Essex Property Trust Inc (ESS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Essex Property Trust earnings conference call. My name is Carol, 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 this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

Thank you. Welcome to our third quarter earnings call. This morning we're going to be making some comments on the call which are not historical facts, such as our expectations regarding markets, financial results, and real-estate projects. These statements are forward-looking statements which involve risks and uncertainties which could cause actual results to differ materially. Many of these risks are detailed in the Company's filings with the SEC, and we encourage you to review them.

Joining me on the call today will be Mike Schall, Mike Dance, and John Eudy. Again, included in the earnings release on our web site, you'll find our market forecast for 2007. We will discuss the highlights in the market sections. Also included with our earnings release is a schedule titled New Residential Supply, which includes total residential permit activity for the larger U.S. metros, as well as the information on median home prices and affordability as compared to the markets that Essex operates in. To get those details visit our web site under investors and media.

Last night we reported another strong quarter with core FFO increasing 11.5% per share. For the quarter, the portfolio grew revenues 5.8% greater than same quarter in '06, and 1.7% on a sequential basis. I feel very good about those numbers. The strong performance was driven by the fundamentals in our supply-constrained markets. This morning I'm going to review by market the data on what's going on with single-family existing sales transactions and the impact of these changes in the job growth. The jobs, and we define an at-risk group of jobs which is really tied to the housing market in construction. The real-estate and credit intermediary sectors, or subsectors.

Nationally these sectors are down 136,000 jobs, or 1.1% year-over-year in September, or through September. However, the largest drag on the total job growth for the country, for the national picture, is manufacturing. Manufacturing jobs are down actually 201,000, or 1.4%, which is a greater impact than is being created by the housing sector, but it doesn't seem to be focused on it at this point. The impact of the single-family slowdown on job growth is actually going to be smaller in our markets. Seattle and northern California experienced smaller increases in home building over the last few years than many of the markets nationally. What's really driving most of our markets is that we've got a very strong manufacturing sector, which is being -- in our regions, which are being primarily driven by the high-tech industries. I'm also going to provide data on potential supply of condo conversions that could return to the rental stock and their impact on the apartment market.

Starting with Seattle, which continues to expand at a strong, steady pace year-over-year job growth for September was up 42,000 jobs, or 2.9%. Unemployment rates are trending under 4%, while the labor force growth is now around 3% as compared to the nation of about 1%. For September, national single-family existing home sales were down 18% with median prices down 4%. In Seattle, as of August, which is the latest data we have, sales are down 27%. However, the median prices were actually up 7%.

In Seattle, jobs in this at-risk category were actually up 4.4%. This is due primarily to the large infrastructure and nonresidential building construction. The manufacturing sectors up 3.9% driven by Boeing. We estimate that no more than 1500 existing apartment units are targeted as condo conversions, which could come to the market in the next 6 to 12 months. This supply represents 4/10 of 1% of the existing apartment stock.

Going to northern California. Again, job growth remains strong in northern California year-over-year growth in September is approximately 40,000 new jobs or 1.4%. This is strong relative to our new supply. Unemployment in the third quarter increased from 4.4 to 4.8%. And the labor force has continued to expand by a very strong 1.6% during the period. For September, existing home sales were down 46%. However, median prices were actually up 2%. In northern California the at-risk jobs were flat. The tech sector, which is really driving this economy, was up about 1.2%, or 3700 jobs. Condo conversion deals are insignificant relative to size of rental stock and will not be a factor in determining rental growth in northern California.

Going to southern California, I'd like to discuss the wildfires in southern California, the economies and their impact on the apartment market, primarily San Diego County. Recent estimates indicate about 2,000 homes were destroyed or damaged in southern California, the majority concentrated in San Diego County. A large portion of these were newer homes with prices well above the county median value. Several hundred nonresidential buildings were also damaged or destroyed. However, the infrastructure damage was minimal. In the short run, some of these evacuees will join the renter pool. However, relief aid from federal and state governments, as well as private insurance will support reconstruction. Rebuilding of the homes obviously will take a little bit of time, will be a slow process. The net result is that we have not altered our outlook on the economy or the strength of the apartment market in the San Diego, in the short or the long run.

