Essex Property Trust Inc (ESS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter 2007 Essex Property Trust earnings conference call. My name is Karissa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (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.

Good morning. And welcome to our call. I'm going to apologize in advance a little bit. I think our comments are going to be a little bit longer than normal. We are trying to support the 2008 guidance, plus give you color on what's happened for the fourth quarter. So we are going to be a little wordy. Please bear with us.

On 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 is Mike Schall, Mike Dance and John Eudy.

Also included in our earnings release on our website you'll find our market forecast for 2008. We will discuss the highlights in the market section Also included in 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 information on the median home price and affordability as compared to our Essex markets. To get those details visit our website under investors and media.

Last night we reported another strong quarter with core FFO increasing 12.7% per share, for the quarter. The portfolio grew revenues 6.2% greater than the same quarter in '06, and 1.3% on a sequential basis. On today's call I'd like to comment on how we see multi family financing. I'll also comment on the basis for our 2008 guidance on a market by market basis, and finally I want to comment on cap rates.

To the extent that the multi-family sector has gotten tainted with the same brushes, the other property sectors from this credit crunch and financing situation, I think that's been a huge over reaction. The multi-family sector still has access to financing from Fannie and Freddie. Nine months ago we were able to borrow 60% to 65% of value, at 80 basis points over the 10 year treasury. That's not available today. But we can still get financing in the 55% to 60% range, at 170 to 180 basis points over the ten year treasury. In fact, in January, we completed a loan on a Southern California property with a all in rate of 5.21%. We've been big believes in using mortgage debt from the agencies, since we've been public in 1994. I think we've seen unsecured market cheaper than mortgage debt, maybe two months out of that entire time. So you will continue to see us use that financing strategy.

Let me talk to you about each of our regions quickly. Seattle's economy remains one of the strongest in the nation. GDP for the state of Washington has been the highest, has one of the highest percentage of exports in the country, which is benefiting from the currency issues. The success at Boeing, from record-breaking orders on the 787 as well as delivers on the 737, has driven the growth across that region. Expansion at Microsoft and the surrounding software industry on the east side, has led to a 3.4% growth in the information and business sector jobs. Residential construction is expected to remain relatively flat over the next few years. Increases in the multi-family deliveries, are being offset by declining single family supply. So again, if you look at the permit schedule at the back of this-- of our information, those numbers don't exactly true-up.

Despite the boom in apartment rents over the last two years, the ratio of rent to median household income remains relatively low at 16%. And this is below the historic average, and renting represents approximately 51% of the cost of ownership in this market. We expect for 2008, 28,000 new jobs, and a total supply of multi-family and single family of about 12,500 units or 1.2% of the existing stock. We expect occupancy will increase to 96%, with a 7% rent growth in this market.

In Northern California, job growth was slightly stronger than the nation in 2007. The strongest economy in Northern California are in the San Francisco and San Jose areas. The recovery of the San Francisco and San Jose economies had little to do with the single family boom. These markets have little, if any, exposure to the subprime family market. New single family supply in this market totaled only 4/10 of 1% of the existing stock. Internet, top technologies, business service, education, health, and tourism have been the drivers. We forecast 28,000 new jobs or 1.5% job growth in '08, with new total supply of 7500 units or 6/10% of stock. Occupancy levels remain at about 96%. Rent growth of 5.5% in San Francisco, and 7% in San Jose.

The Oakland market did have exposure to the subprime mortgage issues, primarily eastern Contra Costa County, where we have little ownership exposure. In the second half of '07, Oakland suffered from significant loss of construction, and financial intermediary jobs, which are now back to the 2002 levels. Thus, we don't expect these sectors to remain a drag on the economy, going forward. Stronger growth in the service sector will lead to overall job growth of approximately 10,000 jobs or 1% in '08. This level of jobs should keep occupancy at about 95%, leading to a 4% rent growth.

Affordability continues to be on our side. Let me give you some statistics here quickly. Relative to ownership, and I'll do it market by market. San Francisco in '07 actually saw home prices go up slightly, 2.5%. However, we think that prices are going to go down 7.5%, resulting in '08, resulting in median home prices of $771,000. If you then look at what the cost of ownership, relative to renting is, rent will be about 53% of ownership, and if you look at what rent is, as a percent of median household income, it's about 26%.

In San Jose, we saw prices tick up on the single family homes of about 3% in '07, again, expecting about a 7.5% price reduction in '08, resulting in $737,000 median home price in '08. Rent as a percent of ownership at about 45%, and rent as a percent of median household income at 18.1%. And finally, Oakland rents were-- prices were flat in '07, however we expect to see a little bit larger, 10% price change in '08, negative price change, resulting in $621,000 home prices. Rent as a percent of ownership at about 48%, and rent as a percent of median household income at about 19.3%.

Let me give you the rent as a percent of median household income, put that in perspective for you. Historically across this region it's been 23% to 24%. So in San Francisco, rents are at, or slightly above the-- sort of the historical levels. In San Jose and Oakland they're significantly below, which I think bodes well for us to be able to push rents.

In Southern California, the economies are weaker, and in some parts facing recession. However, reduction of single family construction to negligible levels, will help the apartment market. In Ventura County, we continue to be negatively affected in 2008, by the loss of jobs at Countrywide Financial and Amgen. And on the supply side, with two large lease subs in Simi Valley, and Oxnard, we expect to continue to lose some construction jobs, and single family supply will be cut. We expect total new supply of about 1300 units in this region, which is about a half percent of existing stock, and we expect to see jobs flat. Occupancies will fall slightly to 94.5% with flat rents.

In Orange County, we saw drastic cutback in financial intermediary jobs. The sector lost about 8,600 jobs or 17% of the sector in '07, and are now back to early 2003 levels. Construction jobs were cut back by 6,200 or almost 6% in '07. More cuts in the sectors are inevitable, and will lead to flat job growth overall for Orange County in '08. Single family construction will be cut to about 2,000 units, with total supply of single family and multi-family units of about 5,700 or 6/10% of total stock, and no new jobs. We expect occupancy will fall to 95% with 2% rent growth, concentrated in north Orange County.

