Essex Property Trust Inc (ESS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the first quarter 2007 Essex Property Trust earnings conference call.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS)

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. Welcome to our call.

This morning we will be making some comments in the call which are not historical facts such as our expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements which involve risk 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 today on the call will be Mike Shaw and Mike Dance. John Eudy is also with us. He's going to be available for questions during the question session.

Again, just let me bring you up to speed. On our Web site you'll find our market forecast for 2007. I'll discuss the highlights in my market section comments.

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 affordability as compared to our Essex markets. To get those details go to the Web site under "Analyst Resources."

Last night we reported a strong quarter with core FFO increasing 18.9% per share for the quarter. The portfolio grew revenue at 7.5% greater than the same quarter in '06 and 1% on a sequential basis. The strong performance was driven by the fundamentals in our supply constrained markets.

Overall our regions are performing as good or better than we expected. Job growth remains very strong in Seattle and Northern California and the low unemployment rates are driving stronger income growth throughout our markets.

Let me touch on each of the markets quickly. Seattle continues to expand as strong, steady pace year-over-year of job growth for the first quarter of '07 was up 43,600, or 3.1%, after growing by an annual average of 37,000 jobs, or 2.7% over the last three years.

Microsoft continues to expand, taking over 1 million square feet of office space in downtown Seattle. Boeing's new 767 is set to be the most successful aircraft ever after setting predelivery order records.

The outstanding performance remains steady across all regions in the area. We're revising our residential supply down slightly to 13,200 units, or 1% of stock due to a cutback in single-family deliveries of about 500 homes.

In Northern California, job growth continues to improve. For March, year-over-year growth in industry jobs was 62,000, or 2.2%, more than twice the rate of total residential supply growth. Unemployment in the first quarter was down to 4.3% from 4.6 during the same period last year and labor force grew by an unexpectantly strong 2.1% during this period.

New supply forecast for 2007 has been revised slightly down to 16,300, or .7% of existing stock and that's due primarily to a drop in single-family production in the East Bay. The existing single-family market has performed better than we expected.

In March sales activity was down 18% but median prices were up 2%. Low interest rates and stronger than expected job growth seem to be keeping the market surprisingly strong.

In Southern California year-over-year job growth slowed a bit, down to 63,000 jobs, or just under 1% below our expectations of 1.4% for the year. The weaker growth came primarily in Orange and San Diego counties.

We revised our forecast. We now believe that we'll see about 1.2% job growth in that region for this year of 2007.

We are also lowering the forecast of new total supply for the region of new units to 42,500, which is eight-tenths of 1% of existing stock. This is due, again, to a decline in single-family supply. Most notable change is the decline in San Diego of 2500 single-family homes from 7500 down to 5,000.

Market rent growth in our Southern California markets was below our 4%, 4.5% annualized rate in Q1. However, year-over-year growth is still above this rate and we expect to meet the forecast for the year.

The single-family market performance was as follows: Transactions in March were down 24%. That was slightly larger decline than we had expected, however, median prices in the region as a whole rose 2%.

However, when you go to the submarkets, prices were down 5% in San Diego, 7% in Ventura, flat in Orange and up 6% in Los Angeles. However, the decline, the 24% decline, as far as sales was fairly uniform across all of those markets.

Let me just touch on one other subject, the subprime issue. There's been considerable speculation about the consequences of the reduction in subprime lending in the various markets, specifically there's been a concern that the reduction in loan production will cause weaker total job growth and thus weaker rental growth.

The MSAs identified in California with the largest delinquency problems are Sacramento, Fresno and the Inland Empire which are markets with the most supply and generally lower household incomes. We've tried to analyze what the impact might be from the reduction in the single-family production and single-family resales.

Since coming out of the flat period starting in 2003, or really starting in 2004, which through 2004 through 2006, that three-year period, we've added 797,000 new jobs in California. Of that total, there were approximately 60,000 jobs that related to single-family production, sales, and financing.

And that's broken down as follows: New residential construction was 28,000 jobs, real estate agents and brokers are 10,000 and credit intermediaries were 22,000. Just point the credit intermediary number is all intermediaries, not just single-family, we couldn't break that any further. And also, these are numbers for the entire state of California, not just our coastal markets.

We've updated our supply estimates for single-family production and over our markets we believe that the single-family production will go down about 4700 units. However, the multi-family production is staying constant, we don't see that falling off. So as a result of that, we really don't think that we're going to lose any construction jobs.