For September, the existing home sales in our markets, this is the entire southern California region, was down approximately 50%, with median sales prices flat for the region. However, in sub markets, such as San Diego, prices were actually down 6%. The weakest area of southern California was outside our markets in the Inland Empire where transactions fell 59% and the median sales price fell 12%. After a weak second quarter, job growth in southern California actually improved in most areas. Year-over-year job growth is 53,000, or 0.7%. The unemployment for the third quarter increased slightly to 4.8%, and the labor force has continued to increase in size, or at 1.8%.

Southern California, the at-risk jobs were down 18,000, or 2.3% in September. Just over half of those losses were from credit, intermediary jobs in Orange County and construction jobs in San Diego. The potential supply of condo conversions as rentals in our sub markets is concentrated in San Diego County. We estimate that there are approximately 1200 units or 3/10 of the existing stock of apartments that could return to the market as rentals. Condo conversions in the rest of the southern California sub markets are insignificant.

Finally, with respect to our southern California properties, we're pleased to report that after the fires, all of our personnel and residents have safely returned to our properties. Several properties were evacuated during the process, and during the fires, but damage was minimal.

Quickly, touching on Cap rates, this is sort of across our markets. We look at the A&D product and we believe that Cap rates have moved up probably about 25 basis points. And again, we see this as across all of our markets. And just a quick update on the disposition activity we talked about last quarter. The [Portland] portfolio has received significant buyer interest. The San Diego portfolio has had slightly less interest. It is our policy to report sales upon closing, so that information is yet to come.

Now I'd like to turn the call over to John Eudy.

Thank you, Steve. Our development pipeline remains constant at just under $1 billion, which includes 3,111 rental units containing approximately 2.8 million net rentable square feet of residential, and 114,000 square feet of ancillary retail. The developments will be delivered in the portfolio starting early 2008, and over the next four years at the approximate average rate of 250 million a year. Our strategy remains to maintain the development exposure at approximately $1 billion, and as the units are delivered into operations we will recharge the pipeline. Managing our development activities in this way maintains our exposure including our ownership percentage on the fund II developments in the 5% range of our total market capitalization, which is consistent with our long-term strategy of balancing the risks and the rewards of development.

During the quarter the following material activities have occurred. Our most recent addition to the development pipeline, City Center and Moore Park, cleared the CEQA, that's a California environmental quality act challenge period which we had in California on October 4th. We're in the process of bidding out the hard costs and we have decided to pursue bond financing which delayed our planned start date by approximately three months. Our inducement resolution was approved by the city of Moore Park in October allowing to us pursue the bond financing in the [tepra], that's the bond -- checked California bond agency, meetings are scheduled for November. We are fairly confident we will get the bond financing. However, in the event we do not we will still proceed as originally planned with conventional financing and start site work in December.

Please note in the schedule S-9 of the supplemental our marketing department has given most of our developments their permanent marketing name. So when you reviewed, please be advised. The name should be fairly simple to track. We're on track to deliver initial occupancy as follows. Northwest Gateway, February 2008, Eastlake 2851 on Lake Union March 2008, The Grand in Oakland on December -- in December 2008. And then Seattle and Chatsworth Studio 4041 in Studio City and Fourth Street in Berkeley are on track for May, March -- excuse, me, March, May, and September, effectively 2009.

On the budget status, there are no changes to report. We are on budget consistent with our reporting last quarter. The only reasonable reason for hard cost increase should be limited to changes in scope, not in the contracts. As we have reported in the past, when we start construction, it's always with a G-max contract with a general contractor in a local area guaranteed by the principal of the parent of the firm. All of our GCs must have an established local presence with the subcontractor community in the areas they serve in which our development exists.

What G-max really does is, it forces the truth out of the budgeting process by requiring the general to commit to a budget with actual subcontracts in hand or commit to take line item risk, which tends to eliminate a best efforts estimating process that would otherwise occur. All of our contracts are open book, G-max contracts which allows us to review and qualify all subs. Not doing so, a buyout in this way really is a cost-plus effort with no parameters of cost or budget control, and you can end up waiting for the last bill to come in before you really know what the budget will be. The G-max format does not have an implied premium as some may think. We know from our 23 years of development experience all it does is put the real numbers on the table when you sign a contract going in.