Los Angeles particularly west L.A., and Long Beach, has performed much better than the rest of Southern California. These areas, have primarily a multi-family housing stock, and there's virtually no exposure to single family construction. These areas also have little exposure to credit and intermediary jobs. The concentration of the single family fallout in this market, is in north county area, which is Valencia, Lancaster, Palmdale. We have no apartments in that area. There will continue to be some lease-up competition in Woodland Hills and Pasadena. We expect 30,000 new jobs or 7/10 of 1% in 2008, and new total supply of 14,600 units or 4/10 of 1% of existing stock, and that's total multi family and single family stock. Occupancy will remain at 95.5% with overall rent growth of 3%, and with stronger growth in (inaudible) areas of west L.A. and Long Beach.

Finally, San Diego, that economy showed some resiliency in the second half of '07. Construction jobs have fallen, and we expect that to continue to decline, as residential construction falls. Jobs outside these sectors grew at a healthy 1.9% in '07, with strength across almost all the other sectors. In addition, most of the condo conversion projects have already re-entered the market as rentals, and we do not expect further erosion in occupancy as a result. We expect 2008 to be very similar to '07, with market adding about 10,000 new jobs, or 8/10 of 1% and total new supply of 6200 new units, or 6/10 of 1%. We expect occupancy to remain at about 95% with 2.5% rent growth.

Again, let me give you some sense of the affordability, relative to single families in this market. All of these markets had single family prices actually drop in '07. Ventura being the biggest at 5.5% and everything else at 2.5% to 5%. In 2008, we see bigger price drops coming. We see in Ventura about 12% additional drop, L.A., 10%, Orange, 7.5%, and San Diego 12.5%. Which will result in prices, median home prices ranging from $475,000 in Ventura to $639,000 in Orange, with the others in between there. And that's going to make rent as a percent of ownership cost, range from about 48% to 59%, again, affordability is on our side.

And then if you look to what is rent as a percent of-- excuse me, the median household income, it's at about 17% in Ventura, to as high as about 22.9% in Los Angeles. Orange and San Diego being in the 21% range. And again, if you put this in perspective on a historical basis, these are at about the historical levels, that we've seen.

Finally, talking about cap rates real quickly, on our last call, I indicated that we believe cap rates would increase by 25 basis points. Since that time, it has become more clear that cap rates are moving. I think depending on the property and the market quality, increase has been 25 to 50 basis points on the West Coast. However, in our markets, I will tell you there's been very little volume of transactions, and you can't really point to a lot of transactions to support these.

However, the one interesting thing that's happening now is, with the reduction in interest rates, I think you're going to see cap rates staying flat from this point, or maybe even ticking slightly down, because there's a potential for positive leverage. The other point I would make is, there's a significant number of new listings coming into our markets this first quarter, and we expect this to lead to an increase in the number of transactions in the next three to six months, which will bring clarity to the cap rate picture. Let me turn the call over to John Eudy.

Thank you, Keith. In our last call, I briefly touched on the market for land and specifically, recycled opportunities resulting from the fallout of the condominium for sale market. The concern, could there be a glut, of development deals converting to apartments, which could lead to an oversupply. We doubt it, for reasons of financial feasibility.

We have looked at several of these deals over the last year, and in all of our markets and have not pursued a single transaction that was recycled in 2007, which meets apartment underwriting criteria. I suspect other multi family rental developers that compete in our space, are experiencing the same conclusion. With the large gap that still exists between bid and ask, and with entitlements, which are generally not conducive to apartment developments, specifically to designed unit size, parking requirements, and type one construction in many case, as the drivers, the transactions are simply not being consummated. Combined with the continuing challenges of additional financial burdens, like increasing affordability requirements, inclusionary housing, and city fees.

Over building in our markets is a result of conversion of forced sale recycled land deals going into the apartment developmental pipeline is simply not going to happen to any significant degree. There will be some opportunities that pop up, and become available,e but they will be more the exception, than the rule.

One development cost component which appears to be going in our favor in the near term is a possible reduction of construction hard costs, led by the labor side of the equation. I have stated for the last several quarters, we have seen the amount of subcontract bidding activity increase significantly in our southern and northern California markets, primarily due the falloff of the wood frame home building business. We also see the very beginning signs of this starting to occur in the Seattle market as well.

On the raw material side of the equation, wood is at a seven year low, reflecting the domestic supply demand imbalance, and concrete and steel have stabilized over the second half of 2007. Both should trickle down through the system over the next several quarters. We do not expect to see overall construction costs come down as significantly as they have gone up the last three years, of course, but there's a much higher likelihood they will retract a portion of the gains over the near term, in lieu of going up any further. If we do see a reduction, it will not be enough to significantly alter the economics, to spur additional apartment development or close a bid ask gap on the recycled condo land. But it will help in the margin on deals which we are currently in the process of buying out.

The following activities occurred in our development projects during the quarter. During the quarter, we added Fourth Street in Berkeley, 171 unit deal, which will start construction in April. We moved our City Center deal in Moore Park, from development projects to land held for future development. We have not concluded negotiations with the city on bond financing and tax credits, and are clarifying some aspects of the development agreement. We have delayed the construction start until the negotiations are concluded. Our land basis is at $7.9 million, or just under 39,500 per unit, which includes a full set of working drawings and engineering, which is very attractive and gives us a lot of options.

Belmont Station, formerly Northwest Gateway in Los Angeles, is two months behind schedule. We will be opening the leasing office, and delivering initial occupancy in April, followed by substantial completion the following month. East Lake 2851, on Lake Union in Seattle will open a temporary leasing office this week, and will deliver initial occupancy in the permanent leasing office next month, and substantial completion in April. The preleasing interest in this development has far exceeded our expectations to date.

The Grand in Oakland will top out the 22nd floor, that's the top floor, next month, and is on schedule for substantial completion in December 2008. Studio 41, in Studio City, is scheduled for substantial completion in March 2009, and [Ceilo] and Chatsworth is scheduled for substantial completion in May of 2009.

Our predevelopment projects pipeline the following activities occurred. We have added Main Street in Walnut Creek. This is an assemblage of 1.94 acres of land in the heart of downtown Walnut Creek, which we just concluded and closed December 18 of 2007. We purchased a property in the joint venture with a retail developer, and the property will be developed some mixed use retail residential deal.

