Essex Property Trust Inc (ESS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Essex Property Trust earnings conference call. My name is Tuwanda and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

Thank you. Welcome to our second quarter earnings call. The normal housekeeping. We will be making some comments on the call which are non-historical facts, such as our expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements which involve risks and uncertainty, which could cause actual results to differ materially. Many of these risks are detailed in the Company's filings with the SEC and we encourage you to review them. Joining me on today's call will be Michael Schall, Michael Dance and John Eudy. Before I begin my comments, just sort of make a point. On our website you will find our market forecast for 2007. We will discuss the highlights in the market section. Also on the website 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 the Essex markets.

To get those details go to our website under analysts resources. Last night we reported another strong quarter with core FFO increasing 12.8% per share. For the quarter portfolio grew revenues 7.3% greater than the same quarter in 2006 and 1.6% on a sequential basis. The strong performance was driven by the fundamentals in our supply constrained markets. In addition to reviewing the economic data for our markets, I will also be providing some data on year-over-year median home transactions and sales prices for existing homes, both nationally and by our market. The movement in median prices may not fully reflect current trends in the market. We believe price depreciation will increase as the full impact of the non-traditional financing unwinds over time, particularly in the next six to 12 months. In the short run we believe homeownership rates will decline creating additional demands for our apartments. Starting out in Seattle. Seattle continues to expand at a strong steady pace. Year-over-year job growth for June was up 40,000 jobs or 2.8%.

Unemployment rates are trending under 4%, while the labor force growth accelerates. We are maintaining our forecast of total new supply of 13,700 units or 1.3% of the existing stock. Boeing remains very strong. Employment for June increased by 5400 jobs, or 10% from June of last year. And the commercial airplane orders also increased by 10% over 2006. The economy and apartment markets remain strong across the entire metro region. We have increased our forecast market rent growth for 2007 from 7.5% to 9%. The national -- looking at single family now, nationally single family existing home sales were down 13% and median prices were down 1%. Seattle had a similar result with sales being down 16%, however, median prices were up 12%. In northern California the job growth remains strong for June. Year-over-year growth in industry jobs was 53,000 or 1.7%. Unemployment in the second quarter remained flat at 4.3% and the labor force continues to expand by a very strong 2% during this period. We are maintaining our forecast for total new supply of approximately 15,000 units or 0.007% of the existing stock.

San Francisco and San Jose remain the strongest areas. Limited new supply, 0.5% in San Francisco is more than being absorbed by strong job growth of 2%+. San Jose still has the strongest fundamentals going forward. Rents are still at the low historical levels in relation to income and mortgage payments. We have increased our forecast rent growth in San Francisco and San Jose for 2007 from 7% to 8% and maintaining the forecast of 6% rental growth for the Oakland MSA. In the bay area single family market remains strong. For the May Day of San Francisco sales were down 9% but median prices were up 1%. In San Jose sales were down 13% and median prices were up 9%. In Oakland, sales were down 24% but median prices were up 6%. Contrasting that to a market out of our area, Sacramento, where the home sales were down 25% and prices were also down 11%. Southern California. During the second quarter job growth was weaker than we anticipated, primarily in Orange and San Diego.

Year-over-year job growth for June was 48,000 jobs or 0.006%, which was below our expectations of 1.4% job growth for the year. L.A. County continues to -- as expected with levels and Ventura is slightly below expected levels. We now forecast job growth for 2007 at 71,000 jobs or 1% for the area. Given the weaker and less uniform job growth across the region, local markets have become more sensitive to new apartment supply. For the three month period from April through June, the unemployment rate held steady at 4.3%, while their labor force grew approximately 1%. We are lowering our forecast new total supply for multifamily and single family by 0.001% from 38,000 new properties to 36,000, which is 0.006% of the existing stock. This decline is primarily due to single family production across the region being cut back. We are also lowering our market rent forecast in Orange and Ventura from 5% to 3.5% and in San Diego by 1% to 2.5%.

We believe that L.A. is strong and will continue its 4.5% rent growth through the year. The single family market performance from May, sales declined approximately 25%, with median prices down slightly in San Diego and Ventura, flat in Orange County and up 7% in Los Angeles. If you look at the markets in the regions outside of our primary markets, home sales were down 46%, this is talking about the inland empire, and median prices were down 2%. Looking at San Diego and Orange County, the job loses that we have seen were primarily concentrated in construction, finance and manufacturing. The construction and finance follow the sub-prime problem, as well as our projected drop in single family delivers. However, on the flip side, we believe the confusion in the single family markets should make homeownership less desirable and our occupancy should benefit.