As I noted in my comments earlier, home sales in Northern and Southern California were down 18 to 24%, depending on the specific market. Again, we don't believe that this is going to translate into significant job losses.

Sort of back that up, in March 2007 data shows that those jobs have been flat and over this last quarter and so we haven't seen any degradation in those at risk jobs, if you will, to this point. Overall, again, California jobs are driven by the service sector and we've seen 1.6% job growth overall, or excuse me, 2.9% in the service sector, 1.6 overall, and so we think that we're -- our economies are well-suited to grow in this coming year.

Just a quick update on acquisitions. Our year-over-year, or our year-to-date closings have been $115 million. In addition, we have a pipeline of transactions that when closed will slightly exceed our 2007 guidance for external growth which you'll recall is $200 million. The first quarter activity was driven by several unique opportunities that we were able to take advantage of.

Now I'd like to turn the call over to Mike Shaw.

Thanks, Keith. And thank you, everyone, for joining us on the call today.

In our February earnings call the investment community expressed concern about the increased vacancy and availability that occurred in the fourth quarter of 2006. At that time it was our opinion that the slowdown was seasonal in nature. The results of the first quarter appear to confirm our assessment during the first quarter call.

As usual, the seasonal weakness continued throughout January 2007 and then gradually improved in February and March. As of March 26, 2007 physical occupancy, in other words on that day, had improved to 96.2%.

The financial occupancy result for the quarter at 95.6% reflects a gradual improvement in occupancy throughout the quarter and that result was down .3% from Q4 2006 and down .8% from a year ago. As of April 29, 2007 our physical occupancy stood at 96.4%, reflecting the resolution of occupancy issues at several properties that occurred in the November to January time frame.

To deal with the occupancy issues early in the quarter we made greater use of concessions. For the portfolio, same property concessions increased to $327,000 for the quarter, or $138 per turn compared to $223,000, or $92 per turn as of the first quarter of 2006 and $271,000, $97 per turn for the fourth quarter of 2006.

Loss to lease partially recovered during the quarter, following the significant decline in Q4. It stood at 4.3% of scheduled rent at March 31, 2007 versus 3.7% as of Q4 2006 and 5.4% in Q1 2006.

Now I'll go and review some more specific statistics for each major part of our portfolio starting in the Pacific Northwest. Seattle was our strongest market during the first quarter with 11.4% rental revenue growth and a .8% decline in occupancy year-over-year.

Sequentially, Seattle grew 2.1% on a .1% decline in occupancy. Downtown, the area north of Seattle near Everett and Mill Creek and the East Side markets are all very tight while the south end is perhaps a small step behind. As of April 29, 2007 physical occupancy in Seattle was 97.2%, net availability 3.2% and in Portland, occupancy was 95.7% and net availability of 5.8%.

Home purchase activity continued to be relatively strong in Seattle. We attribute this to better overall affordability as compared to the California markets. Seattle has, again, relatively has high median incomes, however, the median price home is much lower than in California at $375,000.

During the quarter 19.8% of our move-outs were related to home purchase compared to 19% a year ago. In Portland 19% of our move-outs were to buy homes versus 24% a year ago.

Now turning to Northern California. The Bay Area continues to perform well with 8.9% rental revenue growth on a 1.3% decline in occupancy year-over-year. Sequentially, Northern California experienced 2.6% growth in rental revenue on a .6% increase in financial occupancy.

As of April 29, 2007 physical occupancy was 96.8% in our Northern California portfolio, and net availability was 4.9%. Move-out activity related to home purchase was 16% of our turns for the first quarter compared to 12% a year ago.

Now turning to Southern California. In Southern Cal our performance was as expected. Same property revenues year-over-year increase 6.1% on a .7% decline in occupancy. Sequentially revenues grew at .1% on a .6% decline in occupancy.

Although our Southern California results are good, we have been affected by deliveries of new apartment properties which softened various local markets as aggressive lease-ups occur. This is particularly problematic in the high-density urban projects which often cannot be effectively phased, leading to completions of 100-plus units at a time that need to be leased very quickly.

As a result, concessions of up to two months free are being offered by properties in lease-up, affecting pricing in our nearby communities. We are tracking apartments in various stages of completion and lease-up as follows: In L.A. County, 4300 units, Ventura County, 1500 units, Orange County, 4900 units and San Diego, 3100 units.

