Essex Property Trust Inc (ESS) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2008 Essex Property Trust earnings conference call. My name is Tawanda and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

Thank you. Good morning and welcome to our third quarter earnings call. This morning we will 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 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 is Mike Schall, Mike Dance, and John Eudy. Included in the earnings release on our website, you will find our market forecast for 2008. These forecasts have been revised this quarter to reflect the change in jobs and rent growth for several of our markets for 2008. Also included with our earnings release is a schedule titled New Residential Supply which includes total residential permit activity for the larger US metros as well as information on median home prices and affordability as compared to the Essex markets. To get those details, visit our website under Investors and Media.

Last night we reported another strong quarter with core FFO increasing 10.2% per share. For quarter, the portfolio grew revenue 4% greater than the same period in '07 and 0.7% on a sequential basis. We are very pleased with that result. In recent events in the financial markets has increased the level of uncertainty and the likelihood of a longer period of weak economic growth. This uncertainty will affect all metro areas and apartment markets. We believe our markets are well positioned for the long haul. The view that all California markets are experiencing the worst and the same of the housing crisis is inaccurate. Real estate is driven by local conditions. Our high quality of life coastal supply constraints in the apartment market have not been immune from the impact of the housing crunch, but are very distinct from the unconstrained inland areas of the state. I would like to discuss some of these economic indicators that separate our coastal markets going forward.

Our largest exposure to home construction and finance jobs are in the Orange County Venture markets. The bubble in these sectors began in 2003 and peaked in mid 2006. As of September 2008 the jobs in these areas have been cut back to sort of the 2002 to 2003 levels. Accordingly we feel the majority of these cuts are behind us in these markets. Market occupancy in both these markets is at or above 95% currently.

Foreclosure activity has been relatively high in California. Again, California as a whole gets lumped together as one big market and we have, this is actually a very inaccurate view of this area. Foreclosure activity nationally was down 7% sequentially in Q3 to 765,000 units, resulting in foreclosure rate of 6.2 per 1,000 of single family homes in the housing stock. In California, that rate was 7.2 in Q3; however, if you disaggregate, in our coastal markets, foreclosures were down sequentially 22% to 43,000, resulting in a foreclosure rate of 5.4 per 1,000 stock. In Silicon Valley and San Francisco, the foreclosure rate is half of the national average. By contrast, in the unconstrained inland markets of Modesto, Stockton, and San Joaquin in the north and Bakersfield through to the inland empire in the south, the foreclosure in Q3 totaled 31,000, resulting in a foreclosure rate of 14.7 per 1,000 of stock. We believe these foreclosure rates are a proxy for exposure to single family rentals going forward and thus feel our core metro area will face less exposure to the single family rentals.

Last quarter we mentioned we saw a slight improvement in the seasonal pattern of transactions driven by price declines. This trend continued to a much larger degree in Q3. Transactions in Q3 increased by 16% sequentially and 12% year-over-year in our metros. Year-over-year prices are down from 35% in Oakland, roughly 30% across southern California, and 15% to 20% in San Jose and San Francisco. A significant portion of these transactions were foreclosures.

Despite the decline in home prices, single family affordability remains low in our markets in relation to both current incomes and historical levels of affordability in each market. It is still difficult to buy a home and more financially appealing to rent. In addition, single family permit activity has dried up. In our markets, the trailing 12 month single family permit have -- represent only 3% of the single family housing stock. We believe this limited supply will lead to a quicker level of stabilization.

We continue to believe we have chosen the correct strategy of locating in limited supply housing markets with a high exposure to technology oriented service jobs. Our portfolio has the largest exposure to venture capital funding, which we think is an advantage particularly in these current financial environment. Year-to-date venture capital funding has been about the same as last year and up roughly 40% from the low point in 2004. Our markets represent 9% of the jobs in the country, yet receive 51% of all venture funding, particularly San Francisco and Silicon Valley, which receive roughly 40% of all venture capital funding.

Big picture we have two focuses at Essex. We want to operate our portfolio efficiently, we strive to keep occupancies high, which we believe is going to produce the best NOI result going forward, and two, we want to maintain our liquid balance sheet which Mike Dance is going to describe in his comments -- actually a lot in his comments. Given the uncertainty of the equity in the debt markets, we believe it is important to know that we are covered for the next three to four years. We also want to know that we have liquidity that will allow us to take advantage of distressed opportunities that we believe will be popping up in the next 12 to 18 months.

We are currently finalizing our projections for the next year by submarket and completing each of our budgets. We are not far enough along to give guidance, but given what I have seen so far, next year's FFO will not have the same growth we are enjoying in 2008. Now I would like to turn the call over to John Eudy.