In conclusion, our forecast rent growth for the entire portfolio remains at our previous expectation. In northern California and Seattle additional strength is offsetting the slowdown we are seeing in San Diego and Orange County. Now I would like to turn the call over to John Eudy.

Thank you, Keith. We continue to make substantial progress in both our underdevelopment and predevelopment pipeline, which now stands at 3,115 units for a total of just under $1billion. The average land cost in our development and predevelopment pipeline is $58,778 per unit to keep our land basis number in context to our urban core locations. Current land transactions are occuring in the $70,000 to $90,000 a unit and up range for unentitled as is. We now have 1,108 units, including 18,000 square foot of ground floor retail in the active development stage at a total cost of approximately $355 million. Development cap rates continue to be in the mid to high 6 cap range. This quarter we moved from predevelopment to development in City Center, 200 units in Moore Park, California. The property is adjacent to City Hall and in the core downtown area of Moore Park, a suburb of Los Angeles. We obtained the entitlement approvals by unanimous council vote in July and are waiting for the [Sequa] challenge period to expire in early September, at which point we will begin active sight development.

We have no reason to believe any environmental challenge for entitlements will occur. On delivery time lines, our initial occupancy dates remain as reported last quarter on Northwest Gateway, 100 Grand Agua Canyon and Studio Gateway. We have pushed back the opening dates for City Center two months, due to entitlements taking longer than projected, and Lake Union two months, due to some labor shortages we had in the concrete subterranean garage portion of the building. An issue Seattle has had of late due to some critical labor shortages, especially in the type one construction trades. On the budget front, all of our budgets remain intact with the exception of Studio Gateway, which increased $7.3 million as a result of our going fully subterranean on a garage and podium structure as opposed to semi-subterranean, which we originally planned.

On predevelopment activities, we received entitlements on our Berkeley, California transaction by unanimous council vote, 171 unit development on the corner of Fourth and University ind Berkeley, which we should be adding to the development pipeline in early 4Q. We obtained entitlements on City Place in downtown San Diego at the corner of Front and Ash for 141 units, across the street from our Palermo project, which we completed in 2005. On our Broadway Heights deal in Seattle, we filed our formal development application for 292 units in downtown Seattle at the corner of Broadway and Republican. We should be through the entitlement phase by the end of 4Q and have our approvals in hand ready to go. Formal development applications are pending and in process on Hollywood, Sunnyvale and our San Jose developments.

On construction costs, excluding the Seattle metro area, we continue to see bid activity increasing with more subs coming back into the market looking for work, primarily due to the diminishing for sale activity and construction starts. The labor market is becoming much more stabilized to competitively bid jobs. However, with the recent spike in oil, we expect the pressure still to be on on the commodities side of the equation for hard costs. We believe the labor side of the equation, being more balanced and stabilized, should offset the commodity increase pressure to some degree. However, as an abundance of caution, we are still forecasting a 10% hard cost growth rate into our budgets. Seattle is a different story. Faced with a lot less labor pool for construction activity, coupled with a tight weather window for starts and the amount of construction activity currently occurring, upper pressure still exists on hard costs at this time.

We will be prebidding our job on Broadway (Inaudible) Seattle starting in early 4Q and have included in our current numbers what we think is a reasonable estimate of the cost, given the hard cost pressure in the market. At this time I would like to turn the call over to Mike Schall

Thanks, John, and become everyone. Thanks for joining us today. We are pleased with the results of the portfolio in the second quarter. Overall, the Company remained ahead of its original revenue guidance in each of our major markets and operating expenses continue to be near the high-end of our original guidance range. Financial occupancy for the portfolio increased 0.3% compared to the first quarter of 2007 to 95.9%, but was lower than the 96.8% occupancy reported a year ago. There are two factors that contributed to lower occupancy. First, as reported on the first quarter call, there are a number of lease-ups of new apartment communities near our properties, which have had the impact of softening conditions for all. Second, we have continued our strategic unit turn program, which upgrades the interiors of selected units within the same property portfolio. In other words, the strategic unit turns are in addition to the redevelopment communities outlined on page F-10 of the supplement.