On our pre development activities, on Fourth Street in Berkeley, we cleared the CEQA challenge period on September 24th and plan to start demolition in November. On City Place in San Diego, we're in the process of bidding the job and should be in position to start as planned in February 2008. On Broadway Heights in Seattle, we had our initial entitlement architectural review meeting in the City of Seattle last month and have a follow-up hearing scheduled for November 7th. We anticipate receiving approvals and starting construction in April 2008. On [Chasman] Station in Sunnyvale, we had our initial architectural review work session meeting with the planning commission on October 8th which, went very well, and we are in the final stages of meeting the requirements of our vested development application expect to go to planning commission within the next 90 days and start construction June 2008. And on our River Oaks in San Jose and Essex Hollywood in Hollywood development applications they are pending and in process as scheduled.

On construction costs we continue to see the construction costs level off in all our markets except Seattle. The amount of bidding activity continues to increase, as I reported last quarter, which we continue to believe is putting downward pressure on hard costs. Stabilized development yields will be in the 6.5% range. And last but not least, developers in our west coast urban core supply constrained markets continue to face increasing challenges to develop, starting with the simplistic geographic boundary issue and the challenges infill development brings, like the CEQA effect and the NIMBY issue, increasing fees, increasing mandatory affordable requirements, and most recently the greening requirement on all our development applications, all continue to keep potential for overbuilding at bay. We are cautiously optimistic the recent turmoil in the for sale markets may lead to an overreaction on land values in the near term and may present us with opportunities to pursue which we might otherwise not have.

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

Thank you, John. Thank you, everyone, for joining us today. As Keith indicated we're pleased with the operating results of the portfolio during third quarter. Once again, Seattle was our strongest market and continued to perform well above guidance levels. It had a 10% increase in same property revenues and 2.8% sequential growth. Northern California closely followed Seattle with 8.9% revenue growth as compared to our guidance range of 7 to 8%. Southern California same property revenue grew at 3.7% year-over-year, a result that was below our guidance range for the first time this year. The southern California results were impacted by a 0.9% drop in same property occupancy and $116,000 increase in concessions.

Operating expenses grew at 3.8% for both the quarter and year to date. Slightly above our guidance range of 2.5 to 3.5%. Our northern California portfolio was largely the cause of this with same property expenses up 7.7% for the quarter or $343,000, and 6% year to date. This increase is attributable to wage pressure in northern California and accrual adjustments attributable to two properties in the third quarter.

Before reviewing each market in greater detail I would like to discuss two long-term investments in our operating platform. First, we continue to work on our migration of our GL and property management systems, Yardi, currently approximately 30% of our properties have been converted to Yardi, and we expect this primary conversion effort to be completed by mid-2008. At that time, several additional Yardi capabilities will be implemented including service orders and resident portal. In addition, we're working on automation projects dealing with human resources and yield management.

This year has also been a year of substantial property improvement at Essex. We believe that our properties enjoy some of the best locations in the west coast and in many cases the portfolio can be upgraded to a more profitable position within the renter pool. In addition to the work done by our redevelopment department that is listed on page S-10 of the supplement, major exterior renovation projects have been substantially completed by our operations department at five properties comprising 1408 units. During the quarter we started renovation at 320 unit interiors and have made progress in reducing the number of days -- number of down days due to rehab a unit to 30 days plus, in some cases, a few additional days for asbestos abatement and washer/dryer additions.

Overall, the quarterly results included $757,000 in rehab related vacancy, of which 303,000 was included in our same-store results. Loss to lease which estimates the difference between market and in-place rents without regard to concessions, declined to 13.6 million, 3.5% of scheduled rent from 17.1 million or 4.6% of scheduled rent as of June 30th. The reduction is largely attributable to quarter end price reductions to build occupancy as we head into our seasonally weaker fourth quarter.