Thank you, Keith. We have had no new additions to the development pipeline during the quarter. I have the following updates on our activity. Belmont Station in Los Angeles has been substantially completed and was open for occupancy on August 8th. We continue to make significant leasing progress and have leased 155 units or 56% of the property to date. The Grand in Oakland is nearing completion on budget and scheduled for occupancy in January. Our temporary leasing office will be open tomorrow. Early indications are showing significant preleasing interest off our web site and home bank. The building will be the only new luxury high rise [round] community in its competitive market, much like the Essex on Lake Merritt was in Oakland when we completed it in May of 2002. As you may recall, we experienced a six month lease up of 207 units in the post 9/11 dot com era meltdown period prior to the economic rebound which began in 2003. I would expect the same type of market acceptance on the Grand.

The remainder of the development pipeline under construction is on budget or less than the estimated development budget and slightly ahead of delivery timeline outlined in the S-9 supplemental. We have added no predevelopment projects or land held for future development during the quarter. On the three predevelopment projects we have in our pipeline, all are currently leased at rates substantially below market rents and we have the flexibility to extend the leases or release should we desire to do so and extend our anticipated current schedule start date.

On land acquisition activity, we continue to be actively engaged in the market and are attempting to take advantage of any overreaction to the current economic client and add to our land predevelopment pipeline for 2014 and later deliveries. With a timeframe from the site identification to delivery between five and six years in our supply constrained markets, the best time to contract to acquire land is countercyclical to positive economic news. It is probably fair to say that right now we have that in our favor when we are talking to land sellers. Compounding the situation for land sellers is the fact that development lands financing is virtually impossible to obtain right now but for the most well financed companies and developers. For the time being, the era of speculative merchant developers in our space is over.

Construction costs have continued to go in our favor on contract buyouts on the deals we are currently building. We are seeing realtime traction, beating our budgets, and expect to see that continue and be the wind at our sails for at least the next 12 months. Will oil bouncing around $65 a barrel, wood at a 30 year low, and other construction related commodities following a downward spiral, that will translate into significant savings to our hard cost budgets going forward.

On the labor side of the equation, I have never seen a more competitive market with general and subcontractors in my 30 years in business. The infrastructure of individual talent and companies built up during the home building boom of the last six years is now at our disposal for a very limited number of construction activity starts on the new rental development market. We are getting the best of the best subs, giving us a competitive buyout situation, as well as the most talented personnel, which will translate to more efficient productivity at the site level. At this time, I would like to turn the call over to Mike Schall.

Thank you, John. And thank you, everyone for joining us. Last night we reported another strong quarter operationally. As you may recall, our 2008 guidance originally assumed a second half economic recovery that clearly will not occur. Given that expectation, we are pleased with the performance of the portfolio, especially our ability to maintain strong occupancy levels throughout our critical summer leasing season.

During the quarter, we experienced the following difficulties. Overall sluggish employment growth especially in southern California; localized supply issues in various submarkets including downturn Seattle, downtown Oakland, and many southern California sub markets; and failed condo projects being rented as apartments. Partially offsetting these headwinds was a 24% reduction in moveouts to purchase a home. What does this mean? In the short term, weaker job growth and lease ups of a finite number of newly developed apartments and former condo projects will drive moderating multifamily fundamentals. However, longer term, current trends will lead to a future point, perhaps in 2010, where the coastal markets will experience a pervasive housing shortage.

Typically three things happen when rental market conditions soften. First, more people double up. This is difficult to track directly although we have anecdotal evidence it is beginning to happen, particularly in southern California. Second is compression between A and B rents. Most of the newly developed communities in the coastal markets, including our own, are A quality property. For the most part they are requiring more concessions than anticipated, indicating compression in rents. In general, B quality properties near A quality lease ups are not doing well, but are less affected than the As. And finally, delinquency becomes a bigger issue. For the quarter, same property delinquency actually declined, although we have aware of the need to remain vigilant in our collection efforts.

With strong occupancy throughout our markets, we are well positioned for the seasonally weaker fourth quarter. Our results follow a similar pattern as previous quarters, with better than expected strength in northern California and Seattle offsetting moderate weakness in southern California. During the third quarter, northern California led the way with an 8.4% same property revenue growth well above our guidance range for 2008 of 5.5% to 7%. Our Seattle same property revenue growth of 7.5% also exceeded the top end of the 2008 guidance range, in this case by 0.5%. In southern California, our revenue growth of 1.1% fell below the guidance range of 1.5% to 3% for the first time year. Conditions continue to deteriorate in southern California due to greater supply and more job loss.

