Essex Property Trust Inc (ESS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Essex Property Trust earnings conference call.

My name is Angelique and I'll be your coordinator for today. At this time all participants are in a listen-only mode mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the presentation over to your host for today's call, President and CEO, Keith Guericke. Please proceed, sir.

Thank you.

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

Joining me on today's call will be Michael Schall, Michael Dance and John Eudy. Included in the earnings release on our website you will find our market forecast for 2008. Please note we have made some changes to our rent growth forecast. We will discuss the highlights in the market sections. Also included with our earnings release is a schedule entitled New Residential Supply which includes total residential permit activity for the larger U.S. markets as well as information on median home prices and affordability as compared to Essex markets. To get those details, visit our website under Investors and Media.

Last night we reported another strong quarter with core FFO increasing 10.1% per share for the quarter and the portfolio grew revenues at 5.7% greater than the same quarter in '07 and 0.6 a percent on a sequential basis. The strong performance was driven by the fundamentals in our supply constrained markets. On today's call I'm going to concentrate my comments on Southern California where the fallout from the single family market in manufacturing has led to a weaker job market.

Briefly Seattle and Northern California, the economies in apartment markets--in these markets are performing as expected through the first quarter with occupancy rates well above 95% and rent growth on pace to meet our forecast for the year. Going to Southern California, those economies are less reliant on hi-tech research and development which is driving the Seattle and Northern California economies. In addition, some of these markets have larger exposure to the single family industry. Job declines in this sector have come quicker than anticipated; consequently, these markets are weaker and in some parts facing recession. However, despite recent single family price declines, affordability remains at historically low levels for each market.

Now starting with Ventura. The housing boom which started in the first quarter '02 created a spike in new jobs. Construction jobs for March were down year-over-year by 2,000 or 11%. At this point the sector has shed the bulk of the job growth since 2002. As of March, the credit intermediary sector was down 600 jobs or 2% and has shed two-thirds of the growth since Q1 '02. We expect the job losses in construction to end in mid-summer and in Q4 '08 for the credit intermediary jobs and this is based on what we see as jobs lost to date.

We revised our expectations of 2008 job growth from flat to down 0.6 of 1%. Correspondingly we have revised our forecast of occupancy down 50 basis points to 94% and rent growth down from flat to negative 5%. These factors apply to the Ventura portfolio result in approximately a $1 million decline in revenue from our original guidance. Like Ventura, Orange County has a higher exposure to residential financing. The credit intermediary jobs were cut even faster in Orange. Jobs in this sector are now back to levels last seen in August of '01. We believe this sector will stabilize by the end of third quarter '08.

In March, construction jobs were down year-over-year by 5,100 or 5%. We expect losses to continue at the current pace through the end of 2008. The market is showing improvement in other sectors that were weak in '07 notably retail trade and professional and business services. We have revised our job growth forecast from flat to down 5,000 or 0.3 of 1%. Our forecast for the apartment market remain unchanged at 95% occupancy and 2% rent growth.

We expect the weakest areas to be in south Orange County submarket which is roughly 50% of the apartment market. The majority of the credit, intermediary, and single family construction jobs were all located in south Orange. Besides the job losses, the area will be negatively affected by the lease-ups in the platinum triangle area of Anaheim. Occupancy in these areas fell below 94% in Q1 while the rest of Orange County maintained 95% occupancy. Just to point, the majority of our portfolios in north Orange County.

Going to L.A., L.A. has a--L.A. county has a smaller exposure to the housing sector than Ventura and Orange. Construction and credit intermediary jobs were down 11,600 or 5% year-over-year. We expect housing sector job losses to continue through the end of '08 but at a slower pace. Manufacture will remain the largest drag on the L.A. economy going forward. We revised our total job growth in Los Angeles from 30,000 to 10,000 or 0.2 of 1%. We are lowering our outlook for occupancy by 50 basis points to 95% and our rent growth forecast from 3% to 2%. The weaker areas will be in north and east Los Angeles county where the manufacturing housing sectors are a larger part of the economies. The submarkets west of downtown will outperform the county forecast.