Now I'd like to briefly review each major part of our portfolio. Starting in the northwest. Seattle may be the best multifamily in the nation, downtown Seattle, the area north of Seattle, which includes Boeing field in [Everin],and the east side, including Bellevue, are all very strong. The area south of Seattle has more affordable for sale housing, and therefore is not quite as robust as the remainder of the metro area. The only concern that we see in Seattle is the number of construction cranes that are visible causing us to closely monitor housing construction in the Seattle area.

Reflecting the strength of the Seattle market as of October 22nd, our physical occupancy in Seattle stood at it 97.3% with net availability of 4.5%. In Portland occupancy was 94.4%, net availability 6.28%. Home purchase activity represented 17% of our move-outs for the quarter compared to 20% a year ago. That was in Seattle, and in Portland 17% of our move-outs were to buy homes versus 24% a year ago. Traffic was up both sequentially and year-over-year in the Seattle market.

In northern California, portfolio continued to be strong in nearly all sub markets with same property rental rate growth of 9.1% and property revenue growth of 8.9%. Silicon Valley, the largest component of our northern California portfolio, led these results with same property revenue growth of 11.8% year-over-year and 3.7% sequential growth. As of October 22nd our physical occupancy stood at 97.1% in northern California, with net availability of 4.8%. Home purchases represented 14%, almost 14% of our turns for the quarter compared to 11.5% a year ago. Traffic was pretty much flat in northern California.

Now to southern California. As expected, the growth in southern California is moderating, although at distinctly different rates depending upon the sub market. New supply and our jobs-related issues are the key differentiating factor in these results. For example, Ventura and northwest L.A. County are affected by lease-ups of competing apartment properties, as well as job cuts announced at Countrywide financial in Calabasas and Amgen in Thousand Oaks, Orange County has similar issues. The Inland Empire where we have only 276 same-store units, has a combination of commute issues, labor force issues affected by the construction industry, and much more affordable single-family homes, many of which are being converted to rentals.

At the other end of the spectrum our results in the remainder of southern California were quite good as reflected in the results of L.A. County which generated 5.9% same property rental rate growth and 5.4% revenue growth. Physical occupancy at October 22nd in L.A., Ventura, was 95.7%, net availability of 6.1%. Orange County occupancy 96.8% net availability of 4.84, and San Diego's occupancy stood at 97.2 with net availability of 5.5%. Move-out activities attributable to home purchases increased modestly in each of our southern California areas except San Diego where move-outs to home purchases declined from 7.5 -- to 7.5% of our move-outs from 7.9% a year ago.

Now I would like to turn the call over to Mike Dance.

Thanks, Mike. My comments today will focus on the 2007 year end guidance. Yesterday we reported on increase in recurring funds from operation of 11.5% compared to the third quarter 2006. And we narrowed our estimated range for 2007 to $5.56, to $5.62 per diluted share. With the strong third quarter operating performance, we reported funds from operations at $1.33 for the quarter, and year to date funds from operations through September 30th, 2007, of $4.34 per diluted share. To achieve the high end of our estimated range, the fourth quarters funds from operations will need to be $1.28 per diluted share.

We expect the general and administrative expenses for the year will be $1 million higher than our current run rate for additional year end incentive cash and or equity bonus. Also, we expect to increase our estimated incentive cash compensation for property operations by $300,000. In September, we had the acquisition of Mill Creek with a purchase price of approximately $100 million, which was financed on the lines of credit. The short-term dilution in the fourth quarter from this acquisition will decrease FFO by approximately $300,000. We expect this dilution to be reduced in early 2008 when we pay down the borrowings with proceeds from the disposition of several properties with a value of approximately 100 million.

Similar to our strategy in the fourth quarter of 2006, in late summer we shifted our emphasis from aggressively pushing rents to a bias of increasing occupancy to prepare for the slower traffic patterns we historically experience in late fall and early winter. In addition, we expect an increase in the property's repair and maintenance expense in the fourth quarter to clean up the southern California fires, and in northern California and Seattle we typically experience higher operating expenses as operations prepare for the winter. This activity will [slow] the sequential NOI growth in the fourth quarter, but we believe will position us to be in a strong operating position as we prepare for 2008. The impact on FFO per share for the items just discussed will result in our achieving the high end of our FFO range.