Operating expenses grew at 3.9% for the quarter, near the high end of our guidance range of 2.5% to 4%. Year-over-year expenses were influenced by large property tax reassessments in Seattle, higher utility costs, and a couple of property specific issues. As stated previously, we expect operating expenses to remain near the high end of the guidance range for the remainder of 2008.

Earlier this year, we completed the conversion of our property management and general ledger systems to Yardi and the roll out of 24 hour call center support at all of our properties. During the quarter, we finished the initial implementation of YieldStar's Price Optimizer software. With Yardi, call center, and Price Optimizer conversions now in place, we are pursuing ways to leverage these investments in the form of higher rent and lower cost.

Same property concessions, both in total and per unit turned, declined during the third quarter. Most of this decline is due to the implementation of Price Optimizer which provides an array of net pricing options -- in other words without concessions, to the residents. Loss to lease, which estimates the difference between market and in place rents without regard to concessions, declined from 2.4% of scheduled rent in the second quarter of 2008 to 1.9% at September 30, 2008. The use of fewer concessions in Q3 resulted in lower economic rent, contributing to the decline in loss of lease.

Now I would like to briefly review each major part of our portfolio. Starting in the Northwest, the Boeing machinist strike has shut down production for several weeks. As of October 2008 approximately 2.2% of our Seattle properties were occupied by Boeing employees. Given that there is a tentative agreement to resolve the strike, we do not expect a significant impact at our Seattle communities. Downtown Seattle softened this summer due to condo units reverting to the rental market and it is too early to determine the impact of the sale of Washington Mutual.

During the quarter, we completed the residential lease up of our East Lake at Lake Union property, 127 unit property owned by Fund II, consistent with our rent and absorption expectations. As of October 20th, 2008, physical occupancy in Seattle was 96.4% and net availability was under 5%. Home purchase activity represented 14% of our moveouts for the quarter, compared to 17% a year ago.

In northern California, the overall market continues to be strong but has some pockets of weakness due to supply issues. An example is downtown Oakland. As of October 20th, 2008, physical occupancy was 97.5% in our northern California portfolio, with net availability under 4%. Home purchases represented 9.3% of our turns for the quarter, compared to 13.8% from the same quarter a year ago.

Now to southern California. John noted that we commenced the lease up of our Belmont Station property consisting of 275 units in downtown LA. Current rents average around $2.50 per square foot, ignoring concessions, which is close to our expectation. However, we are using one to two months in concessions versus the 0.5 month that was originally planned. We are expecting stabilization by June 2009. Physical occupancy in southern California summarized as follows -- in the LA Ventura 95.6% physical occupancy, net availability is 61.%. Orange County occupancy 95.2%, net availability of 6.2%. In San Diego, 97.2% physical occupancy with net availability of 5.2%. For our southern California portfolio, combined move out activity attributable to home purchases was 7.7% for the quarter compared to 9.5% a year ago.

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

Thanks for joining the third quarter call. My comments today will briefly discuss the basis for narrowing the range of our 2008 guidance and then highlight the activities that have strengthened our financial position and ability to meet the 2009 to 2010 debt maturities and development commitments. After the $0.01 adjustment for the writeoff of unamortized loan costs related to the sale of Cardiff by the Sea, the third quarter funds from operations are in line with First Call's consensus estimate and the guidance we provided on the second quarter's call.

As Mike highlighted earlier, we have maintained high occupancies throughout the portfolio and we are well positioned to replicate the same property revenue results achieved in September into the fourth quarter. The midpoint of our FFO range for 2008 assumes that there will be modest revenue growth from the apartment communities in the non same property results, with the ongoing lease up activities at Belmont Station and from the communities in the redevelopment pipeline that are close to returning to stabilized occupancy. The midpoint of the 2008 guidance assumes that short term interest rates will continue the recent downward trend as the Fed continues it bias of reducing interest rates to stimulate the economy. To achieve the high end of guidance, we will need continued rental growth in our northern California and Seattle market, high occupancy in southern California at current rent levels, lower borrowing costs on variable rate debt, and approximately $0.05 from a combination of increases in noncore income or expense reductions.