Finally San Diego has seen a sharp reduction in credit intermediary and construction jobs. There is very little left to lose in these sectors from the buildup since 2001. We expect the housing sector to be stable by mid-summer. Manufacturing remains weak but other service sectors have outperformed Southern California are still growing. We've revised our total job growth in San Diego from 10,000 to 5,000 or 0.4 of 1%. Our outlook for apartment market for the year remains unchanged at 95% occupancy and 2.5% rent growth.

Just a quick update on cap rates. In the Bay area looking at A location, A product cap rates seem to be in that 4.25, 4.5 range; the B product and B locations, 5.25, 5.5; Southern California slightly higher, 4.5 to 5 for the AA product--A location and 5.25, 5.75 for BBs; and in Seattle, A location, A product, 4.25 to 4.5 and B location, B product 5.25 to 5.5. Remember this is on very limited data. That's the end of my comments, I'd like to turn it over to Mike Schall. Thank you.

Good morning or afternoon, and thank you for joining us.

Based on the feedback from prior calls. I've scaled back on my prepared remarks to allow more time for the Q&A session. Once again as Keith indicated we had a strong quarter operationally. As expected Northern California reported superior results leading the Company with 11.8% same property revenue growth, well above guidance of 5.5% to 7%. Our Seattle results were also stronger than expected and above guidance.

In Southern California our revenue growth was within our 2008 guidance range of 1.5% to 3%, although we continue to see deterioration in operating performance in several submarkets attributable to increasing multi-family supply and/or job losses in specific areas. Operating expenses grew at 4.4% for the quarter, slightly above our guidance range of 2.5% to 4%. Most of this increase, as well as the 5.8% increase in Northern California operating expenses, was due to our Hillsdale Garden property in Northern California which reported unusually low expenses in the first quarter of 2007; and had a property tax reassessment related to the formation of a joint venture with the land owner.

In addition, we discussed unusually large property tax reassessments at many of our Seattle properties which was also included in our guidance. Accordingly, operating expense expectations remained within our guidance range for 2008. I would like to highlight progress made in improving our operating platform. Our conversion to Yardi's property management and generally ledger system is now 85% complete with 18 properties awaiting conversion at this point in time. Everything else being done. We are now running yield stars price optimizer at 24 properties and we've implemented call center support at 98 properties and expect to complete the call center roll-out by May 16th.

Next topic is lots to lease which estimates the difference on an annual basis between market and in place rents without regard to concessions. Loss to lease declined for the quarter to $3.1 million or 0.9% of scheduled rent. We now show that market rents in Southern California are below scheduled or in place rents. This relates to aggressive pricing to hold occupancy as we prepare for our peak summer leasing season. Most of this gain to lease in Southern California relates to lowering rents on a temporary basis to hold occupancy.

Now I'd like to quickly go through more detailed statistics for each major part of our portfolio. Starting in Seattle, physical occupancy as of April 21st was 97.3%, net availability 4.1%, and the home purchase activity represented 19% of our move-outs compared to 20% a year ago. In Northern California, again as of April 21st, physical occupancy stood at 97% and net availability was 4.7%; home purchases represented 10.2% of turns for the quarter compared to 16% a year ago. And in southern California, again holding occupancy as we head into our peak leasing season this summer is a critical part of our operating strategy. This strategy was tirelessly implemented by our regional and site staffs during the quarter and we do really appreciate their effort.

Physical occupancy as of April 21st in L.A. Ventura County was 95.7, net availability of 6.3%. In Orange County occupancy 96.5%, net availability 4.2%, and in San Diego 96.6% physical occupancy with net availability of 6.7%. Move-out activity attributable to home purchases decreased in each of the Southern California MSAs, L.A. Ventura was just down slightly. Orange County was 8.6% of the turns were to buy homes versus 16% a year ago and San Diego was 9.3% for the quarter compared to 12% a year ago. That concludes my remarks.

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

Thanks, Mike.

