't think it's appropriate to comment at this time.

Okay. What is the total asset value of assets in redevelopment?

Oh, you want in addition --

You want the basis of the assets?

Yes. You guys list the NOI, you list the redevelopment spend, but I wonder what the total asset value is.

Well, I mean, I would say it probably averages around -- I don't have a number in front of me, Alex. But I would say, based on cap rates and assuming we're not -- they were not trading in the midst of redevelopment, from $200 to $230 a unit, probably for these. Keith, I would say that's a pretty good average, as rehab let's say.

Alex, I'm still confused. Are you asking what the book value is or what is the value -- current value if they were sold?

No, what the book value is. Some companies will break it it out so that way you can sort of back out the NOI and get a better sense for what the proforma contribution will be going forward.

Sorry Alex. I misunderstood that. We do have the book value broken out in our 10 K from last year. So that number is readily available, I don't have it with me.

Okay.

The supplemental real estate schedule, at the back of the audit financial statement. It is there, we just don't have it right here.

Okay, okay. And then as far as competition for new deals, what are you seeing the most competition for, is it office conversions, you know, traditional apartment deals, failed condo deals.

Well, I'd say on the acquisition side, the condo conversion market is gone pretty much. So there's none of that activity going on. So it's really, it's the income buyers out there that are looking for, looking for income, and we have seen this year the newer, better located stuff has been aggressively bid and, you're looking at literally four caps. And we'ver been -- we try to be selective, continue to look at A markets, but look at a little bit older properties -- B properties -- get a little bit better cap rate with a better accretion. We do have our rehab program that we can add value to. John could comment at the development side, what's aggressively sought after.

On the development condo break-up deals, the ones that we're intended to be built out as condos, there are several out there. As you know we purchased two of those deals, Chatsworth and Studio City last year. The problem is the spread where it works as a rental versus where they're contemplating it being on a for sale. It's a little problematic to get a deal. We do have a couple that are in our shadow pipeline that we are working on. Beyond that it's competitive out there for A-sites, and we're beating everybody's head trying to get to the right deal.

Okay. And just my final question, can you give us a sense of what you're seeing as far as composition of tenants. A number of years ago we were seeing people trading up as rents were coming down. Are you guys seeing people trade down now that rents are going up.

I think you're referring to the '99, 1999 to 2001 period. We definitely saw -- because rents were pushing the rent-to-median income ratio -- they got as high as I think like 32%. Rent-to-median income ratio in San Francisco for example, which was very high, the highest point we have seen historically. And as a result of that you had double ups, you had newspaper articles that were talking about the police, the fire people living way far away from their local communities and a variety of other things. We're not seeing that Alex because the rent-to-median income ratios still are, in Southern California they're at about -- well, actually Southern California in downtown San Francisco they're at about the long-term historical rate. So we still haven't pushed that ratio like we did in the late '90s and early 2000 era. In Santa Clara County, the East Bay, and in Seattle we are well below sort of the long time historical average. So we have not seen that happen yet, and it doesn't seem to be warranted looking at the relationship between rents and median incomes.

Okay, thanks a lot.

Next question comes from the line of Jonathan Litt of Citigroup, you may proceed.

Hi, it's Craig Melcher here with John.

Good morning.

Can you talk a bit more about Northern California, the slow down in the fourth quarter. I know you went through a bit of color, but if you could go through those traffic numbers again and maybe discuss what did surprise you to cause the rents to come down a bit and the occupancy to come down.

Well, in the traffic numbers, if you look year over year it was fairly close. You know, 2005 versus 2006. I think the difference was that Northern California picked up enormous head of steam in early 2007 and that continued unabated through the summer months. And we thought that would continue into the fourth quarter. So we didn't expect to see sort of a dramatic reversal following the same. It ended up following a similar seasonal pattern that it historically has, but given the strength that we had in the second and third quarter we thought that would continue, and again, what we tried to do as a result of that is, we're trying to increase our scheduled rent obviously. So we were holding off and waiting for conditions to improve and found ourselves in a bit of a hole. Then as a result of that, then we became, we became more aggressive and, and was -- were trying to make sure that we didn't build a huge hole to start 2007. So that's the color. I mean, and again since we've been watching traffic patterns on a week by week basis throughout the fourth quarter and into the first quarter, and really only in the last two weeks have we started to see things really pick up. It's very difficult to increase occupancy when there's no traffic available in the marketplace. So we think that that situation is largely behind us. So if you look year over year it sort of follows a seasonal pattern. We were just a little bit too aggressive as we entered the fourth quarter.

And on the disposition activity expected for '07, can you just give a little more color on the cap rate we should expect on the first quarter deal and the market.

The first quarter deal is going to be in the mid fours. And then, that's the Southern California asset. And as far as, I mean I gave you cap rates on the market. I think Southern California given, best stuff, A stuff is going to be at fours and slides to about a five depending on the quality of the assets. This asset is a older B asset in a solid B market, and it's going to be at about a mid four.