On land held for future development we have moved City Place in San Diego, from the predevelopment projects, to land held for future development. We received entitlements late last year in the process of completing working drawings, and bidding out the job. The property is currently leased month to month as a parking lot, and we are bidding the construction costs at this time. We anticipate a fairly dramatic drop in construction costs in San Diego, due to market conditions, and if our assumption is correct, we plan on taking advantage of it. If we are correct in our assumptions we should be moving this back into the development pipeline in the next few quarters, and would deliver it into operations in mid-to late 2010, a time frame we think the hangover of any potential San Diego shadow pipeline will be over.

On Park Boulevard, we completed our-- are in the process of completing our entitlements, and have entered into an agreement to sell the property for $10.9 million. Our current basis is $6.9 million. We have received a non-refundable option payment from the buyer in the amount of $436,000.

In conclusion, development is not getting any easier in our markets. Only more difficult and fraught with constraints from economic, political, and geographic barriers to pencil a deal. The average time from identification of the site, to stabilization, has increased from probably the mid-four year range, to the mid-five year range, in my opinion. In my 30 years in the business, at no time has it more difficult to get apartment development deals done, from site identification to stabilization, than today. Our barriers of entry are strong as they ever have been, and I doubt it will change in the near future.

On our greening efforts of our pipeline we have acquiesced to lean into the changing-- rapidly changing political environment and are doing everything we can to label ourselves green, which are revenue neutral, and considering all other options on a case by case value added approach. The perception of green efforts by our society, and specifically our current and future tenants we believe, will continue to evolve, to save the polar bears in the near future, and we are positioning ourselves to take advantage of the marketing edge it will give us. At this time I would like to turn the call over to Mike Schall.

Thank you, John. And thanks everyone for being with us today. Once again, as you know, we had a strong quarter operationally, as expected, Northern California and Seattle continue to produce superior results, that were well above our original 2007 guidance. In Northern California we had a 13.5% increase in same property revenues, and 2.3% sequential growth. In Seattle, we reported a 10.7% revenue growth, and 2.2% sequential growth.

In Southern California, we continued to see deterioration in operating performance, attributable to increasing multi-family supply in several sub markets, and moderating job growth, and a few examples of significant work force reduction, Countrywide and Amgen immediately come to mind. Overall, for the year we generated 6.5% revenue growth, representing the high end of the original guidance range and 7.9% NOI growth, for the same property portfolio.

Operating expenses grew at 4.1% for the quarter and 3.7% year-to-date, slightly above our guidance range of 2.5% to 3.5%. The expense growth above guidance was principally due to a $1.1 million or 6.2% increase in expenses for the year, and $509,000, 8.7% for the quarter, in Northern California. The increase above guidance was due to wage pressures, accrual adjustments that affected the entire northern California portfolio, and asset specific issues at three properties, dealing with estimates of repair and maintenance, costs, and property taxes.

Before reviewing each market in greater detail I would like to highlight improvements to our operating platform. First, we continue to work on the migration of our GL, and property management systems to Yardi. Currently over half our properties have been converted to Yardi, versus 30% of the properties at the end of last quarter, and we still expect the primary conversion effort to be completed in mid-2008.

In addition, we are now running yield stars price optimizer at 17 properties. (technical difficulty).

Ladies and gentlemen, please stand by. Your conference will resume shortly. Thank you for standing by. Your conference will resume shortly. You may proceed.

Hello,this is Mike Schall again. Sorry about that. Not sure what happened. I'm not sure exactly where the conference got cut off. But I'll go back and pick up from where I think it left off.

I was talking about operating improvements to our platform here, and had commented that over half our properties have now been converted to Yardi, it's our new property management accounting system, versus 30% last year. In addition, we are now running price a optimizer yield star at 17 properties, and we have implemented call center support that also is in operation at 17 properties at this point in time, both of those are scheduled for company wide roll-out this year.

We scaled back unit turns in the seasonally weaker fourth quarter, and reduced average time it takes to rehab an apartment unit. As a result, the quarterly results reflect a reduction in rehab related vacancy to 394,000 for the quarter, of which 122,000 was included in the same store results.

Loss to lease which estimates difference between market and in place rents, without regard to concessions declined to $8.6 million, 2.3% of scheduled rent from $13.5 million or 3.5% as of September 30, 2007. The reduction is largely attributable to weaker conditions in Southern California, and seasonal weakness, and its impact on rent at the end of the fourth quarter with the largest overall reductions in Seattle and southern California.

Now I would like to briefly review each major part of the portfolio, starting in the Northwest. Seattle, as you know continued its strong performance, and is clearly one of the best multi-family markets in the nation. All sub markets are participating. Construction of new multi-family properties, both apartments and condos, remain our primary concern, as some properties are now actively in lease-up. So far these lease-ups have had little impact on our portfolio, which is expected to continue, as long as the current level of job growth is sustained.

We improved financial occupancy in Seattle, both sequentially and year-over-year, by limiting lease expirations in December at most properties to 3%. Reflecting the strength of Seattle market, physical occupancy as of January 28, 2008, in Seattle was 97.6 net availability, 3.3%, home purchase activity in the Seattle area represented 18% of move-outs for the quarter, compared to 19.5% the prior quarter.

We reported the sale of our Portland properties in the fourth quarter. So I'll no longer comment on that market.

In Northern California, the portfolio led the company in the fourth quarter with 13.5% revenue growth, and financial occupancy at 97.5%. This reflects the inclusion of our 697 unit Hillsdale Garden property for the first time. That property is located in San Mateo, and it contributed a 29% increase in same property revenues for the quarter. So it helped move the overall results up. All sub markets in Northern California continue to perform well. As of January 28, physical occupancy was 97.2% in northern California, net availability at 4.5%, home purchases represented nearly 16% of our turns for the quarter, compared to approximately 13% for the same quarter a year ago.

Now to Southern California. Conditions have moderated in Southern California, reflecting limited demand growth that in many cases is insufficient relative to the new supply. As stated before, development deliveries in Ventura County, the Inland Empire, and certain parts of L.A. and Orange Counties, are having difficulty reaching stabilized occupancy, pressuring rental rates, and increasing concessions. In total, our Southern California portfolio generated 2.2% revenue growth in Q4 versus the prior year, and 0.6% sequential growth.