During the quarter, the strategic unit turn program reduced occupancy on the same property portfolio by 288,000 or 0.4% of revenue. I also want to note that it is our plan to scale back the strategic unit turn program to reduce deliveries in our seasonally weaker fourth quarter. As a quick update on companywide physical occupancy following the end of the quarter, as of July 23, 2007, our physical occupancy stood at 95.7%. We have also made significant progress in upgrading the portfolio. Some of this activity is pictured is on the added link to our website in the earnings release tab under the analysts resource section. The properties shown on this link are redevelopment communities and we will add to this as time goes on. In addition to the redevelopment activity, we had several major renovation projects that had been completed by operations, often with very impressive results, similar to the projects being completed by our redevelopment group.

On the loss to lease. Loss to lease, which estimates the difference between market and in place rents on an annualized basis, increased to $17.1 million or 4.6% of scheduled rent versus $16.1 million or 4.3% of scheduled rent at March 31, 2007. Now, I would like to briefly review each major component of our portfolio starting in the northwest, the Pacific northwest. Seattle continued to lead the growth of the portfolio with 14.4% NOI growth on 11.8% revenue growth. Similar to last quarter, downtown Seattle, northern King County, very near Everett where Boeing manufactures the 787 Dreamliner, and the east side are all very strong. Southern King County has a greater share of for sale housing supply and is not quite as strong as the other areas. As of July 23, 2007 physical occupancy in Seattle was 96.5%, with net availability of 5.5%. In Portland occupancy was 94.9% and net availability stood at 6.7%.

Home purchase activity continued to be relatively strong in the northwest. During the quarter 21.5% of our move outs were related to home purchase, compared to 18.5% a year ago. In Portland 28.8% of our move outs were buy homes versus 27.5% a year ago. On to northern California. The San Francisco bay area continues to perform ahead of the high-end of our original guidance range. While all parts of the market are performing well, Santa Clara County, the peninsula and San Francisco are the strongest market segments. As of July 23, 2007, physical occupancy was 96.3% and net availability 5.5%. Move out activity related to home purchase was up modestly for the quarter relative to a year ago. On to southern California. In southern California, growth rates are moderating consistent with our original guidance and Keith's comments. The strongest parts of southern California include the coastal markets and fully developed sections of L.A. County.

I will go through the availability numbers in a moment. In general we have seen net availability increase in some of the southern California sub-markets to above our 6% target. As indicated last quarter, the lease-up of competing properties is an important contributing factor in southern California that is effecting rental growth and occupancy. Physical occupancy as of July 23rd in the L.A. Ventura area was 94.5%, with net availability at 7.3%. In Orange County occupancy was 96.3%, net availability of 5%. And in San Diego occupancy was 96.1% with net availability at 7%. Similar to northern California, move out activity related to home purchase was up modestly in each of our southern California MSAs relative to a year ago. In previous calls, we have discussed our on going computerization project.

The first step of the project is a conversion to Yardi Thus far we have converted our accounts payable system, our general ledger system and approximately 20 of our properties. We also continue to test several other system improvements, including yield maintenance and call centers, which we expect to implement following the Yardi conversion. Now, I would like to turn the call over to Mike Dance.

Thank you. My comments today will highlight the second quarter results, provide some color on our expectations for the next two quarters and address the current status of management's consideration of a stock repurchase program. Yesterday we reported an increase in our recurring funds from operations of 12.8% compared to the second quarter of 2006. The growth in funds from operations was driven by the strong increase in same property net operating income of 8.5%, with an increase in same property scheduled rents of approximately $5.7 million or an 8% increase over the comparable quarter of 2006. Same quarter free rent and concessions total $300,000 for the second quarter, an increase of $77,000 over the same quarter in 2006. Our same property vacancy in 2007 increased by approximately $846,000. However, as Mike already noted, the same property vacancy during the quarter includes nearly $300,000 for units that are not available for rent while undergoing complete interior renovations of their kitchens and baths.

The largest component of our non-same property net operating income comes from the communities that are undergoing complete renovations. With recent approvals of an expanded scope of redevelopment at two communities in Bellevue and the addition of Marina Cove in Santa Clara, the redevelopment pipeline is now at $91 million in estimated cost to complete the underwritten improvement. The net operating income from the consolidated redevelopment pipeline was approximately $8.4 million for the second quarter, which was an increase of $1 million over the same quarter in 2006. Given the significant construction activity that we undertake at these communities, we are very pleased that our property operations and the redevelopment teams are able to maintain or increase the net operating income at these communities. I will now focus my comments on changes that impact our 2007 guidance.