My comments today will briefly highlight our first quarter financial results and provide an update on the 2008 guidance. After excluding non-recurring items of $0.23 a share of preferred interest income, the recurring funds from operations for the quarter was $1.44 per diluted share, an increase of $0.10 over the $1.31 reported in 2007. The March quarter results beat the first cost consensus estimates for funds from operations by $0.050a diluted share. The same property NOI growth of 6.4% beat the high end of our 5.4% guidance and this outperformance contributed $0.03 per share to the first quarter's funds from operations.

Our 2008 guidance did not forecast the 100 basis point drop in interest rates on the variable rate debt. This significant drop in short term rates added another $0.02 per share to the quarter's funds from operations. On this five in the supplemental financial information attached to our press release, we disclosed almost $240 million in tax exempt variable rate mortgages with a weighted average interest rate in the first quarter of 2008 of 3.8% compared to the 4.8% paid in 2007.

These mortgages are variable rate demand securities and are exempt from federal income tax. They also are credit enhanced by either Freddie or Fannie, and even though the debt has 20 to 30 years maturities, investors are guaranteed repayment at par when the bonds are repriced every seven days. We are currently benefiting by the increased demand for this debt as investors seek low risk short term investments. As a result of favorable interest rates on our short term variable rate debt, we have revised our estimate for 2008 interest costs net of capitalized interest to $84 million compared to the original guidance of $87 million.

This favorable variance is offset by the impact to net operating income from the revisions to our total Southern California job estimate. With the new estimate we have decreased our estimated rental revenues in Southern California by approximately $1 million. If the economy stays weak through 2008, we believe that short term interest rates will stay low and the reduction to our interest expense will serve as an economic hedge to our FFO forecast. Other than the $0.23 of non-recurring interest income from the REIT payment of our investment in Mountain Vista, the first quarter results have no unusual items and we believe that the March results will approximate to the operating results that investors can expect for the next three quarters of 2008.

With no other significant changes to our 2008 guidance, I will conclude my remarks and turn the call back to the operator for questions. Operator?

(OPERATOR INSTRUCTIONS)

Gentlemen, your first question comes from the line of Michael Bilerman with Citi. Please proceed.

Good morning out there, Craig Melcher's on with me as well.

Mike, just a quick question on the guidance. If you take the core results out of the first quarter, you annualize them and then you add the gain you had, you sort of get to the mid-point of guidance. So I guess sort of what takes you if you're going to have some sequential growth during the year I guess below that and sort of--what sort of gets us to either end?

I'm not sure I understand the question.

Effectively if you annualize your first quarter results and you add the $0.23 of gain, you get the $6.00 a share.

Right.

Which is effectively in the midpoint of your guidance. So it sounds like you're going to have some growth and continued growth in NOI as you go through the year, so I'm just not sure why you wouldn't lift guidance further. I'm just trying to understand how you think you're going to fall out.

Again I think just the uncertainties in the economy. We're being cautious. We don't want to be overly optimistic and be accused of being pollyannish, so we're just kind of assuming the status quo for the rest of the year and that's why we have a range of guidance. So if the economy remains strong and interest rates stay low, we can expect to beat the mid-point of our guidance.

And on the same store NOI guidance for the year, do you have a new range for that or did the softness in Southern California get offset by strength in Seattle and Northern California?

That's right. That's a good point. Thank you. Really the favorable news in Seattle and Northern California was offset by the reduction in jobs in Southern California.

Just looking at your development pipeline page a couple of the development starts were pushed back a little bit. Can can you talk about what that was attributable to, whether it was just the development timing issue or a decision that you made internally?

This is John Eudy.

On Belmont Station we put it--oh, starts?

The start date.

Start dates as you know on the estimated dates that we put out there's a lot of future guessing as far as the exact timing, there are variables that can happen. We have extended a couple of underlying leases to basically time the delay; for example, Essex Hollywood would be one. We were going to start it sooner. We chose to extend the current lease with the tenants in the building out until September of '09. That's one example. Beyond that do you have specific ones?