Our Southern California results were impacted by a 0.6% or $369,000 drop in same property financial occupancy, and $152,000 increase in same property concessions, compared to Q4 of 2006. Physical occupancy as of January 28, 2008 in L.A. Ventura was 95.1%, with net availability at 6.3%. In Orange County, physical occupancy 95.1%, net availability 5.9%, and in San Diego, 95.6% physical occupancy, net availability at 8.2%. Move-out activity attributable to home purchases, increased modestly in each of our southern California metro areas. I'd like to thank you for joining us. Now I'd like to turn the call over to Mike Dance.

My comments today will review our 2007 results, provide some color to the 2008 guidance, and highlight the strength of our balance sheet and debt capacity.

In the fourth quarter, we missed the first call consensus estimate for funds from operations, due to an impairment charge of $500,000 related to a loan for a condo conversion in Sherman Oaks. Even with this charge to FFO, we did exceed the low end of the guidance, we provided on the third quarter conference call. Given the current oversupply of unsold homes, slowing velocity and declining home prices, we have postponed the construction of our two remaining condo developments, until the housing market recovers. We stopped accruing interest income on the loan to the condo converter in the third quarter, and discontinued interest capitalization on the 90 Archer, and View Point condo developments in Q4.

After excluding non-recurring items such as impairments, and other income and expense items, recurring funds from operations for the year ended 2007, was $5.20 per diluted share, an increase of 12.7% over the $4.62 reported in 2006. The 2007 results were primarily achieved with the increase in net operating income from the same property portfolio of 7.9%. During 2007, same property schedule rent improved by $20.4 million or a 7.3% increase over 2006. The 2007 same property vacancy loss increased by $2.3 million, which included rehab vacancy from approximately 300 units taken off line during 2007, to renovate kitchens and baths. The 2008 guidance assumes the continuation of the strategic unit turn program, and assumes approximately $750,000 in rehab vacancy, and the same store portfolio in 2008.

In 2007, the southern California market saw an increase in rental concessions of almost $500,000, compared to 2006. The 2008 guidance assumes $1 million in rental concessions for this same property portfolio. Our 2008 guidance assumes-- uses published economic forecasts of job growth, and new housing supply, to estimate rental demand, and property rents by market. The 2008 growth in rental income for the same property portfolio is expected to increase by between 3% to 4.5%.

In 2007, the year-over-year same property operating expenses increased by 3.7%, slightly higher than the high end of the original guidance range of 3.5%. 2008 guidance assumes that property operating expenses will be between 2.5% to 4%.

General and administrative expenses for 2007 totaled $26.3 million or $2.3 million higher than our original guidance. The increase was a result of a-- primarily three items. One, we had a performance based cash bonus that I discussed on the last call, which was paid based on the strong 2007 results. We had additional expenses associated with the granting of an equity based performance award, and we had a write-off of several-- we had had write-offs of several projects in the pipeline, that were abandoned in the fourth quarter.

The 2008 guidance assumes no increase in general administrative expenses, as the performance based cash bonus will be replaced by the outperformance plan, and then other increases in our G&A expenses in 2008 will be offset by allocations of property management overhead to property operations, in the form of additional property management fees, which are included in the guidance for 2008's property operating expenses.

We are starting 2008 with over 96% financial occupancy, with modest concessions in some markets, and rents being flat in Ventura County ,and growing as high as 7% in Seattle and northern California. We estimate that 2008 funds from operations per diluted share, will range from $5.85 to $6.15. The midpoint of our 2008 guidance assumes an increase in net operating income of 4.5%. To achieve the high end of the guidance, net operating income growth will need to be approximately 5.8%, and we will need to generate additional non-recurring income, in addition to the other income of $0.23 per diluted share, realized from a transaction that closed in January 2008. We are assuming that any impairments or abandoned projects for 2008 will be insignificant to the 2008 results.

The 2008 development activity is expected to be approximately $150 million, which for both construction and land acquisition cost, which will be funded by our bank facility. An additional $50 million in development costs for fund two's construction activities, will use fund two's construction financing.

We will not be providing quarterly guidance for 2008, but hopefully the following narrative will enable reconciliation between our fourth quarter 2007 results, and what we expect the recurring funds from operations without one-time items, will be in 2008. On F3, we have disclosed recurring funds from operations of $1.26 per diluted share. On F7, footnote one, we have disclosed supplemental property taxes that were accrued in the fourth quarter, but related to prior periods, of $1.1 million.

We incurred a disproportionate amount of G&A expenses in the fourth quarter of 2007, that will be recognized throughout 2008, which is a difference of $1,250 million. As a result of restructuring our tax (inaudible) subsidiaries, the fourth quarter tax provision of $400,000, is expected to be an immaterial accrual in 2008.

Also included in other expenses in the fourth quarter is a $300,000 business tax, related to the sale of the Essex at Lake [Marrett] to a condo converter in 2005. These fourth quarter adjustments totaling $3 million, will add $0.11 per share to the FFO run rate of $1.26, reported in the fourth quarter 2007, or a starting run rate of $1.37 in the first quarter of 2008. The midpoint in guidance assumes a growth rate from recurring sources of funds from operations, to increase by 11% over the 2007 results of $1.30 per quarter, or an average of $1.44 per quarter during 2008, for total recurring funds from operations of approximately $5.77 per diluted share.

In our 2008 guidance we stated that the combination of the cessation of interest capitalized, and the additional operating costs expected by the leasing up of the two development projects, will result in a reduction to our 2008 FFO of approximately $1 million. We expect this dilution will reduce FFO in the second quarter 2008 by $0.03, and by $0.01 a share, in the third quarter of 2008. These assets are expected to reach 95% occupancy, by the end of 2008, so most of the external growth in the funds from operations run rate-- or internal growth and external growth will occur in the fourth quarter, third and fourth quarters of 2008.

Over the last five or six months we have gotten a number of questions concerning our access to capital, to fund our external growth. As of December 31, 2007, our debt to total market capitalization is about 36%, using the stock price at year end. Using debt to market capitalization as one metric, to measure our debt capacity, we can add an additional $400 million to our current debt, and still have a strong balance sheet, with debt to total market capitalization of 41%. We are well within all our cash flow and debt service coverage ratios, on the covenants for our $200 million unsecured bank facility, and we can expand the accordion feature on that facility to $350 million.