The estimate for 2007 funds from operations per diluted share is unchanged from the first quarter guidance of between 550 and 565 for the year. General and administrative expenses for the year-to-date is consistent with our 2007 guidance. If we exceed the mid point of our guidance of 555 per diluted share, operations and corporate management may be eligible for additional incentive or equity based compensation of approximately $0.03 a share, which will be included in expense in the quarter the value of the compensation becomes probable and can be estimated. As noted above, the kitchen and bath renovations undertaken in the second quarter have achieved our targeted yield of at least 10% on the total revenue generated in capital expenditure and we have expanded the number of units that will be renovated in the third quarter, which will add to our same property vacancy in the third quarter.

During the renovations underway at the recent acquisition of Cardiff by the Sea and the expanded redevelopment program, as already mentioned, we expect to see additional vacancies of approximately $0.02 a share in the second half of 2007. The joint venture with the Hillsdale Garden's landowner began in the middle of May. A full quarter dilution from this joint venture will begin in the third quarter consistent with the guidance given on last quarter's call. Interest expense is projected to continue at approximately $20 million per quarter for the third and fourth quarters of 2007. The higher than expected interest expense is offset by higher net lease income from the rental activities at two pre-development sites referred to as the River Oaks and Hollywood projects.

Our original 2007 guidance incorrectly assumed that this leasing activity would reduce capitalized cost. The current accounting treatment reduces the consolidated net income under Generally Accepted Accounting Principles for the depreciation expense on the building and leasehold improvements of the commercial space that was acquired from these acquisitions. While these acquisitions are in various stages of entitlement and building design, we do have operating leases that range from 18 to 24 months with a tenant option to extend for additional 12 months. Accordingly, we are recording the net leasing activities from these two development projects as net lease income. The net lease income is approximately equal to the amount of interest expense that we had assumed would be capitalized, so this is not a material impact on the 2007 funds from operations. The issuance of common stock during the second quarter exceeded the amount we had anticipated at the beginning of the year.

Management's decision to issue equity in the second quarter was based on our philosophy to match the cost of capital with the yields on our investment opportunities. With our year-to-date investments, including the development acquisition of the forementioned, the River Oaks project primarily and to create the debt capacity to fund the future development pipeline, the issuance of equity locked in a cost of capital that will create significant value as we deliver these development communities. With the the additional common shares outstanding, the weighted average number of shares will increase in the second half of 2007 and will offset the projected increase in property net operating income. This leads to the discussion as to whether Essex is considering a stock buyback program. As noted above, we believe our current debt capacity is needed to fund the existing development pipeline and at today's stock price it is not in the long-term best interest of our shareholders to leverage up our current balance sheet to buyback stock.

However, we are currently considering asset sales and other sources of capital that can generate positive arbitrage for a stock buyback program. As a REIT, the harvesting of existing assets and other alternative sources with capital has many complexities and requires careful tax planning. As soon as these planning complexities are resolved and can be implemented without significant dilution to FFO per share, management will present a plan to the board of directors for their approval. This concludes my remarks and I will now turn the call pack to the operator for any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Litt with Citigroup Please proceed.

Hi, it is Craig Melcher here with John. I just want to go back to the asset sales you are considering, can you talk about what markets they could be in and how you will go about determining which assets you may sell.

Yes, this is Keith. I think what -- we've talked over time about Portland as being a market that has disappointed us and clearly that's a market that we are evaluating. And then the other market that we would evaluate would be San Diego. When we did the "Fax" merger we ended up with some assets that were lesser quality than our general portfolio. So we would look at those assets as well as that, in my comments we noted that that is probably one of our slower growing markets. Those would be the two markets that we would be considering. And depending what kind of yields we can pull out of assets sales, whether it makes any sense to do that and try and do a stock repurchase would be part of the analysis.

And on the NOI gross guidance for the full year, is there a same-store number you can point us to for the full year? For the full year I think last quarter it was turning a little above eight. I'm just curious for an update on that.

I think we will be again on the high-end of the range of about 8.5% on a Y growth for same property, maybe a little better than that.

Thank you very much.

Your next question comes from the line of Alex Goldfarb with UBS. Please proceed.

Just going to the topic of the bonus. You said that that was based on the midpoint or on 555 and is that just a program for this year or is that a program that we should anticipate every year?

Okay. I meant 558, so appreciate that clarification. Basically, it has been the practice of management to get what we call these LTIP, long-term incentive program, awards every two years and the last time an award was given was at the end of 2005. So that is something that we are considering and looking at some various programs to keep management around for a long period and sometimes that creates shareholder value.

And the parameters of that program?