No. That one specifically. So is that for timing just uncertainty in the market conditions or on liquidity side?

Yes. We had the ability to extend the lease and we chose to do that, so we're pushing the development out a little bit and as comments have indicated that the market might be a little bit soft there. We figured delivery in 2011 would be a better timing execution. In the meantime the return that we get on the leases in the 6% range, just over 6% range on our acquisition price.

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

Hi. Good morning.

Just a clarification. You said in the first quarter that you received $7.5 million of preferred income but recognized 6.3. Will you be recognizing that balance or has that already been recognized?

We had an investment balance of $1.3 million, so they were completely paid off. There's kind of similar to a loan with an equity kicker. So we've been completely paid off and we will no longer have any--

No more recognition, then?

Yes.

Okay. Next question is it sounded like from your commentary that based on the work you've done on the sources of the job losses in Southern California that you think most of the bleeding is going to be done by the end of '08. Is that accurate?

That's correct. The way we address that is we try to look at the defined new jobs that started this housing bubble which started in 2002 and so really what we're doing is we're looking at what happens if all those jobs go away and at current rates we're seeing the majority of that bubble goes away by depending on the submarket third quarter, fourth quarter of this year and so yes, that would define our expectation of the outside.

Great. Last question is what do you think the biggest risk is into performance in Seattle? It's been quite the juggernaut, we keep hearing things about some new supply coming in. Is that sort of the biggest risk that you see in Seattle?

Well, it's always a combination I'd say between as long as the job growth continues at the current level I think there will be the demand that's required to support the new supply that's coming online. There are large concentrations of new product. I'd say especially in Bellevue and our portfolio's pretty interspersed throughout the Seattle economy, so we're not necessarily in the hotbed of the new supply; but anyway our view right now is that the combination of jobs on the one hand--job growth on the one hand and supply on the other hand, we should be fine up there. If that changes, then yes, the market could soften up because we know with 100% certainty that obviously the supply comes online.

Great. Thank you.

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

Hi, thanks. Good morning.

Keith, on last quarter's call you discussed that there was a clear disconnect between the buyers and sellers in the marketplace and it's something that we've continued to hear on various earnings calls this quarter. Have you seen any change in that in your markets, in that dynamic recently either for the better or worse?

No. I think it is very--we're still very consistent. The stats that I gave you with respect to cap rates were based on--in Northern California five or six closings; in Seattle less than that; and Southern California are similar. So just a handful of closings.

There's a lot of listings especially in Southern California right now by private as well as public companies and there's a lot of activity, but it seems like things go into contract and buyers come back for very large price hits and things generally fall out because, again it's not like the early '90s when you had way--when you had leverage that was out of hand. Today there's not a lot of paying.

The sellers that are selling are looking for an opportunity and and so if they can't hit somewhere close to the yields they need--they've got good occupancy and generally have loans in place and generally whether it's rent growth or flat rent growth they're not going backwards. So there's just not a lot of pain. So I don't think that you're going to see cap rates move much more because sellers just don't have to.

So do you think, then, that you just continue to see essentially a stall-out in transaction volume rather than pricing change to get the deals flowing again?

I would think that in my mind it's either going to take a very long time or it's just not going to happen because again, if sellers don't have to sell unless they see better opportunities, I mean if you can sell an existing deal and you're willing to take a higher cap rate because you can redeploy that money at a better yield somehow, that might happen; but I just don't see that happening and so I would guess it's just going to stall out. You're going to see very few transactions over the next 12 to 18 months.

Okay.

So then given your comments there and given that in the past you guys have been one of the companies to take a more opportunistic approach on investments, can you just talk a bit about how you view the risk reward equation for investments on various sides of the capital structure right now?

Well, again we think that the development piece is clearly where we can create some value. The other area that--and this is not from new acquisitions but from our existing portfolio, redevelopment is a place where we can see yields on our dollars spent in the 8% to 10% range. So clearly that's an opportunity for us. We are actually looking at some opportunities where lenders are involved because there is some pain there and so I think you're going to have to find those areas where there is pain involved in order to get a better than normal return.