The rationale for the lower end of the range is a conservative contingency for structured finance loans. In August 2006, we originated a loan commitment for up to 9.7 million for a condo conversion of 26 apartment units located in the desirable southern California market. To date, four units have closed, and there are five units in contract. We are closely monitoring the sales activity in the fourth quarter and have stopped accruing interest on the loan until the sales volume can restore the loan's interest reserve. If the loan does go into default, we could have an impairment charge of approximately 1.2 million and the 2007 forecasted funds from operations will be at the low end of our guidance range.

In closing I will touch on the two land investments owned by our taxable REIT subsidiary in the for sale housing market. To minimize our exposure we have indefinitely postponed the future developments of the projects identified in the supplemental quarterly information on schedule S-9 until we see an appropriate investment return for the associated risk. Today we have created value on these project by successfully obtaining the expected entitlements with governmental approvals for the building design. Starting in the fourth quarter, we stopped interest capitalization on these projects until such time as construction begins. We believe our cost basis of 100,000 per fully entitled door approximates the current market value of these two development sites located in northern California and Seattle.

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

Thank you, sir. (OPERATOR INSTRUCTIONS) And your first question comes from the line of Alexander Goldfarb with UBS. Please proceed.

Just wanted to circle back to the comments that you made on the greening requirement. If you could just expand on this, and just share if this means that it accelerates the approval process and if this is a trend that we'll start to see among apartments?

Well, this is John Eudy, we see it happening at the early stages, in all deals. It started with single family, and it's moved over into the multifamily area. And the net result right now is different approval agencies, cities, counties, and what have you, are interpreting what everything from lead to green means, and at the end of the day, the expectation is it will be revenue-neutral. What it will cost you'll get back in savings, either through savings in utility costs or what have you, but it causes another hurdle that you have to get through to get through your development transaction. And it's just another bureaucracy, governed item that is a challenge.

So does this -- are there enough people out there who have the design resources to properly like scope out green apartments, or is this going to create sort of bottle neck?

No, there's plenty of consultants that have come to the table. It's a matter of interpreting what green means and whether lead becomes a standard or there are about three different metrics that different agencies are following, so it's just -- it's slowing the process down a little bit, and it's also somewhat a reactionary thing to the whole green movement in the country.

Okay. And then, going to the loss to lease schedule, southern California seems to be a consistent trend but northern California and Seattle seem to jump around a fair amount. Is this just having to do with, as you get to quarter end, where you're trying to get occupancy, or what's causing some of these numbers to bounce around so much?

Yes, it's exactly that, Alex. We didn't have to push as hard in northern California or Seattle to hit our occupancy objectives. Again, we're going into a slower -- seasonally slower period, and, therefore, our strategy is to build occupancy and hopefully coast through the fourth quarter, and it was more difficult to do that in southern California, which puts more pressure on rents and, therefore, you get a bigger swing in lost to lease.

Okay. Final comment is, Seattle, there was a tick up in turnover, it was up almost 10% from last year. If you could comment what's going on in Seattle?

I don't think that indicates anything special. I think that's just an isolated event. I think that is not significantly different. We turn more units in the summer for sure, that's planned. In this case we also work to lower our fourth quarter lease expirations to somewhere in the 3 to 4% range. So that created a little bit more turnover activity in Q3. So it's a combination of just planning items and normal execution.

Okay. Thank you for your time.

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

Good morning, guys. To follow-up to Alex's question on the turnover, was the cost -- the increased cost in Seattle, was that related to that increased turnover?

Wait, I'm sorry, I missed part of that. You broke up a second there.

Sorry. Was the cost increase in expenses in Seattle during the quarter, was that partly due to the increased turnover?

Oh, yes, in some small part it would have been due to that, but overall, Seattle expenses were 2.1%, so, I think they were actually under our guidance range. So I don't think that -- we typically turn more units. We typically turn around 65% of our units, in the third quarter, again, due to building for the fourth quarter and just due to normal summer events. So it didn't have a large incremental impact. The additional turns did not have a large incremental impact on expenses. It's a small number.