Consistent with past levels of compensation. With our current program, there is a, under FAS 123 R if you care about the accounting, it is pretty punitive as far as the accounting charge, so we are looking at alternative sources or alternative ways of making that more efficient from an accounting view point.

Okay. Next question is do you think in this cycle you are going to be able to push rents to the same level as a percent of income that you were able to do so in the late 90s?

That's a good question. And I guess by way of background, I would say that the all time high rent to median income level that we achieved in the late 90s was in the San Francisco bay area, where we achieved about 30% rent to median income. However, I remember that time very well and I remember, Keith and I would talk about, on these calls about, we don't really necessarily believe the loss to lease and we are concerned that it can go, it can turnaround and go the other direction, which it subsequently did. I don't think that 30% would be a sustainable number. So having said that. We talk about this a lot. In northern California, as Keith mentioned, we are still below the long term historical relationship between rent and median incomes, so we think that we can push rents for the next foreseeable future, let's say, as long as economic conditions hold together.

So we think in northern California and Seattle that is the factor that will drive that. So we see nothing but pretty good activity going forward. In southern California you sort of are at the long-term historical average rent to median income relationship. And so we think it will be more difficult to push rents beyond that in southern California, because when you push rent to median income ratio up higher, it basically means that it is much more difficult for people to afford the apartment homes in the local market. We learned a lesson again from northern California in the late 90s, Lots of different -- lots of weird things happen when that occurs. There were double-ups, for example. People commute longer distance in order to try to find cheaper housing and a variety of other things. So the market does have sort of a self correcting mechanism. So, long story short, northern Cal, Seattle, I think we are pushing right along. Southern California is going to be much more moderate, which is pretty much what we anticipated at the beginning of the year and we are seeing currently.

Just thought I would hop on the Seattle, Northern California, how much more incremental do you think that percentage could increase?

That relationship has two components, right? It has a -- what is the rate of growth of the median households incomes, which we think is somewhere around 4%, so, if you keep the ratio consistent and as household incomes grow to 4%, then without changing the ratio you could see 4% rent growth. That's not so bad. With respect to where are the markets -- where is northern California? We said southern California basically has had the long-term historical rent to median income relationship, so we will leave that one aside for a moment. We are still below that relationship in northern California and Seattle and that could be maybe 15% just to get back to the historical relationship. Again, we generally don't project above that. So, I think that -- so I think you have a potential just to get back to the historical average. You have a potential of 15% bump over and above the 4%, let's say, approximate increase in household income levels and southern California you are sort of at that, whatever the household income level increase would be. Again, around 4%.

Okay. Thank you for your time.

Your next question comes from the line of Mark Biffert with Goldman Sachs. Please proceed.

Keith,in your opening remarks you made a comment about the different markets and where you are struggling. I'm wondering if you can provide a little bit of what you are seeing in terms of the shadow market in each of your markets.

Shadow market with respect to -- with ?

Condos coming back as rentals or single family homes competing with your rentals.

Actually Mr. Schall, who runs our ops is probably a better -- a better force to speak to that. But I will give you my thoughts and that is basically Seattle, we have no issues. Northern California, we are no issues. Southern California, my sense is the only market that we would have issues or could have issues would be San Diego where you do have what they call a gray market, or whatever you call it, with respect to unsold or condos that were bought with the idea of a short term flip. And then the owner is sitting there looking at his alternatives. I would guess that San Diego is only market we have any issues in and beyond that I will let Mike give you his views.

I agree with what Keith says. I think the key factor there is what is the overall supply relative to stock, and that's on the website, and San Diego is between, I don't know exactly 1% to 1.5%, somewhere in that range. At that level it is not -- I don't think it is going to be a big factor. You just aren't producing enough supply to create a hugh problem. Having said that, I am glad we are not active in the Inland Empire, because in driving through there recently, there are tens of thousands of brand new homes that go on seemingly forever. I would be somewhat concerned about that, because obviously if a developer is going to build a house that is going to be sold and it is going to be occupied and I think that will have an indirect impact. We have one property in Hemet that I would be concerned about there, but for the most part, we don't have a lot of properties in the Inland Empire, Riverside County and et cetera. And I am glad we don't.

Okay. And for the second half of the year I am just wondering what your guidance is for the promote fees or additional condo gains?

Virtually nil. We only have two units left and those are sold. But again, the net gains after taxes and everything else won't move the meter. And the fund is in its final stages of liquidation and we don't expect any more promote income from fund one.

