Essex Property Trust Inc (ESS) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Essex Property Trust Inc third quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Keith Guericke, for Essex Property Trust. Thank you, Mr. Guericke, you may begin.

Thank you. Welcome to our third quarter earnings call.

This morning we will be making some comments 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 risk and uncertainty, which could cause actual results to differ materially. Many of these risks are detailed in the Company's filings with SEC, and we encourage you to review them.

Joining me on today's call will be Mike Schall, Mike Dance, and John Eudy. John will be available for Q&A after our comments.

First of all, I would like to thank all of our associates in the field. Given the tumultuous operating environment that we faced this year, I think they have done an excellent job of providing service to our residents, and maintaining high occupancy in our properties, which stood at 97% at the end of the third quarter.

We reported core results for the quarter that were at consensus, which reflected the revenues for the quarter down 4.7% and our continued focus on occupancy, which ended the quarter at 97%. We've continued to focus on and work hard at maintaining a high occupancy. Our markets have been as impacted as any by job losses. What we have going for us is we do not have significant new supply of either single-family or multi-family units, as a percent of existing stock.

While we do believe we have not hit bottom yet, we do see some improvements in our market. Let me highlight some of these improvements. As I mentioned on our last call, we felt our California single-family markets would stabilize ahead of our other markets, due to the lack of excess new supply. It appears that the bottom occurred in Q1, 2009, for prices. The trend of increasing transactions and higher median prices continued in Q3.

Transactions during Q3 were up year-over-year by 10% in northern California, and 11% in southern California. in Q3, median prices in northern California were down 15% from the same period last year, but up 22% from the bottom in Q1 this year. In southern California, median prices were down 10% from the same period last year, but up 11% from the bottom, which was Q1 this year. In both regions, year-over-year price comparisons in Q4 will be positive.

In contrast, prices in the Inland Empire were down 29% from the same period last year, and down 4% from Q1 this year. In Q4, median prices will still be down over 30% from the previous year. We believe that single-family markets must stabilize before we see improvement in the economy as a whole.

In addition to the improvement in single-family housing, we are seeing market occupancy increase. We have chosen a high occupancy strategy but in addition to that we're seeing reports from various services that the overall market occupancies are increasing as well.

In addition, we believe the full impact of the stimulus package has not been felt yet. Market rent that we projected in our expectations in southern California were overdone. Frankly, they're coming in down less than we originally thought they might, and that represents about 50% of our portfolio. That's not to say that market rental rates won't continue to drop in 2010. We do know that we have in-place rents that are greater than market rents as of December 31, 2009, that will continue to impact our rental revenue in 2010.

Let me quickly update what we think cap rates and how we look at cap acquisitions this year. Cap rates on current economic rents have remained lower than we expected. In Seattle they range from 5.75% to 6.25%. In northern California, 6% to 6.5%, and in southern California cap rates range from 6% to 6.75%.

As I said on last quarter's call, I think cap rates are going to stay in the current ranges for the following reasons. Operations and occupancies aren't that bad. Lenders will work with borrowers who have maturing loans, and the GSEs are continuing to furnish debt, currently in the about 5.5% range. And if you were to finance (inaudible) at a 70% LTV around a 6.5% cap, that is going to produce about a 10% cash on cash return. So we think there's lots of demand for that kind of opportunity.

And finally, we don't think sellers are going to transact at high cap rates when expectations that things are getting significantly better by 2011 and 2012. Despite all that, we are seeing more opportunities, and expect to have several transactions in contract before year end.

Quickly going to development, please refer to our schedule on S-9 in the supplemental financial package. The projects under development are on track, and we expect them to be delivered in the first half of next year. Of the total cost to complete, approximately $40 million is being funded by a construction loan. The remainder is being funded by the balance sheet.

In addition, I think we're being very conservative. We are not capitalizing interest or overhead to the category titled land held for future development or sale, which is the single biggest category we have. We will not have any additional starts this year. However, we are going to continue to evaluate the projects under the predevelopment project category, and if we see appropriate opportunity in the coming year, we could start one of those projects.