So that would be kind of a type of situation where you may look to do sort of a loan to own type of deal?

A loan to own or a buying out a piece of debt that's under water or some combination of the above.

Okay. Thanks, guys.

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

Thank you. Good morning.

Hey, Al.

Just following up a little bit on the financing side. What are your guys seeing as far as the life companies and Fannie and Freddie? We heard some comments on the call before yours that is sounds like Fannie and Freddie are now lowering their spreads after widening them. What are you seeing on that end and then what are you seeing on the life company end?

Yes. Freddie and Fannie are still about 200 basis points spreads on a 10 year mortgage which is what we attempt to do and life is probably about 75 basis points more than that.

Okay. Are you seeing the life codes want to be more aggressive in the apartments or more aggressive on the development side or no change?

Really no change.

Okay. And then as far as portfolio allocation just listening to your comments on Seattle and just looking at what you've done in exiting Portland, if you were going to think about doing some repositioning on the portfolio, are there any markets that you're inclined to increase investment in or decrease investment in?

The reality of our business is it's a combination of cap rates and growth and clearly we've had the most exciting growth in Northern California and Seattle but it's also the most difficult cap rates. I mean clearly everything else equal we would like to see a more opportunities in those two markets.

Unfortunately I mean everything is cyclical and these markets will also over time soften and Southern California as it gets beaten up is going to create opportunities. So we're going to have to look at combination of cap rates and growth rates over a three year horizon to really make those decisions, but I would tell you just the easy decision sitting here today is Northern California, Seattle is--it would be the place that we'd feel very comfortable today.

Okay. And then the final question is just on the new Sunnyvale deal it seems to have--if you could just provide some background on that. Obviously it's come about and now it's already in the development stage. So if you could provide some color, background on that as well as how you're going to handle the retail aspect of it.

Sure. John Eudy again.

We had that in contract for almost two years if you recall, Alex. We got it entitled in February, got past the challenge period in March and then just closed the property last--about with a week ago. In terms of start, we've got it anticipated to start February of next year. We're starting working drawings as we speak. It is a mixed use deal that has about 48,000 square foot of retail. We've got a pad out front of just under 15,000 square feet that we have a leasing negotiation right now with a small anchor grocery store and then the rest is in line underneath the footprint of the building of approximately 32,000 square feet plus our leasing office.

Okay. Thanks.

Your next question comes from the line of Steve Swett with KBW. Please proceed.

Thanks.

Keith, just to follow-up on the questions on the cap rates, I understand there's not a whole lot of data and there's no pain to force some of the sellers to execute transactions today, but you referenced some rental growth rates that may turn negative and so from a return perspective it may look that some of these owners in Southern California a sale might be a better option than a hold. Could you just provide maybe your feel for what cap rate differences might be between--I don't know--Northern California and--I'm sorry, northern Orange County, southern Orange County or the central areas of L.A. versus the Inland Empire the discrepancy between those areas?

Sure. I don't have--I have a little bit of data. I was talking to our acquisition guy down down there in preparation for this and it's tough to differentiate a lot. I would tell you that southern Orange County is generally newer product, more As, northern Orange County is sort of the solid Bs and A minus, B plus kind of market.

So that would just tell you that the cap rates that I discussed for As in L.A. are probably 50 to 75 basis point higher in south Orange County. I would tell you that Inland Empire, not because we're looking out there, but because brokers give us feedback all the time, cap rates there are probably 6.5 to--say mid-point 6.5. So maybe 6 to 7 depending on the quality of the real estate because I think everybody is recognizing that there's going to be a lot of pain out there for a fairly long period of time.

Okay, and then, Mike, a couple of operating questions.

On the gain to lease that you referenced in Southern California, have you seen any change as the spring has progressed? I think you referenced that you had to get more aggressive in rents to hold occupancy. Has it changed with a typical seasonal pattern or is it still weak?