Okay. And next to the Thomas Jefferson asset apartments that you acquired, it appears is a little bit smaller of a property than you'd normally acquire. Is there a bigger project surrounding that? And can you give a little more color on that?

Magnolia, I think is what you're referring to, which was acquired adjacent to Thomas Jefferson.

Yes, that was a small [4000] 20-some-unit building. Thomas Jefferson is actually 156 units. We have a number of properties that are in that 150 to 200-unit range, which is not atypical for us. So I think the Magnolia property, which was a smaller property is adjacent to the -- actually the Thomas Jefferson is a newer property, has a very nice marketing window, we bought that as sort of a adjunct to the Thomas Jefferson, the idea would be to combine those and create a single larger property with that acquisition.

Okay.

The other comment I would make about Thomas Jefferson is, it's an older property and a great location within Sunnyvale. It's one and two-story buildings which there may be some density improvement opportunity there, so it opens -- it's what we like to do, which is take great locations then try to figure out how we can improve them and Thomas Jefferson would be a great example of that.

Okay. And then when you look at the operating -- in terms of improvements in Seattle and northern California, do you think that we're kind of at the peak of rent growth in those markets, or do you expect a lot of that to continue into '08?

This is a business where you build momentum, and that momentum carries you for some period of time. So certainly I expect to continue the momentum of northern California and Seattle into 2008, and so I don't -- whether that momentum is carrying us up or straight across or down a little bit, I don't really -- I don't know. Our economist is here. If he wants to comment he can. But pretty clearly those markets will be -- will continue to be strong. It's our opinion. In 2008.

Okay. And lastly, related to the Palisades redevelopment site, looks like you are pretty much completed on the redevelopment. What are you seeing in terms of yields on that property now that it's nearing the end?

We're seeing -- I don't have that number exactly, but low to mid teen type returns on -- and this is measured by our primary metric there is looking at rents before and after, rents unrehabbed versus rehabbed, versus the cost, divided into the cost on an annualized basis. So that generates a low to mid teen type of return.

That's across the entire redevelopment pipeline, or is that just for the --

Just for that one. But I don't think -- those returns, there may be a little bit wider range. We think kind of at the low end we're at 9. At the high end, we've seen some as as high as 17 or 18%. So the range is wider if you look at the entire spectrum of redevelopment opportunities with respect to Palisades sort of in that mid to high end of that range.

Okay. Thanks.

And your next question comes from the line of Jonathan Litt with Citi. Please proceed.

Hi, it's Craig Melcher here with Jon. On the nonrecurring FFO item, in the last couple years you've had a pretty good piece of FFO from this. When we head into next year without the condo projects, is there anything on the horizon that could cause some nonrecurring FFO to recur in '08, or should we think of the base of FFO going forward to kind of be stripping out the nonrecurring and growing from that point next year?

We are in the process of doing our 2008 budgeting process. We have some opportunities to generate nonrecurring funds from operations. There was -- there is one identified in the supplemental related to the sale of our Mountain Vista joint venture where there's preferred interest that we can recognize. So that has been disclosed in our supplement. We're still working on other ones.

That's on page S-11 if you're checking.

And on your acquisition appetite at this point, and you mentioned Cap rates are up 25 basis points or so, should we expect you to be active in the acquisition market now, or are you taking a pause and seeing where things shake out?

Well, we've closed about 350 million so far this year. Right now we're -- I wouldn't say that our appetite is ravenous but what we're trying to do is pick our spot. We've talked in the past about looking for broken condos. We're trying to find Cap rates that are better than what you might expect, so we're trying to find some opportunistic situations where we're taking advantage of the marketplace and we're not just taking advantage of the quarter -- the quarter Cap rate move which basically puts us in -- on par with every other acquisition. So I wouldn't be surprised if we could see one more transaction before the end of the year, but it wouldn't be huge. It would be in the 40 to $50 million range.

Thank you.

And your next question comes from the line of Bill Crow with Raymond James.

Good morning, guys.

Hi, Bill.