In January 2008 we obtained $49.9 million of ten year fixed rate financing at 5.21%. Which is secured by a southern California asset. About 30% of our net operating income is currently unencumbered, and we see $100 million of 2008 fixed rate debt maturities, as an opportunity to refinance these assets at rates less than their current rate of 6.8%, and to either take out additional proceeds, from this refinancing, or add additional assets to the unencumbered pool. This concludes my remarks, and I will now turn the call back to the operator for any questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Anthony Paolone, of JPMorgan. Please proceed.

Thank you. I had a question about the impairment you took on the mezzanine note, maybe this also relates to the rest of the notes that you have on your balance sheet. What's next in this instance? Like what exactly happened there, that you're writing it down, and is it recoverable? Do you go after the property? Can you just walk through what's next there?

The next is we are currently discussing the borrower, a plan for them to exit in the best interest of both parties. They have some ability to sell units, but the reason for the impairment is the slowing velocity, and the marketing costs that are incurred as the units are sold. So prices have held, it's just a slowing velocity. So we're looking at alternatives, such as maybe an auction, or looking at marketing plans. There is the possibility of recovering some of it. But that would probably not be until 2009.

So is the impairment reflect, in this instance, a reduction in what the base value was expected to be?

It basically reverses the interest we accrued in the first and second quarter of 2007. So we still expect to recover our total principal.

Okay. Understood. Another question, moving into Southern California. Can you talk about how-- you mentioned I think in your commentary, that you've actually seen some weakness even in parts of Los Angeles. Can you elaborate on that, and give us a sense as to how that market is holding up?

Yeah, there's a couple places in L.A. county that are weak right now, and clearly Keith mentioned about the northern part of LA county that we're not in, Palmdale, Santa Clarita valley, Valencia area, but in addition, it's not just limited to that. I'll give you -- Woodland hills for example, I've commented on before. Arch don't have the lease-up deal there, Morgan Group does. AVB has a deal coming on line here very soon, and there isn't the demand to absorb those units in the very short term. And so you're in a concessionary one to two month, concession type of market, temporarily until those units are leased up, which is expected to be a pretty significantly long period. I think those markets will be soft. So L.A. county, having said that, L.A. county is a huge county. There's a lot of different separate submarkets within LA county. Keith talked about the stronger ones, certainly west side L.A., but at the same time there are some weak parts of LA county as well.

Okay. Thank you.

Your next question comes from the line of Jonathan Litt of Citi. Please proceed.

Hi, it's Craig [Motzer] here with John.

Hey, Craig.

The 2% job growth, GDP growth figure that's underlying your assumptions, seems a little high, relative to some other expectations out there. How much does that impact the year specific market outlooks?

I think one of the things that we have going for us is that that's a national GDP look, and I think that we've got some market, especially northern California and Seattle which are going to perform better than the national average. So I think we've taken into consideration the impact of the individual markets. For example, if you look at our forecast, we've got zero rent growth forecast for Ventura county, which is about 2200, 2300 units that we-- in our portfolio.

So we try to be sensitive to the fact that each of our submarkets has different supply issues, has different job and growth issues, and again, the majority of the strength, is coming from Seattle and northern California. I don't know if that answers your question exactly. But again, I think the point I'm trying to make is, that we're sensitive to the submarkets and we're not thinking that we're going to see great strength across the portfolio.

And in terms of the 6.2% revenue growth in the fourth quarter, versus the guidance for the full year next year, of the 3 to 4.5, how should we expect that year-over-year growth to trend in '08? Are we going to see a number in the 5s early in '08, or is it going to come down pretty quickly in '08?

I would expect it to-- as you know, this is a momentum business and things don't change greatly from quarter-to-quarter. So I would expect it to moderate a bit from the 6.2% in Q4. But you know, in this business, the first quarter tends to be-- have a little bit of seasonality to it. So I would expect it to moderate a bit. And then hopefully we have a good summer, and still exactly how all that plays out, I'm not quite-- I can't predict to that level of certainty. So I would expect it to be pretty flat throughout the year, I guess bottom line.

Thank you.

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

Good morning.

Good morning.

Just want to go to the line of credit comments. If you could just remind us which one has the accordion to $350 million, then also any sense of the two lines of credits that are going to mature, I think one is in a few months and one is within the next few months, any sense on whether the terms of those credit lines may materially change?

This is Mike. Hi, Al. The line that has the accordion feature is the bank facility, which is the unsecured line. Both lines come due in 2009. So the secured facility with Freddie, I think is a January 2009. We have started discussions with them, as well as with Fannie. And believe there to be some increase in the spread that we're currently, but not significant, maybe going from like 55 to 75. And then the unsecured line with the bank group comes due in March of 2009. But we can automatically extend that a year.

Okay.

The 2008 maturity, Alex, is just a $10 million loan that's used temporarily. So it's not material.

Okay. So really with-- given the accordion feature, so you're not really 55% drawn, you've got more capacity?

That's right.

Okay. And then when you refinance that, you'd be looking to increase it above the 350, or you think that 350 is a comfortable amount for you guys?

Our philosophy is pretty much matching capital with our investments. We like the 200 million from a discipline standpoint of going out and finding secured financing, like we did in January, with the Southern California mortgage. But we have the ability to increase the $350 million, is the point I was trying to make, if we see opportunities in the market.

Okay. And then my second question, just goes to the cap rate comment, Keith, I think you were talking about. You commented about an increase of 25 to 50 basis points, but at the same time commented that there's very little transactions going on. Just want to get a sense for how the increase in cap rates is-- what's that based on?

I think it's based on partly our activity and what we're doing. We've actually done a transaction in the first quarter, it hasn't closed and so we generally don't comment on those. But transaction that we've done, and we've gotten contract that is at a cap rate we would not have seen two quarters ago. So I mean, that's evidence.

The other evidence we have is that there are no transactions happening. So buyers and sellers, there's a disconnect between buyers and sellers. So clearly, the things we are seeing is cap rates are slightly up, and I think that there's, again, there's not a lot of transactions in the marketplace, but I think that part of the reason there aren't, is because there's a disconnect in the cap rates, and you're going to see the-- we think that the buyers are going to demand a little bit higher cap rate, and ultimately that's where it's going to shake out.

Okay. Thank you.