Thank you.

Craig, just to note on that, you know it's in a joint venture right. So the cap rate for the transaction in total is somewhat different than it is on our interest primarily because we have some incentive based piece to that. So I just want to clarify that.

Our next question comes from the line of Steven Rodriguez, you may proceed.

Hi, good morning. A few questions. You were speaking about your San Diego sub market how it's relatively weak compared to the others. But I see sequentially you had pretty strong revenue growth. Is there anything there that you see continuing.

San Diego, you know, we argue that it's the weakest overall of the southern California MSA's and that is a thread you will see through John Lopez's economic research and other stuff and a variety of things. They do have a little bit more supply. San Diego was the one market that allowed essentially unfettered conversion of apartments to condos and has therefore more impact of some of those units coming back on the rental market. And then the issue with the military component of that market. So again I think our results were more a function of sort of recognizing that pushing rents was not the appropriate, was not necessarily the appropriate thing in the marketplace rather it made more sense to really focus on availability and occupancy and we did that. That was the one market we were less aggressive on, as a result of that it performed better in the fourth quarter relative to the market that we expected to do better. So I think it continues to be -- it continues to struggle. The military impact is a little bit hard to judge at this point in time given we don't know exactly what's going to happen to troop deployment, therefore we're taking a conservative approach, focusing again on occupancy and availability in that marketplace.

Okay. I was wondering if you can speak about your dividend policy. I see that it hasn't been pretty much grown since early '06. And I believe you guys are establishing pretty good coverage into '07.

Our policy has been to grow our dividend at approximately the same rate that our FFO growth and that is generally done in the first quarter of each year. We have a board meeting in a couple of weeks and that issue will be addressed. And so I would expect that you will see some dividend activity in the next two to three weeks.

Okay. Great. And one last question, forgive me if you spoke about this earlier, but on your CapEx I was wondering if you could talk about CapEx or current CapEx per unit on average and see where you see that or talk about where you see that trending over the next few quarters.

Sure. We have included a Cap Ex estimate in the guidance of 850 per unit. A little bit of color on that, I think normalized Cap Ex is somewhere in the 650 per unit range. However, I think we fell behind a bit the last couple years, so there is a certain sort of catchup element to that number. But a sort of long haul normalized number is like 650, and it will be 850 in 2007.

Okay, great, thank you.

Next question comes from the line of Bill Crow of Raymond James, you may proceed.

Good morning guys. Keith, you talked about the spread between renting and owning cost -- ownership cost. Could you put that in historical perspective and maybe how narrow does that gap get before it swings back the other way.

Well, I think that the, the thing that we look at is what's the tax benefit of ownership. And so if on a all in basis, if the rents get to within about 20% before, before tax savings, that's kind of the number. So right now we are, again if you looked at the assumption that went into our numbers was we assumed a 30 year loan, 10% down, 6.25% loan and we used a tax rate for the tax savings of 27% on the federal assuming these people weren't all highest marginal earners, and 9.8% in California. So the Seattle, the gross mortgage was $2561 and the rent was $1295, after the tax savings the net mortgage was $1974. So we have a lot of room in these numbers. And I think that answers your question.

Is the spread today as big -- as wide as it's been or has it it been wider.

It's about as big as it's ever been. Because we've had just this enormous run-up in home prices over the last few years. That's probably more responsible for this than the fact that our rents are, have been -- we have come out of this the last three, four years with pretty flat rents. So it's a combination of the two, but I think that the run-up in home prices have been more responsible for the the large gap than the flat rent.

Okay. All right, thank you.

[OPERATOR INSTRUCTIONS] Next question comes from the line of Karen Ford of key bank capital markets. You may proceed.

Good afternoon. You mentioned in your guidance you're planning to do $50 to $75 million of equity capital transactions. Can you give us a little more detail about what those might be and the timing of those.

Well, in 2006 our pattern was to go into what's called a controlled equity offering. We'll have a shelf registration that enables us to go into the market when the time is right and we have opportunities to fund some of our development activity.

Okay. So that is pure common equity, that's not asset sales, JVs, that's pure through the continuous equity offering.

Yes.

Okay. Secondly, in your guidance you mentioned you're not going to have a carry on development in 2007. Is that a product of just what the stage that your developments are in, or are you guys doing something differently than others are not to have any development carry this year?

I'm not sure where that comment's coming from. We do disclose capitalized interest. So I'm not sure --

No, I guess the question is some of your peers have had development carry hit their expense line item. And I assume -- is the reason why it doesn't hit yours just because your developments are not coming on line until 2008, so you're able to capitalize the interest throughout the year in '07?

Right.

Okay, fair enough. Final question, can you tell us what the yield on investment was, is going to be on Tracy as a rental.

Approximately a four cap.

Four cap, okay. And any plans to add any additional condo conversions into the TRS, beyond Peregrine?

Not right now. I think, you know, the market has softened up, and it's something that probably doesn't make a lot of sense right now. So we will not pursue that aggressively.