Really, Steve, it's very little time has passed since the quarter ended. So I don't think that we've seen a change thus far, but I will say that if you look at that number, it is highly concentrated in our larger buildings. So for example Hillcrest Park which is 600 units right next to Ventura County is about 800,000 of the $3 million Southern California gain to lease number and so it tends to be heavily focused on larger buildings in a couple of those markets and I think it's too early to tell if things have changed.

What we're trying to do is be a little bit defensive about it and try to make sure that if the world--we don't see a lot of evidence that the world is getting better, then we'll assume that it's getting worse and we will just hold occupancy wherever we can. So I think it's sort of--I think it's the right strategy given that market and if it we get surprised on the upside with better traffic patterns and job growth, then that's great. Too early to discern whether it's changed from the first quarter, though.

Okay, and then last question sort of related. As you roll out Yield Star, you obviously have various strengths across all your different markets. As it gets implemented is it something that you expect that Yield Star will provide rents and you guys will go with those or is it something you'll roll out a little more slowly and just let your leasing people get their hands around how it works and what the numbers are that are recommended?

Well, at least initially. I think the beginning part of the roll-out has been a little bit slower just because you do end up with some data conversion issues and making sure that you have amenity codes and things like that correctly working; and so that part of the roll-out has been a little bit slower and then--the second part of that is we are constantly testing the Yield Star results against what we know about the market and so we want to be very careful in terms of how we roll it out.

So that we expect to roll out throughout the rest of the year and essentially be close to done sometime in 2008 and so we'll speed up from here but unless we have some difficulties, but it's a more--the level one conversion was started at the beginning of the year and it almost done. So that was a very quick roll-out. Yield Star is more complicated and therefore, could possibly have more error and also is critical importance to us. So we are being pretty cautious when it comes to that roll-out.

Okay. Thanks.

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

Thanks.

And on Yield Star when do you expect that to be fully rolled out?

By the end of the year.

Okay. I don't know if you said that, but got it now.

Nobody should be assuming 10% to 12% revenue growth in any market, in your case Seattle and Northern California for any length of time. It's not sustainable. So in your mind what are some of the factors besides maybe supply and affordability, maybe that's it, that are sort of inflating revenue growth there and what would you sort of say to people about the longer term expectations for revenue growth in those two good supply constrained markets?

Well, I think if you track revenue growth for Seattle and Northern California over a longer period of time, you get somewhere in the 4% long term average yield rent growth. So you're right, those are not sustainable over long haul. Having said that, you also have sort of the cumulative effect of this business and it's really what loss to lease is meant to capture in that we had a pretty significant increase in rent last year in 2007 and really returning--we continue to turn leases. So we will continue to capture some portion of the loss to lease which won't be going forward at double-digit range but it will slowly taper off throughout the year as we price more and more units in the inventory.

So does that answer your question or--

And for Northern California, the area, what would you call the sort of the long term trend?

I think it's the same. It's about--those two are pretty similar, Seattle and Northern California, somewhere around 4%.

Okay. Would you guys be buying back stock at $120 a share?

No reason to.

Okay, and then just a question on sort of the makeup of the market in terms of the tenants. How open are you to, you know, bringing in tenants that may have just lost a home angry tenants that are upset about their circumstances? I mean are they in some cases very good tenants and how are you tackling that opportunity?

So you're saying someone that lost their home in foreclosure?

Yes.

Yes. We're making an exception for that person. In general we don't want people that are the result of foreclosures living in apartments or the house. It goes into the credit history, but in that case given what happened there were many, many people that are very good credit risks that just got essentially in over their head where they bought off on the very expensive homes and 95% to 100% financing that they couldn't afford and everyone knew they couldn't afford it but they took it anyway. If we find people in that scenario, we will make an exception and for a sublet--I don't remember exactly--but it's a slight increase in deposit, we will accept them as tenants and we'll do that throughout the entire West Coast.

Any idea what percentage of new tenants are of that category?

I don't track it. I know that there are several, in that category. So we do make exceptions on an ongoing basis, but I don't have a number for you.