Okay. And just following up on the prior comments on your share repurchases. You said there were some tax issues related to selling some of the assets that you might use to fund a share repurchase program. What are those?

Keith mentioned the San Diego portfolio. That was a result of a C-Corp merger, so the Company called a sting tax, which basically you don't do a temporary one exchange. You basically pay 100% tax on the entire gain, which is not very attractive to us. So we need to figure out a way of exchanging that into a development deal or some other asset. That's one. Also REITs are limited to how many sales they can have in one year. So there are a lot of complexities that we just need to resolve and figure out how it will all work and make sense.

Okay, great. Thanks.

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

Wanted to just explore a little more on the strategic unit turn program, kitchen and bath program.

Yes.

And try to get an understanding of how much you are spending or how much you spent, say, in each of the last two quarters. And specifically, I am trying to think about the impact on your same-store operating results. I understand how it hurts you from an occupancy standpoint, but the fact that you are redeploying capital back into your same-store pool obviously helps you from a rent growth standpoint in future periods.

No, that's correct. In general, Craig, we are spending $15,000 to $20,000 per unit in that program. It depends on how much we do with respect to -- we are not doing the same thing in every unit. It will vary from property to property. We are trying to identify units with the best locations and best views and in the worse condition. So some of this is trading. Some of this is units that we would probably do a unit turn on any way and by putting it in this program and significantly upgrading it, we are, I think, getting sort of the best of both worlds. So we are doing that. In terms of how many dollars, let's see.

Or, Michael, I missed the number of units you said that were sort of out of service in the second quarter, how many units you did in the second quarter. So if you want to just e-mail, you give me the per unit amount if you could just tell me maybe what the first quarter and second quarter number of units done, that would be great.

What I have is the units will be started in the second quarter. We started 61 units. But it has an impact on exactly when you start them in the quarter, because I know that we started at our Meadowood project in southern California. We started several units in the first quarter. I don't remember how many that moved into the second quarter and contributed pretty significantly to the rehab vacancy number in the second quarter. So how about I will call you offline with that information? Buy strategic unit turns in the second quarter started were 61.

Okay, great. Thanks.

Your next question comes from the line of Dave Rodgers with RBC Capital Markets. Please proceed.

Hey, guys, as a follow up to Alex's question earlier and with respect to the ability to push rents in northern California and Seattle, it seems, Keith, when you went through your comments that there was a correlation between better outlook for NOI growth or top-line growth versus home price increases and vice versa with respect to southern California. Would that be an inflection point if home prices do turn, as you expect. Will that be the inflection point for slower NOI growth as you approach the terminal growth rate?

I don't think so, because you have to look at the relationship of rent to home prices and if you go to Sacramento, which is a market we are not in and as in my comments, we have had a reduction in sales that are 25% and home prices dropped 11%. In the bay area home prices of the median home price is about $650,000. So, for the mortgage to have a meaningful drop, you would have to drop home prices 25% or 30% to even get into the range of where rents are currently at, I don't know about you, but I certainly don't see that kind of catastrophe on the horizon.

I do think that your thought is correct, that in those markets that have the greatest, the most expensive rent is where people are willing to spend, excuse me, the most expensive mortgage is where people are willing to spend more on rent. So in the bay area and southern California, for example, the median sort of long-term range for rent to median household income is in that 24% to 25% range. In Seattle, where home prices are less expensive, people spend in the high teens on rent to median household income. So there absolutely is a relationship there, but I think that our home prices are so much more expensive today than rents, that the price drop would have to be enormous for it to have an immediate effect.

Okay. Mike Schall, one question maybe for you. The relative health of your tenant versus what you have been seeing. I don't know if you commented this time around on traffic trends in each of the core geographies or just overall for the portfolio and bad debts and any other type of consumer tenant health issue that you might be able to discuss?

I do have traffic numbers. I didn't go through them, but I didn't see any meaningful changes there. Seattle traffic was up sequentially 3%, down 3% year-over-year. Traffic LA Ventura down 1% sequentially, 6% year-over-year. Orange County down sequentially a little bit more, 7% sequentially, 7% year-over-year. Traffic was up modestly in San Diego, which tends to have more of a military component and is more volatility the result of that. And then in northern California, traffic down sequential 7%, but up 9% from year ago. And so, a little benign there. In terms of delinquency and those types of issues, we didn't see any meaningful change in that during the quarter. I don't see any issues there.

Okay. Thanks guys.

At this time, there are no further questions in the queue. Ladies and gentlemen, that concludes the presentation. You may now disconnect and have a great day.