Your next question comes from the line of Karin Ford of KeyBanc. Please proceed.

Hello, I have two questions. First is, do you have any thoughts as to implications of a potential Yahoo, Microsoft combination, would have on jobs in any of your markets?

Right off the bat, no, not right off the bat. You know, there's no clear indication from either side whether there would be cutbacks or not. We expect slight cutbacks at Yahoo, but not enough to slow down the San Jose market.

Second question, in your '08 guidance release you talked about making some dispositions between 100 million and 200 million, and using the proceeds to fund acquisitions in San Francisco and Seattle. And the stock repurchase. Can you just talk about, given where pricing is between those three options, which, between Seattle, northern California, and the repurchases, which of you guys are targeting more these days?

Again, I think we were not specific in our guidance because frankly, we're going to do what's the best for us at the time. I mean, if we can see our stock at levels that are, where they're at, or below today, we will be more aggressive on the stock repurchase. If cap rates are-- if we're right and cap rates really are 25 to 50 basis points better, given the better growth in northern California, Seattle, we're going to push on that.

I think we're going to try to be as opportunistic as possible which means we're going to have to evaluate our options, as we go. But I think generally, what we've done in the stock repurchase program, if we can do that, or slightly better, we will continue to maybe do another 25 million to 50 million there. But I think that's about as good as I'm going to do for you right now.

Okay. Thanks.

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

Hello, guys. Looking at your sub markets, I'm wondering if you're seeing any distressed opportunities on behalf of merchant builders, and if you guys are going to set aside any capital? You had said before you had that accordion onto your line as well. Would you do that to do investment in these distressed opportunities?

Well, I think John Eudy in his comments talked about, we have not seen an opportunity to take a condo deal and make it work on the apartment side. If you look at the real distress, the home builders, the majority of the big tracks of land that the home builders have, and that you're seeing, talked about where they're disposing of those, those are generally out in the valleys, they're out in the Sacramento valley, they're out in the Inland Empire, they're out in the valencia area, they're in markets that we aren't going to be in. So those really aren't going to -- I don't think we're going to have a lot of benefit. We continue to look at the infill situations and monitor them. But I think they were at such levels, that as John said, we just haven't been able to make any of those underwrite as an apartment.

We continue to look at them. We continue to look at some broken condos. We're looking at those, and there's unfortunately there-- fortunately or unfortunately, there's not a lot of opportunities there. But we are looking at that with respect to existing product that's been built, not sold, especially if it's done as a separate phase, where there aren't a lot of owners involved, where we can get in and make the deal work. We're looking at those.

But again, as I said, the only market that there's a lot of that in, and there really isn't very much, is San Diego. Northern California we don't have a lot of exposure, and generally in L.A. there's not a lot of exposure. Seattle there's been a significant number of condos done, but generally there hasn't been any stress up there yet, so we haven't seen anything there.

In your comments, you mentioned that in Seattle the single family housing supply is actually shrinking. What's driving that?

I don't think I said it was shrinking. I think I said that the amount of new-- that what's happening is, with respect to the deliveries, that the multi-family side has actually grown a little bit. But what we're seeing is, we're seeing the deliveries on the single family side fall back, so that even though in Seattle, we've got permits at about 1.3% on the single family side, we're not going to see all of that delivered. So that's shrinking. So it's the deliveries that are shrinking, not the existing stock.

Part of that is they're approaching build-out in parts of King county. So we're not seeing any shrinking in the north end of Snohomish, but it's in the built out parts of King county primarily.

Lastly, your decision to pull out of the Portland market, I'm sorry if you already said this before, but I was just curious as to-- you mentioned there was affordable housing coming into the market, competing with your rentals. I'm wondering what that spread is? Does that speak to the entire market, or was that just the sub markets that you guys were in?

I think it speaks to the entire market, because even if you have a significant sub market, Portland metro is not that big. Even if you have a specific area where you have more affordable housing, it's going to have some impact, to depress housing values overall.

If I go back, maybe speak about the original premise in Portland, which is that, it was, we believed protected by an urban growth boundary, and that as soon as most of the developable housing sites were built out, within the urban growth boundary, that the tree hugging Oregonians would respect it, and it would take on more of a supply constrained market characteristics. So we understood that there was more supply in the Portland market, but we thought that we would invest into that, with the expectation of it becoming more like a California or Seattle market, over the long haul.

And then I think it was, what, John, maybe a year ago or so, rather than respecting the urban growth boundary, they blew out the growth boundary, and expanded it very significantly, which sort of wrecked our investment thesis on Portland. From that point, rents were extremely low at that point. I think they were one bedroom rents were $499, as I recall at one point. We wanted to let the market recover a bit before we exited. But we looked for an exit at that point in time, once our investment thesis on Portland was proven incorrect.

Okay. Thanks.

Your next question comes from the line of Dustin Pizzo, of Banc of America. Please proceed.

Thank you. Keith, just going back to some of your opening comments where you were referencing the rents, and where they are now relative to historically in the median income. Were you talking about your rents or the market rents?

I was talking about market rents. But our rents are within the market. But that was a market rent comment.

Okay. So given that, and where your rents are relative to some of your peers, and I mean I would argue they're roughly 20% below in some cases, how do you think that changes the competitive dynamic? Do you think it's a benefit to you or-- ?

I mean, I think that our B product in A markets, has been, over the long-term we've got a lot of demand because in the A markets we define A markets as markets that are infilled, that are close to jobs, we've got demand for those, and our pricing is, as you say, less than some of our competitors. So I see that as a positive. And I see that as strength in our ability to move the rents, that we're talking about this year.

Okay. And then just going back to the development pipeline quickly, did you mention why the delay occurred at Belmont Station?

No, I didn't get into it. It was a high density, 135 units to the acre deal, and working with the fire marshal and splitting the first phase from the second, there were some issues that we thought we could do to deliver units earlier in the first phase of 90 some odd units, that we ended up not being able to execute on. Just a complicated deal. I could go on for hours, and put more people on it, and we're there now for an April delivery.

I think it's not so much that we -- that the project as a whole is slowed down but we were going to be able to deliver the first phase, and now we're going to have to deliver it as one phase, as opposed to two phases. That's the primary bugaboo.

That makes sense. Thanks.

Next question comes from the line of [Hendal St. Just] of Green Street Advisors. Please proceed.