I will now comment on our capital plans. It is important to know that it is an ethics discipline to match fund investment decisions with a cost of capital that generates positive arbitrage and accretion to cash flow per share. Accordingly, to meet this match funding objective, it has been the capital plan to fund the developing commitments of almost $300 million and redevelopment commitments of $55 million with a combination of common equity, construction loans, forward starting slots, the unsecured and secured line facilities, and with Fund II's institutional limited partners. Accordingly, we have raised approximately $140 million in equity by selling common stock at average of $120 per share. We have started three mortgage applications at Fannie and Freddie, which are expected to raise an additional $100 million before the end of the year, and we have construction loans in place to fund approximately $100 million of the development commitments in Fund II or in joint ventures, and we have made the final capital call for Fund II institutional investors of over $30 million.

As highlighted in our press release, the new secured line facility of Freddie Mac will increase our borrowing capacity from $100 million to $150 million before the end of 2008. Currently we intend to exercise our option to extend the $200 million unsecured bank facility so that it will mature in March 2010. As we plan for the 2010 debt maturities, we have the ability to expand the new Freddie secured facility by $100 million to $250 million. We also have significant borrowing capacity from our 2009 and 2010 maturities. These secured loans that mature in 2009 and 2010 were originally underwritten with 1999 and 2000 rents and have had ten years of principal payments. Using the current underwriting practices of Freddie and Fannie, we expect that the refinancing proceeds from 2009 and 2010 maturities will generate enough additional funds to pay off the mortgage balance and also retire our exchangeable bond obligation. We also have approximately $400 million of forward starting swaps as a hedge in the event long term interest rates are significantly higher when these mortgages are refinanced in 2010.

In summary, these capital activities are expected to leave us with close to $100 million in cash and marketable securities and over $00 million in line and construction loan capacity by year end with only $25 million in 2009 debt maturities. This capital plan provides us the needed resources to finance our active development and provide sufficient flexibility to fund future opportunistic investments. This concludes my remarks and I will turn the call back to the operator for questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Dustin Pizzo with Banc of America Securities. Please proceed.

Thanks. Good morning. Guys. John, can you talk about where pricing is today on some of the land opportunities you have been looking at versus where it was three to six months ago? And then also, have there been any further changes to what you would be targeting on the development side from a yield perspective or is the mid 6 range still a fair assessment there?

First on land prices they probably peaked -- and the condo urban guys were active in the market two to 2.5 years ago maybe. And at that time, we were boxed out. We haven't contracted any land in our pipeline for well over two year, well over three years actually. And my range would be between $100,000 and $150,000 a door for land was being contracted at that time and up. Currently, there have not been a lot of transactions to look at, so it is difficult to gauge, but I can tell you we are in negotiations on deals where we had fished around -- we will call it $1 now we are offering $0.50 and we are getting a response. So where it all settles out, I can't say because we haven't done a deal yet in the range that makes sense. With that in combination with -- there's going to be some retraction on these hard costs we saw go up 100% over five to six [weeks]. We expect our development yields that we are targeting are in the mid 7 range on current yield.

Okay. That's helpful. And then Keith, I mean as you guys look at where cap rates appear to be headed and the potential for additional stress in the market, have you moved further down the path of considering a Fund III today?

Fund III is an ongoing conversation. We have not made any more commitment than we spoke about on the last call. So it is something we are very interested in. We are cognizant of the benefits of it. The reality is, many of the potential investors out there are suffering from the denominator effect, so the ability to go out and be aggressive to raise a fund is problematic. Having said that, it is on our radar.

Okay. And then just for the last question, I don't want to leave anyone out here. So Mike Dance, the equity you guys issued during the quarter -- was that done through some sort of drip? I don't recall seeing any press release or SEC filings about it or anything like that. And then, separately can you also just touch on the expected pricing of the mortgage applications you mentioned in with Fannie and Freddie?

Yes, we about 1.5 years ago had a prospective supplement with a Cantor Fitzgerald controlled equity offering. And that is the vehicle we used to raise the common equity. And current pricing from Fannie and Freddie, they continue between 115 to 120 debt service coverage and we are seeing anywhere between 225 to 260 in spreads depending on quality of the security.

Okay. Thanks, guys.

Your next question comes from the line of Michael Bilerman with Citigroup. Please proceed.

Hi. It is David [Todi] here with Michael. Just a couple of questions -- to start with tenants, can you provide a little more color in terms of any consolidation you are seeing? Do you have figures around any increases in unit occupancy?

Doubling up. Doubling up, again as I said on the call, it is an anecdotal at this point in time. We don't have that information, I mean I know that historically we started tracking it in northern California in the late 90s. That was a last time it was relevant and it is not something we track on an ongoing basis. Again, so I don't have any hard statistical information. Anecdotally, again southern California has more double ups and if it becomes a greater factor, if we think that our occupancies in general are suffering because of it, we will start cracking it, but we haven't seen that need at this point in time.