Great, and kudos on the brief comments. I think that that's a better use of your time for the opening remarks. Thank you.

Your next question comes from the line of Jay Habermann of Goldman Sachs. Please proceed.

Hey, guys, good morning to you.

Keith, you mentioned some of the impact obviously on the construction job losses and as well in manufacturing. I'm just wondering obviously given the decline in single family home prices what are you seeing outside of that in terms of say retail, for example, and employment there?

And we can take those markets sort of one by one. In Seattle everybody talks about all the cranes and the cranes aren't all residential. I mean there's a lot of office, etc., being built. So in Seattle the retail and office market seems to be going at sort of the same level it had been.

Northern California is very similar. It's got a strong new construction in the--especially in the office in Silicon Valley. I don't know if you can hear this, but we're getting some feedback buzz here. Anyway and then in Southern California it is slowing down a little bit, but not--I don't think we've been able to measure that yet.

Okay. Just trying to get a sense. It sounds like you're sort of indicating the bottom might be late this year and I'm just wondering what sort of gives you that confidence given that home prices are continuing to decline and some estimate that we're only sort of halfway through the price decline thus far.

Okay. There's sort of two questions there. Are you talking about the decline in single family or just generally in retail office?

Decline in single family but ultimately your expectation that sort of job losses sort of bottom out late this year.

And the reason for that is what we do is when we look at jobs relative to each of these sectors, we sort of look at what the long term trend has been for those jobs and then what we're really doing is we're saying that the jobs that we're talking about going away has been the bubble piece of the job formation. So take that and then you look at how the permit activity has dropped off, and in our markets even though we're producing generally in the California markets a 0.50 to 0.75 of 1% of existing stock, the permit activity's dropping off. So as that permit activity drops off obviously there's nothing to follow-up. Anything that's in construction today going to get finished and so is we're assuming that we see the existing projects finish up and then we're going to see a drop-off back to sort of historical norms with respect to anything that gets started.

Okay, and just switching gears in terms of redevelopment you mentioned the returns there seemingly attractive versus obviously current cap rates, but do you plan to expand that program much from the current base?

Over time we will expand it. We are retrenching a bit there trying to compress turn times for our unit in the redevelopment program, and we're also mindful of the fact that we really don't want to be tearing up our buildings when we're struggling a little bit economically, so we're being a bit more selective as to redevelopment activity; but the long term implications or long term opportunities of redevelopment remain very strong.

Okay. Great. Thank you.

Your next question comes from line of Michael Salinsky of RBC Capital Markets. Please proceed.

Good morning. Quick question.

Coming at it--just looking at what you're seeing in the markets right now looking at asset pricing, maybe a way to come at it differently, have you made any changes in your acquisition or development under any assumptions over the past six months?

Well, in our acquisition we haven't bought anything for--or closed anything for six months. So the answer is we're looking at how can we make transactions accretive in today's world given our--and again it's not just the asset price. It's the asset price coupled with our capital cost and in today's world given where thank God our share price has come up recently; but when our share price is down where it had been in the early part of the quarter interest rates the spreads on Fannie and Freddie are up from 80 basis points to 200 basis points and cap rates haven't moved comparably, you're just not going to do anything.

So the answer is yes, we're looking for on the acquisition side minimum of 5.75, preferably above that and then on a development side we haven't put anything new in contract other than we've got the portfolio that's been there for a long time; but we haven't put anything new in contract in a couple of years. So yes, we are being mindful of the changing asset value.

Okay. That's helpful.

Second question, in terms of your guidance that you originally provided for '08 you had 100 to $200 million of projected dispositions. Have you outlined those assets first of all, and second of all, if you have outlined them what do you expect the timing on those transactions to be?

We did not identify them necessarily in the guidance. We are generally looking at our lower quality assets in Southern California, which is going to imply a slightly higher cap rate for those dispositions. We've got a couple that we're working on right now, but nothing far enough along to report on. We generally don't report those until they're in contract with contingencies removed, but that's the profile that we're working on.