Good morning.

Good morning.

Keith, in your comments about cap rates and positive leverage, I wanted to get to your current view on fund, a possible fund three.

We're talking about it. We're looking at it. Again, you know, it's really an issue of having everything line up. It's having the leverage line up, the opportunities line up, and the expectations on the investors line up, and I think that, as you know that the IRR hurdles that we had in our fund one and fund two, were in the mid-to high teens.

We have a cadre of investors that we like, and would probably go back to them, just because it would be simple to raise the fund. I'm not sure-- and we've talked to them, and I'm not sure their expectations for hurdles have come down much. I don't know that we can necessarily deliver mid-to high teen, kind of returns, in today's world. So we continue monitoring that, and when we can line up the opportunities and the expectations on the capital side, we will probably pull the trigger on that.

Okay. Fair enough. Quick follow-up for John. You mentioned that you expect construction cost to come down considerably in San Diego. What specifically are you seeing there? Can you give us more color on that thought?

We're in the middle of buying out that deal down there, and what we have found is, the amount of sub activity coming at us, people that are interested in the deal, is more than I've seen in the last five or six years in any of our markets. And with lumber now at a seven year low, and people very, very, hungry on the construction side, because of what's going on in the home building business, that usually leads to very, very, competitive environment.

You know, labor side of the equation over the last three years was the bigger jump than the commodity side, and because of that, we believe there's going to be a move in our favor. The right time to buy a deal out down there.

Okay. That's all I have. Thanks.

Your next question comes from the line of Rich Anderson, of BMO Capital Markets. Please proceed.

Thanks. Good morning to you guys.

Good morning.

Just a quick modeling question. In the $500,000 impairment, is that in the $800,000 other expenses?

Yes. (inaudible) the $300,000 I mentioned for the Oakland business tax that surprised us.

Okay. That's what I-- I missed that. Okay. And what also contributed to the big add-back this quarter, in minority interest?

The sale of Portland. Go to our S-13, and you'll see it back there.

Okay. Just needed those two quick ones. The bigger picture question is on CapEx. You know, you're talking in your guidance of $950 a door. That sort of surprised me, thinking that CapEx would be coming down. Can you talk about what the sort of change of heart is, from a recurring CapEx standpoint?

You know, it's Rich, just a continuation of some of the things we saw last year, which is we're still-- we fixed a lot of things in 2007, but we're not done yet. So we are projecting that 2008 will be another stronger year in terms of CapEx, just to continue to fix the portfolio, and it reflects the fact that we just didn't do enough, in the three to four years preceding 2007.

And then just one quick one. You mentioned development costs in some cases, looking like they're reigning in a little bit. What gives you comfort that, that won't continue to go down such that, some of your real estate competitors, developers, might be more inclined to add product, maybe not immediately, because of the high barrier to entry need for your markets, but maybe a year or two from now, you start to see an uptick in development, is that something you're watching and concerned about?

We're watching it closely. The amount of change I was referring to is diminimous overall. Instead of going up, it might go down, 5% or 7%, not enough to spur any real activity. It's the point was, that the increases that we've seen in the last three years I think for the near term are evaded.

Thanks very much.

Your next question comes from the line of Matt [Demchuk], of Ardain. Please proceed.

Hello. I want to follow up on Karin's question. I was curious, in your estimation if you think there's a positive arbitrage, between your targeted dispositions mostly in southern California, and your share price?

Yeah. I mean, there's a-- I mean, if you look at our guidance for '08 at-- pick the midpoint, and you look at our current share price, there's an arbitrage there, and I think that some of the stuff that we're looking at selling, we've got one property listed right now that we expect to sell in the low five cap rate range. If we're successful, there would be a very large arbitrage in that situation.

Okay. And at these levels, does it make sense to increase leverage at all to do more repurchasing?

We struggle with that. We've got an ongoing business to run. We are very sensitive to leverage. And you know, if our stock price goes to 85, yes. If our stock price is at our current level I think we're going to be more sensitive to looking at dispositions and repurchases.

Okay. And I guess lastly, I was curious, kind of post 2008, what do you think an appropriate normalized level of CapEx would be for your portfolio?

I would think it would be in the 750 to 800 range.

Thank you.

Your next question comes from the line of Paula [Poscom], of Robert W. Baird. Please proceed.

Thank you very much. I'd like to understand a little bit better, your description about what's happening with G&A expenses, in particular the reasons that they were higher in the fourth quarter, and if you expect that to be a sustainable run rate?

Okay. In the fourth quarter the competition committee did approve an extra cash bonus, and that will not reoccur in 2008, primarily because we-- in December announced an outperformance plan award, that would basically take what we booked in the fourth quarter, and have it ratably accrue in 2008.

Also, we had a significant number of projects, that had capitalized costs that we abandoned in the fourth quarter. That again typically occurs ratably, but with our lower stock price, things that may have penciled with the higher stock price, didn't pencil with a hundred dollar stock price. So we walked away from some deals.

And then the other item, if you look at-- we're pretty transparent on what we take in G&A, and allocate back to the properties for-- in the form of management fees. That covers our-- some of our IT costs, HR, and our regional portfolio managers. If you look at what we do, compared to our peers, we're only allocating about 1.5%. Over time, I see as we continue to add technology, and other resources in the corporate office, that the properties will benefit from, to increase that over time. So 2008, I think we can operate at the same level of G&A that we incurred in 2007, but it will occur ratably over all four quarters, rather than all in the fourth quarter.

That's helpful. Thank you. Can you talk also about any trend differentiation you're seeing across the markets, in terms of the reasons for move-out, aside from, to home ownership?

You know, we studied that a bit. I don't see any huge trends that are-- that have really emerged that are helping us. So I mentioned home purchases, you know, we track military exposure in San Diego, we track Boeing employees, we track lots of different things and there's nothing that you can really say, oh gee, this is an overriding factor, that is having a dramatic impact on us. So I don't think that we see a change really in the business.

I mean, I think the same dynamics continue, that have continued last year. I mean, we're still pretty strong certainly in Seattle and northern California. And southern California has more moving parts. We track what's going on at Amgen for example. I don't know what's going to happen at Countrywide. That becomes a big question mark for us. I don't see any discernible patterns that are going to have-- I can just say hey, this is a new thing that's happening out here, that's going to have a significant impact on the portfolio. I just haven't seen that.