Physical occupancy as of last Monday in the L.A.-Ventura area was 95.5% with net availability of 6.5%, in Orange County, occupancy was 96.3%, net availability 4.5, and in San Diego, occupancy was 96.1 and net availability of 6.3%. Move-out activity attributable to home purchases was up modestly in each of our Southern California markets.

Quick comment on redevelopment. The activities of our redevelopment group are included on Page S-10 of the supplement. For the quarter our redevelopment group completed 151 units, unit renovations, not including those related to Fund 2.

In addition, our operations group also operates a strategic unit turn program that is not part of our redevelopment numbers. During the quarter, we had 72 units that were in the process of being renovated by our operations staff. Again, those are in addition to the redevelopment units.

And then finally, a comment on computerization. In previous calls we've discussed a conversion of our computer systems to Yardi. To date we've completed our accounts payable conversion.

We are in a parallel test of the GL system and have recently started to convert groups of properties to the Yardi property operations system. Better utilization of computerization to improve efficiencies and information flow is viewed as a key opportunity at Essex of which Yardi is a very important first step.

Now I'd like to turn the call over to Mike Dance.

Thanks, Mike. My comments today will highlight the first quarter results and wrap up with some brief comments on the change to our 2007 guidance.

Yesterday we reported an increase in our recurring funds from operations of approximately 19% compared to the first quarter 2006. The year-over-year growth in funds from operations per share was driven by the strong increase in same property net operating income of 10%.

The 2006 net operating income increase was primarily achieved with the increase in the same property scheduled rents of approximately $6 million, or 8.5% increase over the comparable quarter of 2006. The same property vacancy loss during the 2007 quarter increased by $800,000 compared to the March 2006 quarter.

Funds from operation results for the 2007 quarter include non-recurring revenue items totaling $0.39 per diluted share. The non-recurring revenue items include approximately $10.1 million of fee income from the City Heights venture partners and approximately $300,000 related to the sale of condo units at Peregrine Point net of taxes and allocated costs.

General and administrative expenses for the quarter are consistent with our 2007 guidance. The year-over-year increase was a result of higher costs related to the development and redevelopment fees that are being earned from the activities of Fund 2 and higher abandonment costs.

I will now focus remaining comments on changes that impact our 2007 guidance. As expected, we started the year with strong financial occupancy, limited concessions and growing rents. We estimate that 2007 funds from operations per diluted share will range from $5.50 to $5.65.

The mid point of the new 2007 guidance assumes funds from operations from non-recurring items will be $0.40 for the entire year, and funds from operations from our core operations will be $5.18 totaling $5.58 per diluted share. We estimate the quarterly funds from operations growth from recurring items will be approximately 10% over the comparable quarters in 2006.

Our expectations for the June quarter's recurring funds from operations will be slightly lower than the March 2007 results that we just reported for the following reasons.

First, we expect to announce soon a strategic single asset joint venture that will reduce our recurring funds from operations by approximately $0.03 for 2007, or $0.01 in the second quarter. We have experienced higher than expected rates of redemption of [dowry] units which reduces recurring funds from operations by approximately $0.02 for 2007.

We also have, in the first quarter, seen historically one of our lowest quarters for controllable cost per door given that we have less resident turnover and do not undertake as many landscaping and maintenance activities during the winter months, so property operations have historically been lower in the first quarter and we expect these activities to increase for the rest of the year. That will decrease the second quarter's operating, or our net operating income in the second quarter compared to the first quarter by about $0.02.

And last, in 2007 guidance we now have the Cardiff acquisition by the sea. Cardiff is a redevelopment opportunity for us and that will be entering into a redevelopment program. And this acquisition's expected to reduce FFO in the second quarter by about $0.01 per share.

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

Thank you, sir. (OPERATOR INSTRUCTIONS) Your first question will come from the line of Anthony Paolone of JPMorgan Securities.

I guess first question, can you just talk about the cap rates on the acquisitions that you did in the quarter? I guess some of them, the one that you just mentioned, Cardiff's going into redevelopment but just what cap rates look like?

Cap rates that we have talked about in the past are basically still in pretty much intact. The specific deal that we did ranged from 4.5 to 4-point -- 5.25.

The Cardiff, which was the single largest deal, is closer to the 4.5 range and, but it's going into a rehab program as a, petty much a, almost replaceable asset. It's a few blocks from the Pacific and so we see that as a long-term great play.