Okay. And then maybe I missed this on the call but did you talk about delinquencies?

I did, yes. And I noted that during the quarter our delinquencies are down year-over-year.

Okay. Great. And then, also if you can could just touch on obviously there's some expenses fairly unpredictable, but what kind of initiatives you're taking to potentially control tax increases?

Most of our taxes are already controlled by Prop 13. Most of our portfolio is in California and Prop 13 limits California reassessment to 2% in general. So I think most of our property tax exposure is limited because of prop 13. In Seattle less so, but we think that we had a big increase in assessed value last year which resulted in the property tax increases that we saw go through the quarter or really all this year, and so I think it will be less substantial next year.

Okay. Great. Thank you.

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

Hey, guys, good morning. Just wanted to follow up on the question on distressed opportunities and just given the competitive nature of capital and where returns are today and perhaps other areas, whether it is debt at large, but where do you think returns will have to go in order to again raise that capital that you mentioned in there today? And I guess a further question on that is, would you anticipate raising liquidity on your own balance sheet meaning sale assets today because Fannie and Freddie are still providing capital and you can sell at low cap rates, and would you deploy that 12 to 18 months down the road?

Well, I think that the kinds of returns that investors are going to need fund format is in the high teen, low 20s. It is just expectations and alternative opportunities. So I think that drives that. With respect to our own balance sheet, we have sold some of the -- we sold the Cardiff by the Sea, which was a very good asset in a very good market. Basically it was an asset we had held for a short time but the reasoning behind that was because we were going to do a rehab project on it. Then about a year ago, as you recall, our share price had dropped down to around $90 or just slightly under $90 and we thought it would be a better use of those proceeds to sell that asset and buy our shares back. Well, as we all know, real estate is not quite as liquid as our shares are. It took us about six or seven months to do that. By the time we got that transaction done, our share prices were back up around $120. We have used those exchanged dollars to buy the property up in Seattle, which was at a much better cap rate than we sold the Cardiff transaction by. And beyond that we are sort of cleaning up some of our lesser projects down in San Diego we acquired in the Sachs merger.

I think right now what is happening is that people who are actually selling are those who are in distress and certain to sell into a distressed market, unless we thought we can do substantially better probably doesn't make a lot of sense. The other problem is that many of our assets have very low basis. So we have to finalize an exchange a -- 1031 exchange with an identification period within 45 days. We don't have the luxury of sitting on those proceeds for 18 months to wait for better times. What we are going to do is look at either joint ventures or hopefully a Fund III or if we have opportunities at $120, if we ever see that again to look at our own share price or our own equity -- those are the kinds of things I think we are going to use to take advantage of the future.

Okay. And then just back to market, the Pacific Northwest, specifically Seattle and then San Francisco -- can you give us a sense with NOI growth being stronger than expected year-to-date, how much of a deceleration you're anticipating over the next six to nine months? Are you looking for levels to drop in half from here? Do they go flat similar to where southern California is?

No. I think we are as I said we are in the process of analyzing our various submarkets in the process of doing budgets and clearly we are not going have the FFO growth we had this year, but I think northern California and Seattle are probably going to drop to the 3% to 4% range and so we are going to still have decent positive growth in those two markets.

Why do you think you still have some modest growth versus say the period after 2001?

Well I think -- well.

I can comment on that. The period of 2001 was extraordinary. I think we lost in terms of job losses, we lost 200,000 jobs approximately in Santa Clara County alone which was about 10% of the work force. So those were incredible never to occur again type of statistics. I don't think we see anything that is remotely like that this time around. And again there was a huge Y2K dot com explosion and then busting. Those were extraordinary events. Again I don't see any parallels to that.

Sounds right to me.

Okay. That's helpful. Lastly on the concession, I noticed they were actually down in southern California. Can you explain that given the pressure you are seeing in that market?

Yes. I did comment on that. The comment was that with respect to our pricing model since we are using a Price Optimizer piece of software, it generates an array of net prices -- not to say we can't offer a concession but it tends to focus on and focus on a net pricing type model as opposed to a growth plus a concession. So it is really a function of the price optimizer software. So, you will see that. So the offset to that obviously is that economic rents are lower because we are not, because our economic rents don't include the net effect of a concession. So the tradeoffs were lower concessions, but also lower economic rents.

Right. And then at the same time, what are you seeing from your competitors, what are the concessions like in the market now?

Concessions are, we will go to the new product in the market. There's quite a bit of lease up activity throughout southern California. We are seeing in those transactions one to two months and that includes our downtown LA project as well. So pretty significant concession activity on all of the lease ups. Less so typically 0.5 month to one month on areas that do not have a lease up.