Okay, thanks very much.

Next question comes from the line of Thayne Needles of Robert W. Baird. You may proceed.

Good morning guys. Could you give me -- remind me of what your expectations are for yield for the projects underway and how those, the development projects and how that varies if at all from the your expectations for yields on the projects that are going to go in where construction will begin in the second half of the year.

This is all of our development pipeline right here?

Yes, the three projects you have got currently underway.

Yes, the stabilized yields are in the mid-6 range.

Okay. Will that be different at all, your expectation different at all from that number for the projects that are going to begin construction for the second half of the year?

No, that's about the -- it ranges from the low six to seven on any particular deal. But that's really our target.

Okay. And then maybe for Mike Dance, just a point of clarification. Mike, is there any other -- did you mention, are there any other dispositions planned currently beyond City Heights.

No, that's what's in our guidance. That's the only one that we have heart and money expecting to close in the first quarter so --

Okay, thanks guys.

Next question comes from the line of Dave Rodgers of RBC Capital Markets. You may proceed.

Hey, Keith given your comments on the condo business drawing up on the conversion side, what's your total exposure even though my census is low on MEZ loans or any outstanding exposure you might have in the TRS to other condo operation.

We have a $2.5 million loan out on the deal in San Ramone. And we have about $6.5, $7 million on a small deal in L.A. Which is actually not a MEZ, it's a conversion loan that was done to a small developer down there. So in total about $10 million, $10.5 million.

Do you anticipate any exposure on that at this point.

No. The San Ramone activity picked up in January, they sold nine units in January. So it looks like they've got life, and there's enough profit in that transaction to get us out whole, though we may not make as much money as we thought we will, but we will be out whole. The Southern California deal, it's is a small deal, 30 some units. It looks like that's going to be fine. So I don't think we have any exposure on either one of them.

Okay. Given your general comments on San Diego and the strength of the market there, or lack thereof, and your approaching anniversary, I think the 4th anniversary of the [inaudible] acquisition, have you thought any differently about Seattle longer term or potentially more aggressively trading those assets to one of your more higher growth regions.

Well, we have actually in this last year sold three or four of the smaller assets. We have gotten rid of the mobile home parks already. We have gotten rid of the office buildings. And right now we're pretty aggressively into a rehab program on a number of those assets. So I think there's probably another five or so that are all smaller assets, in that 80 to 120 unit kind of range that are a little bit tough to manage. But, so those would possibly go, but the total value of those probably not more than about $80 or $100 million dollars.

Okay. In terms of maybe Mike Schall A versus B performance, I think you guys have a pretty good mix of assets. Have you seen any result differentiation between the A or the B assets at this point.

Yes. Actually we talk about that all the time. You know, our view is, and again this is based on sort of 20 years of experience, and I think that the current activity sort of follows this. Is that when conditions improve, the A assets sort of go first. And then the B assets sort of catch up. So I think that general statement applies to what we see out there now.

At what point, given your historical experience, do you think that spread is wide enough between A and B? How long from now before you maybe see that catchup occur?

It's amazing how markets move, not in lock step, sub markets they do not move in lock step. Certain areas move aggressively and quickly, then areas surrounding it catch up. It can take 12 months for the other assets and markets to sort of catch up to the best assets both from a location standpoint and from a physical asset standpoint. So I expect it to happen over a 12 to 18 month period.

Okay. In terms of redevelopment Mike, the $1.5 million referenced in the guidance is the extent of the additional dilution we should expect from this year?

Yes, that's the expected vacancy loss that we will have while the units are being rehabbed.

So that would be the extent of the additional dilution over '06.

That's the total for 2007. It doesn't compare it to 2006.

Okay, fair enough. Last question, John Eudy, in terms of land cost today you did reference the one deal in your release that you've recently tied up. Can you talk about where land costs are on maybe a per unit basis going forward, similar it to what you quoted on your historical deals.

That's a difficult one to answer. We're in three primary markets, density is all over the place, which is a factor of where that cost is, as well as fees. I can tell you on broad ranges, if that would get you anywhere. I'm not sure it will help you.

Maybe changes relative to six months or a year ago. I didn't hear if you commented on that.

Okay. I think it's been fairly constant. The problem is just getting the right deal to fit, you know, our profile, what we're looking for. I have not seen prices go down and I haven't seen them significantly go up. What we are seeing is some of these condo bail out deals where a lot of work has been done on the front end that you're inheriting, you're getting a lot of the work product already in place, but then it requires a little bit of a retooling to get it to fit an apartment scenario. So I see it as, for the sites that we're looking to go to which are the B plus at a minimum to an A, there's a lot of demand out there for rental apartment deals, getting it at the right price is always a challenge.

Fair enough. Thank you.

There appears to be no further questions at this time. I would now like to turn the call over to Keith Guericke for any further remarks. You may proceed sir.

Thank you for joining us. And we will, if you need anything from any of us please call, and we'll be here. Thank you.

Ladies and gentlemen, thank you for your attendance in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.