We also believe that we can take and, we can do the rehab and take some short-term profits if we so choose on that transaction as well. So we think its, we've got a lot of flexibility.

On your redevelopment pipeline, for instance, I know you mentioned in the press release at Pathways apartments, 17% pick-up in rents. Can you put that in terms of just return on invested capital and what you're seeing on those?

Yes, we're -- we continue to -- we look at it in a number of different ways. The key way, the most important way we look at it is what is the relationship between the incremental dollars that we spend on the renovation and at the end of the day how much does that increase NOI. That range is 8 to 10%.

Almost inevitably, so 8 to 10% a year. Almost inevitably there's some deferred maintenance component that's included in that so the other way we look at it is with and without the deferred maintenance component.

You can't renovate a unit and not address the deferred maintenance, obviously, or renovate a building and not address it for maintenance. So in most cases it's in the low to mid teens without considering deferred maintenance and then it's 8 to 10% net of that.

Okay.

Question on your development pipeline. The deal in Seattle that you announced the joint venture where, I guess, the land, the person contributing the land will take 50% interest. Is that, I mean am I looking at it right? Does that suggest that the land is 50% of the value of the project and if so, is that where things are at right now?

The land value on it is being contributed as equity and then we're matching it with a like amount of capital. I'm not sure if that answered your question.

And then financing it. And then financing it from there.

Okay.

But I mean, if you thing about it, just even unlevered as an asset, is land half of the value of a development?

No, no. Just on the land itself. In other words, if the land was valued and this is just an example, at $15 million and free and clear it contributed to the venture, we put up $15 million in cash, Essex, that's how the 50/50 venture is calculated and the cost to actually develop and build it are in excess of that.

But then your interest in the asset, is that 50/50?

Correct.

Okay. And then what are your development pipeline yields expected to be?

Current numbers are in the low six range, about 6.25, stabilized in the 7 to 7.25 range.

Okay. Thank you.

And your next question will come from the line of Alex Goldfarb of UBS. Please proceed.

Good morning out there.

A question on the housing front. Given the huge boom that occurred in the sort of center part of the state, as those people potentially default on their mortgages, do you thing that they'll sort of remigrate back to the coast or do you think that they'll stay out there?

That's an interesting question. I think a lot of people were willing to commute to the Inland Empire and Southern California and to the Sacramento Valley in Northern California for the right to own a home that was affordable. And their choice is to stay in the location in a rental property and commute back to the Bay Area for their job or to come back to the Bay Area and live in a rental property and be closer to their job and cut their commute cost.

That would be the logical thing for me to assume, however, we haven't done any studies. We don't know for sure but historically people will commute for a home ownership. They will not commute if they have to rent and therefore, if you assume they lost their home and they're going to be a renter, you would think that they're probably going to be relocating closer to their jobs.

Okay.

And then in San Francisco, there seemed to be a number of condo deals going up. Do you think that all those will sell out or do you think some of those will end up being new rental supply?

I would guess that some of them are going to go into the rental pool. But they're very, very expensive.

Some of that stuff is, I mean they're trying to sell it for 750 to $1 million for small 800 to 900-square foot units. I mean, they may go to the rental pool just out of default. It certainly won't be an economic transaction though.

Okay.

And then the final question is looking at Seattle, the growth up there seems to be accelerating especially it looks like the loss to lease moved up from fourth quarter to first quarter. Should we expect that market to just continue strong throughout the year into next?

That's what we expect, Alex, yes, we think that's likely to be our strongest market and with the Bay Area close behind.

Okay. Thanks a lot.

Your next question will come from the line of Rob Stevenson of Morgan Stanley.

Good afternoon, guys.

Are you seeing any sort of differentiation in performance between your, what would be termed as A units versus B units in the same markets?

You know, it's -- we see a lot more differentiation between market, local market to local market than we do product within that market. So in other words, I'd say the A and the B quality units have been similarly affected in our softest markets.

I'm thinking right now about the San Ramone area for example. You know, essentially you had traffic slowdown, you had some move out activity and it was soft for everyone.

So no, I don't think that the A, B relationship is so important. I think that far more important is the submarket that the assets are located in and I think the dynamics are similar within submarkets.

Okay.

And then in terms of property operating margins, do you think that what you saw this quarter is sustainable throughout the rest of the year?

Well, I kind of alluded to this in my remarks that the first quarter is our lowest month for controllable costs, so we do expect controllable costs to be higher for the rest of the year. So that we would see some of the return to norm on the ratio.