If any concession at all -- again, the net effect of rent can some times does not include a concession, you go with a lower coupon rent.

Okay. Thank you.

Your next question comes from the line of Michelle Ko with UBS. Please proceed.

Hi. Good morning. I believe you said earlier you expect next year's FFO will not have the same growth as in '08. I wanted to clarify a little bit about what you said earlier. Do you anticipate FFO to grow in '09?

What I said was we are in the process of getting our budgets together, and finalizing our projections for the year. For 2009 we aren't in a position to give guidance and I was just signaling that you should not expect a 10% growth again, and I will leave it at that, but it is, we aren't in a position to give guidance at this moment.

Okay. I was also wondering if you could tell us more about the sale process for Coral Gardens -- what kind of cap rate it sold for and a sense for how some of the cap rates have moved for A versus B assets?

Well, it is difficult to give you market information because there isn't a very large market. As I said, what we are doing -- that asset is an asset that is in a market that we are not particularly happy with and the assets is an older asset that we would like to just get rid of. So the cap rate on that is probably about a 6% which is higher than we have seen in a long time. In fact, it actually might be slightly higher than that, but it is an asset we think we can get rid of at this point and use the proceeds more productively somewhere else. But there is not, it is just not a lot of activity in those marketplaces right now.

Okay. Thank you.

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

Hi. Good morning. Just a follow up on Jay's question regarding required returns, you said fund investors are looking for high teens, low 20s today. How does that compare to return expectations that you guys have when you are buying today? And can you just talk about how you get to those returns given where you are buying, pricing you are buying say the two assets you bought this quarter?

Well, I mean the assets -- I mean it is very similar to -- frankly what we look at from a REIT perspective is we try to do three things when we buy or develop a new asset -- be accretive to FFO, be accretive to our growth rate and be accretive to NAV. So, we don't spend as much time looking at IRRs as maybe our outside investors, partners would. Having said that, we are looking at very -- if you were to do the IRR calculations on the types of transactions as you will notice, last year we did almost $400 million of acquisitions. So far this year about $80 million. The reality is we have become much more selective and to find those returns is very difficult. So, the answer is we are trying to find very similar kinds of returns even though we are looking at slightly different metrics. And there are very few of those transactions in market. We think that things will get better, I don't know should say get better, because it's a double edges sword. But we think that those opportunities will provide themselves in the near future and we will have some. But very -- what we are doing internally is very consistent with that.

Okay. Thanks. Next question is just regarding the southern California submarkets -- did your ranking of the health of submarkets change at all? San Diego was near the top left quarter and Ventura was down the list. Is that still the same outlook?

Go ahead.

Yes, Karin. I would say that San Diego remains at the top. Ventura started having its difficulties sooner and it has worked through many of those difficulties, -- as you will recall it had pretty significant lay offs at Amgen and Countrywide, and so the market has worked through significant amounts of those. So I would say, I would put them and LA county number two and I think Orange County is the weakest at this point.

Okay. And last question is just on your dividend I know you have a pretty low payout ratio. Are you still hovering close to the minimum payout ratio to maintain your REIT status and are you guys, will you guys need to grow your dividend next year?

No, we have some room, taxable income is about $30 million less than our FFO. Or I should say less than our current dividend.

Great. Final question, just on what WaMu, you said it is early to know what the impact is. Do you know what percentage of your residents are employed by WaMu?

I don't know. We have not tracked that historically.

Okay. Thanks very much.

Your next call comes from the line of Michael Salinsky with RBS. Please proceed.

It is RBC, but thank you. Keith, I know you haven't laid out, you haven't finished the budget for 2009, and I know you are not giving guidance, but just given what you are seeing right now, what is your gut feeling? Is this a shorter term pull back or is more of a prolonged downturn here?

This is John Lopez -- given what's going on, our outlook is that it is going to be a very difficult job formation for 2009 for at least the first three quarters. Probably if the duration is near to five months of weak economic growth.

Five quarters.

Five quarters -- we think we will get better at the end of the summer next year but we won't see strong improvement until the end of next year.

Okay. That's very helpful. Secondly, in terms of -- I noticed on your development pipeline you have, 90 Archer is now marked for sale. Is that a fourth quarter transaction or is that a next year transaction or -- ?

Fourth quarter.

It is. Will there be any gains on that?

Yes.

Okay. And then also too in terms of I believe you're marketing an asset from the fund? Is that, is that a next year event?