Okay. And on some of the later stage development projects, are you pleased or surprised by, in any way the amount of preleasing activity, that you're seeing?

So far the only one that's actually had preleasing activity that's open, is the deal in Seattle and it's very, very strong.

Better than what you would have expected?

Yes.

Okay. And lastly, I can't let the save the polar bears comment go by.

It was a little tongue in cheek.

I love it. It was great. But I would love to hear about what some of those efforts are in terms of, helping label the company more green friendly.

Well, first off, let me give the reasons a little bit more detail.

Sure.

Every city at least in California and the state of Washington, an agency that we deal with that gives entitlements, has jumped on that bandwagon big time, and it's really important for everyone to go in that direction, because you're going to be forced there in any event. So we are trying to be a little bit ahead of the curve. This has only really occurred in the last six to nine months, the velocity it has. It's the reality we're having to deal with, and so we're embracing it.

As far as specifically what we're doing, you know, the practices in the field that you apply when you're doing the drawings, that that you can change to be more green than not, are really adapting your protocol, more than you are actually spending money on anything. And for lack of better word, spinning it in the right direction. We have an internal guy. He's just about to be lead certified, and he's build it green about to be certified, so we're following it into the greenest revenue neutral, we're doing everything possible. To the degree it's an active system, that costs money, we're evaluating it case by case.

I think by the end of this year, everything that you'll see when you come out on the marketing side, on new developments, will take that to heart. And then those of you that have kids in the early 20s, you know what's happening. It's a total different look on how they perceive the green issues, than maybe some people that are old, like myself. And we think that it will be a good marketing thing too.

Great. Thanks very much.

Your next question comes from the line of Michael [Felenski], of RBC Capital Markets.

In in your opening comments when you were talking about cap rates, I thought you mentioned something about that you expected transaction activity actually to pick up in the mid-to later part of the year. What do you think is the driver behind that?

I'm not sure, but I mean, basically in preparation for the call I talked to-- we have acquisition people in each of our markets, and I talked to all of them. They all see significant numbers of new listings hitting the marketplace, thats factual. You know, and the types of things that are being listed are, from many different sources. So I suspect some of it is-- there's those who have a fear of what's going to happen in the future, and they're looking for an exit. I suspect some, there are a number of fund assets that are owned out there, that have an IRR clock ticking, and so if they can get out now, and turn the clock off, that's beneficial to them. But I don't think that there's any one reason driving what's going on.

Okay. Second, you took the impairment charge at Sherman Oaks, and you also stopped capitalizing a number of projects there at the end of the third quarter. Is there any further risk for an impairment charge, or expenses, or anything like that?

Our basis in these are still pretty attractive. So it doesn't-- meaning that our total cost invested is a very modest amount. So we see them as, kind of land held, they're all well located, they're close to other assets, and markets that we track and follow. So I think it's just a matter of either seeing further declines in construction costs, or recovery in the housing market. And basically just keep it on the balance sheet because there will be a time where we can get a significant return from it, just not right now.

Okay. Finally, in your comments you mentioned that with the Yardi roll-out, and the yield star optimizer there that you're rolling out, you had 17 properties, can you talk about the performance of those 17 properties, versus that of your core portfolio.

We track it internally. We pick properties that are across the street from, or down the street from other non-Yardi properties. I'm sorry. Non-yield star properties. And we've conducted the price optimizer test over, probably better than a year now.

So big picture, they would tell you sort of the industry would tell you, or the marketers of those pieces of software would tell you, 2% to 3% revenue pick-up. I would guess that we haven't factored that in, but we think that's probably a little aggressive, but we certainly think that 1% to 2% is definitely feasible. And because it just does a superior job of understanding by unit type, the dynamics of both your inventory, and your current vacancy occupancy situation, and so there is definitely some advantage there. We're thinking it's 1% to 2%.

Okay. Then I think you mentioned too, that you had a transaction you were looking at in the first quarter of the year. On that, in your full year guidance I think it says $100 million. I mean, is there upside to that? Am I reading that correctly?

You're talking about on the acquisition side?

The acquisition side, correct.

That is a fairly small transaction. It's about a $20 million transaction. You know, again, it's a matter of cost of capital and what other alternatives and opportunities we have, given our share price, et cetera.

I think we're going to look at spreading our dollars between share buyback acquisitions, and development, whichever is going to give us the greatest returns. Right now, that's how we've allocated. We think that's what's going to happen for the year. If things change during the year, obviously, we can change those allocations fairly quickly.

Thanks, guys.

Your final question comes from the line of Bill Crow, of Raymond James. Please proceed.

Good morning, guys. People like to generalize, and say that happier portfolio is located in southern California. That's getting painted with kind of an ugly brush these days. If you were to break the southern California between the good markets, let's call it west L.A.,and the really bad markets, Inland Empire at the other extreme, and maybe in between the San Diego, what percentage is in southern California are good markets, as you look to 2008, what percentage is going to be in bad markets?

Looking at our portfolio you mean?

Your portfolio.

It's a breakdown of units on S-8, for example, so I'll use that as a guide. Ventura County looks pretty tough. And actually there's some other data in here, that gives you the market rent forecasts, which is flat in that market. Ventura I would say flat. L.A. county, I'd say our properties are 2/3 roughly, I'm doing this by kind of pulling the stuff off the top of my head, 2/3 strong, maybe 1/3 not strong. The 1/3 not strong would be the Woodland Hills area, more the-- maybe the Pasadena area has some lease-up activity. So those would represent the 1/3. Maybe it's 75%, 25%. What do you think?

Yes, probably that.

75, 25 maybe. Orange County, north Orange is stronger than south Orange. I would say we've got some properties in the beach communities which are strong. So I would say we are probably 2/3 good Orange County, 2/3 to 3/4 good, maybe 1/4 not so good, and San Diego County, I think it kind of all is pretty similar in San Diego County. I don't think there is more of a good, bad part of San Diego County. Then you just have pieces in other-- Riverside county, that I would say is all not good, as all of Riverside county is not good. All of Santa Barbara county is good, that's only 200 units. So anyone else want to comment on that? Does everyone agree?

Yes.

That's helpful. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now disconnect. Good day.