Okay.

And what are you -- what is it costing you -- I know it differs depending on what you guys have to do to the unit but what is sort of a ballpark number in terms of hard costs on a unit turn?

You're right. When we break down unit turns, we have seven different levels of unit turns. So if you were going to cut between all of them, it would be somewhere in a range from the low end of about $10,000 a unit to close to $20,000 a unit.

Depending upon how, again, whether you do doors and drawers on the kitchen cabinets versus replacing the box, other types of differences. So it depends on how extensive. And actually, in addition to that, if we're doing a washer, dryer addition that's typically $6,000 a unit. Somewhere in that range.

But if you're not, I mean if you're just doing a turn, if there's no rehab.

I'm sorry. I was assuming--

I move out and somebody else moves in two weeks later without anything else being done, what's the sort of painting, carpeting all sorts of other sort of things on that sort of stuff?

If you include vacancy down time, those types of things.

Just the hard costs.

Just the hard costs? It can range from 500 to $1,500.

Okay. And then last question.

The JV income for the first quarter of '07, is that a decent run rate for the rest of the year or is there some stuff that needs to be stripped back out of that?

No, that's the run rate.

Okay. Thanks, guys.

And your next question will come from the line of John Litt of Citigroup.

Hi, it's Craig Melcher here with John.

Hey, Craig.

What are your expectations for the same store NOI growth now and did they change from last quarter with the new guidance range?

It's slightly higher than the midpoint we gave on guidance but not quite the high end.

10% range.

Oh, FFO.

No, same store NOI.

It's consistent with slightly between the midpoint of the guidance we gave in 2007 and the high end of the guidance. So it isn't. It's NOI, yes. It hasn't changed significantly from the guidance we gave at the end of last quarter.

Okay. Is that more from on the revenue side or on the expense side that you're getting closer you towards the high end?

The revenue side.

Okay.

On the joint venture that you mentioned was going to be dilutive coming up, the $0.03. Can you just give a little more detail on that and how this transaction would be dilutive to numbers?

Yes, this is a very unique transaction and it's, I don't think it's something that we can describe. So it's a transaction that there's only one way to -- you either are in a tremendous amount of detail or you can't -- it's not a conventional joint venture. Since it hasn't closed we really don't want to comment on exactly what we're doing but it will become clear hopefully in the next quarter.

Is it in your core markets or is it in some of the non-core?

Core.

Core.

Dead core.

Okay. Thank you.

Your next question will come from the line of David Harris of Lehman Brothers.

Hi, guys. Could you just remind me what your same store NOI forecast is per year? Mike?

Yes. On a consolidated basis?

Yes.

That's in the press release.

David, you're talking about going forward, right?

Yes. No, the full-year same store NOI growth that you just referenced in the prior question.

The guidance we gave at the end of fourth quarter was a range of about 8% so it's going to be slightly higher than that.

And at the condo contribution I think you referenced that (stayed) was $110 million for the year. You're still comfortable with that number?

Basically we've got, all of our sort of recurring, non-recurring is done, except (inaudible) which is a couple of condos that are still going to close in Seattle. But then we've got all of our recurring, non-recurring is in the bucket for the year. So basically there's very little -- it's all there, it's all been accounted for and we're done for the year.

Keith, I know you've been asked this question a number of times before. Are any deals out there sort of bust condos that are kind of active or is that just something that's really not yet shown itself up in the marketplace as an opportunity for you?

It's starting to show itself. There are probably four or five broken condo deals in San Diego that we've got an acquisition guy down there who's following. Unfortunately, the spread between what we can pay as operators versus what the seller needs to basically salvage himself is too great.

I think that some of the stuff may ultimately go back to the banks. When that happens then I think there will be some more opportunities. But as of today, we really haven't seen many opportunities.

Are there a ton of people looking for these deals?

Oh, I'm sure there are. There's probably, I would suspect there's 30 funds being formed right now to go out and do all that stuff so the competition will be fierce. So we probably don't get any of them.

Okay. To you, Mike Shaw, if I may.

Just looking through the disclosures, you've been raising rents pretty rapidly in Northern California and Seattle. Are you seeing any push back from tenants that the rate of increase that you are able to or that you've been pushing on them?