Couple of questions. First of all, following up on Craig's question about repeatability of the gains, I think last quarter you made a comment, something like 2008 was in the bag, and now you're looking forward to 2009. Are you backing off that a little bit, as far as the $0.39 goes?

Again, we're in the process of looking at opportunities and, I think 39 is somewhat optimistic, but it's still in the realm of possibilities. We'll give guidance probably the same time as last year as we position our fourth quarter numbers and we'll have the answer to that question.

Okay. And then the question was asked earlier about the positive momentum in northern California and Seattle. Looking at the other market, it seems like maybe there's some negative momentum in southern California, at least from some of your peers you're hearing more negativity, I guess. Where do you see that market heading over the next two or three-quarters?

I think it's, again, very submarket driven, and I think there's some very solid parts of southern California. If you look in our supplement at the geographic breakdown on page S-8, I think it pretty much follows that. So L.A. County, I think, is pretty solid. It tends to be -- have less supply. Jobs are more stable in that area. Therefore, the overall results are better. Orange County has some portion -- some portion of job impact from subprime and other effects, which is, I think, hurting it a little bit. Santa Barbara is very strong. The Inland Empire, again, we're a very small piece. I think that will be very weak, I pick that to be our worst market. And then Ventura County, which is another large piece of our portfolio, production rates of competing housing are not distressing, but it happens to have two major employers that are having some problems. That's Countrywide and Amgen and are laying off employees.

Again, the one issue in supply-constrained markets, even though the supply doesn't hurt you very much, if you do have some impact to the major job pieces, it can still hurt you, and Ventura County, I think, is going to suffer from some of that. So I'd expect it to be weak going into 2008. I think San Diego, we had a pretty good quarter in San Diego, so we're feeling better about tha,t we have about 1/4 of our units, our southern California units in San Diego. About 28% in Ventura County. And then L.A./Orange I think will do a bet better. It's hard to generalize.

Right.

It's a little bit of a -- you have to go down into the details to get there, but I think southern California will be somewhat of a mixed bag next year. I don't think, overall, that it's -- I don't get the sense that momentum is deteriorating significantly. I think there's a few isolated events, again, having to do with supply, where you're -- the typical supply now is -- and I'm thinking about northern L.A. County out by Ventura County, where you have high density deals. Archstone has one, AVB has a deal that's not at lease-up yet, but soon to come in Warner Center, their Seamy Valley deal that Archstone bought from JPI, is not fully leased up. There's an AVB deal in Camarillo. So there are transactions out there that are in lease-up, which, for the period of time that you're leasing up 300 units, if that takes you to do 20, 25 units a month, it takes a pretty long period of time to lease that up. And that has a pretty significant impact on the local marketplace.

So local market issues are going to drive the day in southern California. It's going to be either supply and or job issues. And I suspect that the Inland Empire has the benefit of having both of those problems. So both those problems plus commute issues tied to higher gas, because a lot of people in the Inland Empire commute into Orange County. So, anyway, that would be my handicapping of what's happening.

That's helpful. Finally, Mike Dance, how much of the repair and maintenance is attributable to the fires, the higher repairs and maintenance in the fourth quarter, is related to fires? And are there any other expenses related to the fires, getting people out of their apartments or anything that happened that is in the numbers?

We're hopeful that most of the costs will be with on-site people, but we're still gathering that information and coming up with estimates.

Bill, I don't think it's going to be that large. You've got ash in pools and cleanup of rooftops and gutters, maybe to a certain extent. I don't expect a huge financial impact from that. And as Mike said, some of it will be born by our own people.

Thank you, guys. Appreciate it.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Dustin Pizzo with Banc of America Securities. Please proceed.

Thank you. First, just a follow-up on that last discussion on southern California. As you look at the job losses with Countrywide and Amgen, you look at your portfolio in the Ventura market, does it provide any opportunity to perhaps take market share from some of the higher priced competitors in that market?