We have put an asset out for the fund to market. At this point in time it is not in contract. So, I don't know that it will sell. If we don't get a price that makes sense for us we will pull it off the market.

Okay. And then finally in terms of -- you talked in the past that your bias was still toward northern California and Seattle. Just given what you are seeing with the developments in Seattle, WaMu, some of the other, the Boeing situation, has that changed in any way?

No, I don't think so. I mean reality is that things are going to, I mean all of these markets are cyclical, as southern California continues to get beat up, some of the -- system of the John had talked earlier about some of the land prices that he has seen come down and some of that is in southern California. So it is going to -- there are opportunities are going to come up. It is difficult at this point in time to see which market is the best cyclical advantage. But frankly if you look forward, I mean Boeing is still going to be very strong. It has a huge backlog on the plane, the Dreamliners. Microsoft is still going strong. We are expecting Seattle to continue to be fairly strong at least through next year. Northern California, as Mike said this is very different than the 2001 to 2002 implosion we had here. We have lost very few jobs year-to-date compared to losing 200,000 jobs back there. So this market still has got legs. As I mentioned in my comments, we have got the formation of new ventures and new companies, we have a great venture capital foundation here. So I think these are still the markets that are the obvious markets. But there's going be a point in time where things get so cheap in southern California it does open up and we continue to monitor that. Frankly haven't seen it yet though.

Okay. Thank you very much for the added color.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Lindsey Yao with Robert W. Baird. Please proceed.

Yes. Related to the commercial -- I guess the employment, you mentioned something about the 2.2% occupied by Boeing employees. Do you have an idea of how much of the overall portfolio is leased with corporate contracts?

It is, we do not generally like the corporate business and so it is not a big percentage. It is, less than 5% of the portfolio. In general, it is not something we focus on. And it is a very small percentage.

Okay. With that I guess a small percentage, but have you seen any trends so far with employers coming back to you and saying we are going to have to cut back at all?

I know that's a good leading indicator. We have not seen that yet, but again I don't think that we have enough of those units to be a good barometer of what's happening there.

Okay. Just looking at the new supply in Seattle, because I missed this --can you just give more color on the nature of the supply that's coming on line?

This is John Lopez. There are two nodes where there is supply is coming online the next 18 months -- downtown where there's approximately 2,000 to 2,500 coming online. A majority of that is condo conversion. And there's a similar number in downtown Bellevue over the next 18 months, and there's two or three large high-rise projects that have 500 plus were originally intended to be condos. We think those will all go apartments. Those will probably burn off -- supply will begin to decrease at the end of '10.

Okay.

But those are high end units and they're all going to be the reps to make those things work, and I frankly don't know what the construction costs are because we didn't do any of the, but I know they're high end and if they were being built in any normal market -- which that market is very similar to most of the California markets -- they have to be $550,000 to $700,000 per unit. So the rents they have to get are very high, and frankly most of our product is B plus, A minus kind of product, so we don't think it will have a direct competition with us.

Okay. Great. Thank you.

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

Thank you. Good morning to you. Just -- if you could explain this to me in just like a sentence or two because I still don't, I don't know that I get it entirely, you raised your guidance, low end of your guidance, effectively raised your guidance, and yet you didn't get the secondhand recovery you originally planned. Can you just explain? Is it just you had better than you expected performance in your core markets or what made that happen or just a wide range to begin with?

Our offsetting the not obtaining the second half growth in rents we were expecting has been a windfall in short term interest rates. We are really benefiting from the variable rate demand notes that we have on our low income, where we have below market rate rents.

That got you $0.20 of guidance?

We had -- historically we've paid about 4.5% to 5% on those mortgages, so take $250 million and we are buying about 3.5%. So, almost 200 basis points on 4250 million.

Okay. The next question is on the lack of transaction activity, Keith, and I guess all of you referenced, does that, to you illustrate that there aren't, I guess it does illustrate there aren't distressed sellers out there. That's good in the sense there's not this situation where you have a problematic environment from a debt maturity or debt expiration perspective. But do you see that on the horizon? Do you see owners of -- mom and pop owners of real estate that are going be faced with some debt maturities with expiration in the next couple of years? Are you monitoring those types of situations?