We always see push back. You know, one of the things, I thought I left the CFO role and left all the various issues there behind, but now I've inherited a whole new set of issues and clearly that's one of them. I mean, everyone is -- all these municipalities are very concerned about rent increases and we're trying to keep that in mind and at the same time try to grow the Company appropriately.

But clearly, there is push back. And I'd say in particular on some of the new acquisitions where we are -- we're pressured because of cost to capital, obviously, to get the rents up and get the yields that we underwrote to prevent the transactions from being dilutive.

In those situations, it puts a lot of pressure on us because we're between the cost to capital and the dilution issue on the one hand and issues with local governments and people on the other hand. So clearly, there are some of those issues and we're trying to just be thoughtful and reasonable and trying to address them on a case by case basis.

There is a political dimension to rent rises in some municipalities?

Well, yes. Absolutely. I mean, local governments in general.

As a general statement, they want affordable housing in their community. I go back to, you will recall, David, what happened in the late '90s where we had incredible -- 40% rent growth in Northern California in one year and the pricing out of rental stock to policemen, firemen, teachers, et cetera, et cetera, that were commuting 60 miles to Palo Alto to take a job here. So it is a huge issue and, you know, local governments want to have some element of affordable housing within their communities.

Unfortunately, market rents are what they are and doesn't necessarily follow suit. But the late '90s was a really interesting case study because, you know, it was like, for example, the City of Palo Alto noted that its emergency service personnel lived a pretty extensive distance from the city of Palo Alto because of the affordability issue.

Well I remember having a conversation with you and Keith several years ago in that environment where I think there was serious concern on your behalf that you would actually going to see some impositions of those rent controls. We're not anywhere near that, are we?

We don't see anything right now but I mean, clearly, that is the bat or the hammer that is held above us. Clearly, we are trying to walk a tight rope on that particular issue, so.

Okay. One general last question, if I may, and you can be sort of very brief in the way you summarize this.

Could you give an observation as to what you're seeing in terms of single-family house prices and condo prices in your major markets? This is the for sale market as opposed to the rental.

You know, I mean, I can -- we have a lot of data and as Keith said, in general the activity in the single-family market is declining. I know it's interesting, my neighborhood, I didn't see any for sale signs until about a week ago and then all of a sudden there's like 30 of them everywhere, A frames on every corner. I don't know. And it's obviously very anecdotal, which I apologize for.

But I think in general I mean the trends across the board are for lower -- our expectation of lower single-family home sales, there's been a little bit of a pick up of apartment construction which are noted in the supplement. But on balance, I think we still conclude that we're in pretty good shape when you look at total supply.

David, if I may. As I said in my comments, the overall, the resales are slightly down but home prices, especially in the Bay Area, have held and depending on the submarket in Southern California they're up 5 or 6% or down 2 to 5%.

So, I mean, nothing that's horrible yet and the other thing is we had some numbers on our last call where we talked about the affordable issue and what percent of current rent is of a comparable cost of a mortgage and property taxes and insurance, and as you recall, in all of our markets, that relationship was rent was about 45, 48% of the comparable cost of owning a home, a single-family home.

So the answer is if we see any kind of, it's going to, any kind of diminution of home values it's going to have to be huge before we have any impact on our rental activity. That is not an issue yet. And again, I think that home sales are going to, or the velocity of resales is going to have to drop off significantly before you see any significant repricing.

Okay.

And by contrast with what's going on in California where it sounds like activity rates are slow, prices may be off a touch or flat, Seattle seems to be somewhat fairly buoyant by contrast.

Correct.

Okay. Great. Thanks, guys.

And your next question will come from the line of Ross Nussbaum of Banc of America.

Hey, guys. It's actually Dustin Pizzo here with Ross

Keith, just to follow-up on that last comment. I guess yesterday one of your peers mentioned that the numbers when you look at the cost of owning and renting in San Diego on two and three bedroom apartments versus single-family homes are essentially a wash. Should I infer that you're not seeing that?

I listened to that same cal and I think what they were talking about was Sacramento. That's what I got from the call anyway. San Diego, home prices in San Diego are still 6, $700,000. Condo prices may be down slightly but home prices are still very, very buoyant.

As I listened to that call, I took away from it they were talking about Sacramento. So, I don't know, we may be, we may have listened to, you were talking about the BRE call, right?

Yes.

Okay. I'm (inaudible) I took away Sacramento. We have not seen that in San Diego and San Diego continues to be a decent market.