That's sort of an acquisition question. Mr. Guericke may trump my answer here, but we try to follow our acquisition model, sort of driven by three things. One is the growth rate, so, the growth rate here is going to be lower than the rest of our portfolio. That doesn't excite us about Ventura County in the short-term. Number two is the cap rate, so you would have to -- the answer to a lower growth rate would have to be a higher cap rate. I don't think that we're seeing that in Ventura County. Then number three is, some dislocation in net asset value because we're trying to build net asset value per share. That's closely tied to Cap rate. So we're basically, long story short, we're not seeing the premium in Cap rate that would be necessary to offset the lower growth rate of Ventura County right now so I would suspect not. Keith, do you agree with that?

Yes. Although were you talking about occupancy?

Yes, I was more talking about in the existing portfolio, just as if people lose their jobs and potentially need to kind of trade down in asset class or price point.

I think it it's always an opportunity for us, and we -- our strategy has always been to be A locations, and B, properties, and as more of us transition, we have generally been the beneficiary of being able to keep our occupancies high at the expense of more expensive properties. When things are booming, the A properties generally do a little bit better and pull us up with them. And then on the opposite side, I think we do our occupancy benefits. So the answer to your question is, depending on how tough the economy gets, I think we are the beneficiary.

Okay. And then, I guess, just quickly, Mike Dance, on the balance sheet, what type of investments are in that marketable securities line?

Those are basically treasury instruments that our captive insurance company owns from the premiums they collect for the earthquake policy.

Okay. Great. Thanks.

And your next question comes from the line of William Acheson with Merrill Lynch. Please proceed.

Thank you. Good morning, gentlemen. Could you refresh my memory, which acquisition is going to result in 300,000 in dilution in the fourth quarter?

That was Mill Creek. It was in the Windermere masterplan community in San Ramon, it's 400 units that we closed on in late September.

What is the operational situation there?

Occupancy, it's fully occupied. I think the issue is we bought it at a -- as a brand-new property. We bought it as a -- at a sort of a high force cap, and we finance it on the line at about 6.1%. The idea was, the intent was, and the intent still is, to sell the Portland portfolio at approximately a five cap and trade it into that, which would significantly reduce any drag on that transaction and I think as Mike said, the anticipation is that that finalizes in the first quarter of next year.

Okay. I got you. Going back to the structured finance loan, if possible, contingency, that was $9 million on a condo property?

Apartment converting into condos.

I guess first of all, how many units in total are there in that property?

There are 26. Four have closed, and five are on contract.

Okay. And where is it located?

Sherman Oaks. Southern California.

The interest rate on that loan?

I guess, 4.75 over LIBOR.

4.75 over LIBOR, okay. Not giving anybody an even break there. I guess the other question is, what's the difference between the $9 million loan and the $1.2 million impairment? Did you have any physical recovery options here?

That difference is basically what it's worth as a -- basically our cost basis is 360,000 a door now. They're selling at, and we're collecting net proceeds against the loan at about low 400s per door. The difference that write-down would be in the event that we have to write it down to fair value, what it would be worth as an apartment. And, again, it's a contingency, we're closely monitoring it and we're hopeful it will be coming in at the high end range, but I wanted to make you aware that we did have some exposure there. And that's why we have a low end of the range.

How long have they been trying to make sales there?

They had some delays in getting their white paper which permits them to report their timing. Basically, I think they start marketing -- started marketing in May, but I don't think they had any real activity until July and August, just with the credit turmoil started coming out, the lenders requiring higher standards for the prospective buyers (inaudible) the units, a lot of them fell out of contract as the new lending standards came out.

Okay. Sounds like a situation in flux. Is it viewed as an apartment property?

Great location. We bought a property not too far from it in our (inaudible) subsidiary that's currently going through redevelopment ,so it's a market that we like and it's just not worth 360 a door as an apartment but it is a very well located apartment.

Thank you so much.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of [Christine O'Connor]. Please proceed.

Hi, good afternoon. Most of my questions have been answered but just curious, was the increase in turnover in southern California expected, or was that due to the higher move-outs to home purchases?

No, actually, it's pretty much expected. We do turn more units in the summertime. Those are annualized numbers in the supplement, and so that was expected.

Okay. So similar to what happened in Seattle?

Correct.

Okay. Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect, and have a great day.

Thanks for joining us, and we'll see many of you at the NAREIT in Las Vegas. Thank you.