Okay. Any thoughts at this point in April about starting another fund?

We're looking at it. When our share price was in the $100 range, the fund cost to capital made tremendous sense as our share price continues to pick up some--pick up a little bit. It becomes more of a difficult--I mean we have to compare the cost of our equity on balance sheet versus the fund. I mean clearly I think some of our peers who have gone into fund business look at it as a separate business. We look at that as an alternative cost of capital and I think today if we can get a little bit more traction our share price were to move a little bit better, the balance sheet's probably a better place to finance, but we are right now that is an ongoing discussion in-house.

Okay. Related to that what kind of hurdle rates would institutional investors be looking for at this point?

Well, that's part of the problem is that we have a cadre of investors that have invested with us fund one and as a result of the great result of fund one are in fund two and they have a certain expectation. If we were to go out and try and find lower hurdles, we'd probably have to go out and approach new investors which is a lot of work and it's very expensive. So I think that we can probably expect sort of the low to mid-teens generally in the marketplace, but we have not proved that at this point.

Okay. Then finally you had the $0.23 gain here in the first quarter and I know your guidance for the full year doesn't assume any additional transaction activity. I mean is the cupboard completely bare at this point or are there a couple opportunities you're looking at that could produce some additional income maybe in the second half of the year at this point?

We've always got things that are there and depending on the opportunity we can pull the trigger or not. Nothing significant, though.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS)

Your next question comes from line of Steven Rodriquez of Lehman Brothers. Please proceed.

Hi, guys. Forgive me if you talked about this already, but I was wondering if you could give some update on funding the development. I see you guys have about maybe another $350 million of remaining cost for the end place development.

Yes, this is Mike Dance.

We have a pipeline of unencumbered assets that, for example, John mentioned we closed on Tazman this last quarter; we put an unencumbered asset into a Freddie/Fannie pool, see which one gives us the most attractive pricing and coverage and measure them on several different metrics and make a decision to move forward on them and so we just keep that unencumbered pool going from the development pipeline. On the short term basis we have the bank line and that's got about 150 million of capacity on it. So it's kind of the combination of the bank line for short term needs and the secured line for taking down the equity piece.

And then probably the other piece that as I discussed earlier, the disposition program is looking at 100 plus million which would be as I said selling the--some of the lower end stuff in Southern California which is higher cap rates. Those higher cam rates will certainly marry up with a development deal much better than they would with a reinvestment and acquisition.

Is it fair to say that--I mean should you sell in the lower range say 100 million or even less of assets you could expect a lot more secure debt, maybe 50 to 100 million or even more so?

That's right.

All right. Thanks.

Your next question is a follow-up from the line of Michael Bilerman of Citi. Please proceed.

Can you talk about how the development lease-ups are going and particularly on the pipeline Belmont Station that (inaudible) operations was pushed back a couple months and The Grand was pushed back a couple months.

Yes, Belmont, delivery of the physical product got delayed for a combination of reasons and that's the reason the lease-up hasn't really ensued yet. We opened up a temporary leasing office next week and within this next quarter we'll have pretty good visibility on how that's going. As far as The Grand we pushed it to January just because we'll have our preleasing, we're going to physically complete the building just around Christmas time and the initial occupancy in January is more realistic at this point. The one fund asset that we have, East Lake, opened up about a month and a half ago up in Seattle on Lake Union. That's at about 67 or 68 leases as of the beginning of this week and it's going fairly well.

And how are the rents you're achieving compared to what your expectations were say a couple months ago?

Slightly above by a couple of pennies.

Okay, thank you.

Ladies and gentlemen, there are no further questions in the queue at this time.

I'd like to turn the presentation back over to your host for today's call, Mr. Keith Guericke. Please proceed.

Thanks for joining us on the call and we are here for any follow-ups if you need us and we hope to have you on the call next quarter. Thank you.

Ladies and gentlemen, this concludes the presentation for today. You may now disconnect. Have a wonderful day. Thank you for enjoying today's conference.