One thing in my comments, we've seen -- we think that the completions are going to be down 7,000 to, you know, we're going to see single-family home completions go from 7,000 to 5,000. So that would indicate that the builders are sensitive to the pricing in that market and are lightening up. But again, we haven't seen that.

Fair enough.

And then looking at the disclosure on the redevelopment pipeline, it looked like there were few projects or I guess one in Southern California and then the ones in the fund that were started either in '05 or '06 that didn't show up last quarter. Was I just missing them somewhere or --

Well, it takes a while, five quarters of stabilized operations before they come back in.

Okay/ So you only show them once they've been going for essentially a full year?

Right.

Okay. And then I believe Ross has a follow-up as well.

Hi, guys. Good morning.

Good morning.

Wanted to talk a little bit about your 2007 market forecast, which is showing, if I'm interpreting this correctly, at the end of 2007 for Northern Cal, 6.75% rent growth, for Southern cal 4.5, and I know that's for the market, not for your portfolio. Where do you, I'm assuming from your same store NOI guidance that you're expecting your portfolio by the end of '07 to be at or above that? Those market rent forecasts?

Yes, again, that's the entire market and so what we, again, we try to be very submarket specific and we expect to be, again, our growth is going to come from two things. One is from the rental growth in the market, plus capturing some of our loss to lease that's embedded in our portfolio. So it's going to be a combination of the two.

Sure. And then I guess the related question is there's obviously, at least in your market rent forecast, a material difference in rent growth that's going to occur in, say, San Diego versus a Seattle or a San Francisco. What impact if any do you think that's going to have on relative asset valuations in those markets?

Well, I mean, clearly the cap rates in Seattle and Northern California are more aggressive than the rest of California. We're seeing 4.25 to 4.50 kind of rates in Northern California and Seattle where we're seeing sort of the 4.5 to 5.5 in Southern California. So I mean, the growth rates are a huge consideration in the cap rate decisions that people are making.

Do you think that the buyers in and around San Diego, or let's say anything south of Los Angeles, do you think that their outlooks for rent growth are appropriate for what's going to happen in terms of what the buyers have assumed in the purchases they've made over the last, say, six months?

Frankly, the activity -- for example, I know there's probably 10 active listings of pretty large first-class property on the market in San Diego right now which is getting fairly low play. So I would guess that the reason that is happening is because most buyers are sitting back and considering the growth rates and the cap rates and therefore are -- which is causing the properties to sit on the market. So the answer to your question, I don't think people are ignoring it.

Okay. Thank you.

And your next question will come from the line of Craig Leupold of Green Street Advisors.

Keith, following on that question, I guess, first off, with Seattle and Northern California the cap rates that you just threw out are very much in line with the ranges that you gave last quarter.

But it's interesting that on the Southern California side that seemed to be about, up about 50 basis points from the numbers you threw out last time. Is that just because those are rough ranges or are you actually seeing increases in cap rates in Southern California?

I would say two things. One is rough ranges, number one. And number two is, as I said we closed a couple deals in the first quarter that were at cap rates that were slightly better than we've been talking about lately.

I think that generally we're seeing better cap rates down there. Again, our strategy has been to be in the growth markets, be in Northern California and Seattle where, but obviously, you have to have the growth has to be significant and we do have significant growth.

But it's the combination of going in yield and growth rate and in Southern California we're seeing lesser growth so we're demanding, if we close something down there, a better cap rate and we are seeing some of that now.

On those acquisitions, would you attribute those to sort of special circumstances or were you able to buy them at a price better than market or are those indicative of moving cap rates?

Well, both of the deals that we closed in Southern California were not marketed. So I'm hopeful, I'd like to pat our acquisitions guys on the back and say they did a better job than the market and there's probably a little bit of that.

But I do think that, you know, as I said, there are a number of listings in San Diego now that are on the market that haven't moved and I would guess that the reason they haven't moved is because cap rates haven't moved to the appropriate level.

Okay.

And I guess following on a question that, or a comment that Mike made earlier about what sounded like fairly excessive lease-up concessions and you mentioned kind of in urban, or urban locations. What were you referring to specifically, Mike?

Well, I can point to a number of -- there's a deal in Warner Center that's near our Avondale property. Avondale is 446 units. It has struggled with some occupancy as lease-ups continue.

Also, there's a deal in Simi Valley, JPI deal in Simi Valley that I believe Archstone bought where their, again, heavy concessions have changed the sort of fundamental nature of the market. But by no means is that it. Again, we see, there are thousands of units that are in some stage of development. Many of them are absorbed by the market.