Yes. There's two issues. One is those properties that put five year bullets on -- essentially three to 3.5, three to four years ago, that is stuff is we are looking at, and then the other pocket we think there's going to be some opportunities in -- there's two other pockets. One pocket is there were a number of private rehabbers, they all -- they were fairly prominent and they were looking at pretty high octane transactions and used a lot of leverage, and I think a number of those guys are going to face IRR clocks or just loans that mature in the next couple of years that they're going to have pain because they had way too much leverage. I think the, I don't think the mom and pops are going to be in trouble, because the guys who went out and just put on normal Fannie Mae loans at 50% and 60% maybe even 70% have had rent growth in the last years. The only ones in real trouble are the ones that way overlevered. I think that's potential opportunity we are monitoring. The last one is there are a number of condo developers that build projects that have sold nothing, so we don't have to look at a broken condo but they're just upside down, they can't sell, their equity is gone, maybe the mezz is gone. And we are talking to construction lenders who might have to take a haircut to get out. So I think there's the opportunity, and the issue is whether or not we can get the price to a point where it works as a rental.

So like in '09, like in a period where it will be tough fundamentally you can actually see a good chunk of acquisitions if things align themselves right?

Yes I think that's a true statement.

Okay. Just two quick follow ups. Are you seeing any people or materially going out and renting foreclosed homes in your markets?

Absolutely. It is represents competition in several of our sub markets. Fortunately we don't have a lot of property in the inland empire. That would be ground zero for trying to compete, have a two bedroom unit competing against a three bedroom home at very reduced rents, Sacramento Valley same phenomenon. It is less the case in the coastal markets, but still a factor in a number of places.

But it is not the individual like one bedroom person that is going to live in a tree-lined street and watch kids playing hopscotch; right?

No, no.

It is a family.

It tends to be -- even within the coastal markets the more outlying of the coastal markets. Someone in San Francisco doesn't have that option. Palo Alto doesn't have that option. Santa Clara County for the most part doesn't. But we do have, there are some properties -- again not the core of our portfolio, that are more and they're closer to the more outlying areas and they have a greater impact. Again, it goes right back to what Keith said, which is look at where the foreclosure activity is the greatest and that is where you are going see the greatest impact from rental competition.

Okay. Lastly, are you seeing people move from class A to your property -- are you seeing that type of traffic?

It is hard to track that. We think anecdotally, that is happening as people become more price sensitive, and try to focus on improving their personal balance sheets, pay back a little credit and they can obviously do so if they go into more affordable properties. But we also mentioned there's a number of submarkets there's a significant amount of new product being delivered, tends to be very high end, and probably pushes that segment of the rental market beyond what it would have historically been pushed. And as a result of that we are going see pretty significant discounting of the As and that will inure to the benefit of the Bs.

Got it. Thank you.

Your next question comes from the line of Haendel St. Juste with Green Street Advisors. Please proceed.

Morning, guys.

Morning.

To follow up on I guess unrelated question, are you seeing any pressure from your investors to sell assets given what is going on with asset pricing in the market in the broader economy?

No. Our -- we just had meetings with our investors this last summer and we have talked about the markets and talked about what is going on, and basically in the current fund we have got about three years left plus a couple of extensions. So this downturn is not -- we don't think it will last forever, and clearly we think we have plenty of time coming out the other end to still execute and do the right decisions.

Are you adjusting the expectations given initially high teens return expectations?

We have not adjusted those expectations for the long term. I think that a number of those assets were bought early and we had good cap rates going in and we have gotten some great rental growth and great NOI growth in the assets that is are in the portfolio, in that fund. So I think we are going to be just fine if we sit tight and execute at the right time.

And the follow up on an earlier question -- I didn't quite hear the answer I was looking for more, looking for color on change of asset pricing that you feel has occurred with specifically more in the last 30 to 60 days given your activity in the marketplace?

Well, again, I think you are right -- I didn't answer that specifically. Partly because I don't know. I mean there has been not been a lot of transactions somebody had mentioned earlier. We had a fund asset that was listed. We as of today we haven't received a price that's acceptable to us. So clearly prices in the marketplace are down. I would guess that B product is in the [5.75 to 6.25] range in most of our markets today. A year ago that would have been at least 100 basis points less. So I think that's the range of where things are at.

Okay. One last question, can you give us a sense or maybe quantify your pricing power between new leases, people coming in the door and renewals?

I think in this world the two are becoming closer and closer to one, because everyone does for example a lot of Craigslist type advertising and rental information is so available via the internet that your ability to have a significant difference between new pricing and renewal pricing is pretty limited. So I guess it depends on the circumstance a bit, but we are seeing a tightening of that relationship as time goes on. I think that continues.

Your existing -- .

I don't see a big difference between the two.

I missed that.

I said I don't see a big difference between renewal versus pricing for new leases at this point.

All right, well, thanks, guys.

At this time, there are no further questions in the queue. Ladies and gentlemen, thank you for joining today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.