The fundamental issue is, especially on urban deals, you typically can't phase them. As a result of not being able to phase them you can have, you know, as soon as you get you C of O you have hundreds of units that are sitting vacant.

So it puts a tremendous amount of pressure on the lease-up, obviously, and the objective of the lease-up is to try to obtain 100% of the local market, which, you know, use pricing concessions to do so.

So we're seeing that activity in a number of different places. How quickly does that -- if it's up to two months I think you mentioned on a lease, how quickly is that dissipate once that -- once those new projects kind of reach a stabilized occupancy?

I think pretty quickly once that happens because one you're dealing with a zero income stream versus some -- an income stream, then you get back to a normal market where you're trying to maximize rents and overall cash flow. But when you're starting at zero, when you're starting with a vacant unit, you're under tremendous pressure to make that occur, quickly.

Okay. Then one last question for Mike Dance.

I know on the rehab sheet it shows that kind of your loss to do the occupancy of units that are down was like $375,000. How do you expect that to play out over the balance of the year? Is that sort of a reasonable run rate to assume?

I think it's a little low. We expect it to go up a little higher as we get more turnover because the turnover occurs naturally we're going to rehab them. So in a quarter with not as much turnover we don't do as much rehab.

Great. Thanks.

Your next question will come from the line of Bill Crow of Raymond James.

Good morning, guys. Two quick questions.

First of all, did you say, Mike, that the JV run rate should be fine for the rest of the year?

It's (on a) $0.01 a share will be about $250,000 a quarter.

Okay.

And second question is have you discussed the recurring nature of the non-recurring income? In other words, as we look towards 2008, what is your prognosis about being able to deliver another sort of $0.39 gain or something that would push the numbers up similar to what we saw this year?

We have not made a big sort of bang about our other income activities, however, we have a number of opportunities that are lined up that we believe 2008 is pretty much in the bag right now. We're frankly working on 2009 right now.

Again, it's an activity that we see as a necessary part of our business plan and we're constantly focusing on creating those opportunities where we can take value creation opportunities off the table or we have Fund 2 which at some point in time, and I'm not saying this next year, but some point in time we will start getting promotes on that. We've got a number of irons in the fire and as I said, I think 2008 is pretty much coming to fruition at this point.

So without, obviously, you guys providing guidance, the best way to think about it is to take your guidance for this year and put some sort of internal growth rate, some sort of same store growth on top of that?

On top of the recurring, non-recurring?

That's right. On top of this year's results. We're not going to go backwards next year.

No.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from Anthony Paolone.

Thanks. I read yesterday that Cushner is putting a $2 billion apartment portfolio on the market In the Mid-Atlantic and was wondering what your thoughts are these days on coming out to this side of the country and even on that if you care to offer them?

Again, the reason we pursued the last opportunity was because we saw a transaction we believed was completely mispriced and we saw a lot of money on the table. Frankly, it looks like right now Northern California and Seattle have the best growth rates in the country and for us to go get involved in another market that's going to slow our growth doesn't make a lot of sense for us. You know, we would have to be -- so frankly, we haven't looked at it and we're pretty darn happy with where we're at right now.

Okay. Thank you.

Your final question will come from the line of Ben Lentz of LaSalle Investment Management. Please proceed.

Hi, guys.

Looking at your balance sheet you had an investment in marketable securities. Is that an investment in real estate?

No, those are treasuries.

Oh, they are. Okay. And then the interest income going forward, that was, remains pretty high. Is that going to stay high?

Not quite as high but it -- close.

Okay.

And then finally, when you answered the question about joint venture income staying about where it was, was that the $1.9 million you were talking about?

The joint venture income on the line item.

I didn't understand which one you were talking about there.

The joint venture was a new joint venture we're entering in this quarter.

The run rate question.

Okay.

You don't remember it.

No.

He doesn't remember it.

That's fine, Someone asked a question about joint venture income is the run rate from this last quarter good and I assumed they were actual talking about unconsolidated investments.

I misunderstood the other question. I thought they were asking about the new joint venture we're entering in.

Could have been I misunderstood it. Okay. Well maybe that answers my question. It looked like there was some gain income in there for me and I just wanted to see if you were -- I didn't think that was going to go forward. But I'll talk to you about that offline.

Okay.

Thanks.

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