Finally, as part of a systemic annual review, we evaluate all of our real estate for possible impairments as well as viability of the project. As part of that review this quarter, we took an impairment charge on two development properties in the amount of $6.7 million. We believe that remaining projects on the balance sheet are viable and do not anticipate any further write-downs.

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

Thanks, Keith, and thank you, everyone, for joining the call. Our third quarter results were largely as expected. The third quarter is critical for us, as it contains most of our lease expirations and our highest turnover. The 4.7% decline in same property revenues partially relates to this increased activity.

During the quarter, market rents increased slightly, providing strong evidence of market rent stabilization and leading us to believe that the worst is behind us. Although the country continues to lose jobs, improving consumer sentiment and the ability to rent in better locations at lower rent, appear to be stabilizing factors.

It is also worth noting that consumers have become much more knowledgeable and savvy as it relates to shopping for an apartment, often visiting several properties and utilizing the Internet before making a choice. The pipeline of new apartments and condos being rented as apartments is now being delivered, a trend that will continue into 2010 and will affect the timing of the recovery in each west coast market.

As you know, each quarter we publish our ethics market forecast for the coastal markets, which is included in the supplemental financial packets on our website. We've made several minor revisions to this document, which I won't go through now. However, the bottom line is that we have adjusted forecasted market rents in 2009 to decline 8.8% from -- this was December 2009 as compared to December 2008 point-in-time market rents.

In the Essex portfolio, market rents declined approximately 8.1% from December 2008 to September 2009. This is a smaller reduction in market rents when compared to the 8.5% decline in market rents from December 2008 to June 2009. We're pleased to report that this is the first quarter since 2008 that market rents have improved, albeit slightly. At September 30, the in-place or scheduled rent on the Essex portfolio, ignoring concessions, exceeded market rents by 4.7%, which is down from 7.4% as of June 30, 2009, and 7.1% as of March 31, 2009.

Home purchases represented 10.1% of our move-outs, versus 9.9% last quarter and 9.6% in the third quarter of 2008. March 2009 represented the low point in move-outs to purchase homes at 8.5%, the high point of 17.7% of move-outs to purchase homes was reported at the peak of the no document, no down craziness, which occurred in Q2, 2007. We continued to use concessions on a limited basis for all that the properties at lease up, and we expensed concessions up front, a more conservative approach than most other companies.

We had two properties in lease up during the quarter, both in southern California and both owned by Fund II. Studio 40-41 is now 88% leased and 84% occupied, and Cielo is 62% leased and 55% occupied.

Now I will briefly review each major part of our portfolio, starting in Seattle. Again, referring to the Essex market forecast in the supplement, we increase our 2009 job loss estimate for Seattle to minus 48,000 jobs lost versus 40,000 last quarter, and have adjusted our market rent decline -- this is projected to December 2009 versus December 2008 -- to minus 13.5% and maintain market occupancy forecast at 93%. The labor force has grown at a much higher rate, indicating a stronger labor market in Seattle as compared to the Nation. Export trade may be a future driver of employment in Seattle due to improved global growth and a weaker dollar.

We continue to remain cautious as the predominantly apartment pipeline continues delivery through mid 2010, primarily in downtown Seattle and Bellevue. Approximately 1,400 units opened in the Seattle area this quarter in the 100-plus unit market, and there are 3,500 condos and apartment units that are near completion, again primarily in Bellevue and downtown Seattle.

In northern California, our forecast job growth in northern California, again referring to the Essex market forecast in the supplement, remains essentially unchanged from last quarter. We are maintaining our guidance to rent declines of approximately 7.6%. Oakland has dropped from minus 10% to minus 8%, and San Jose has increased the estimated rent loss from minus 8% to minus 10%, and we've increased our expectations of market occupancy by 40 basis points to 94.4%. Job losses are slowing considerably.

Silicon Valley has our highest exposure to H1B visas, fewer visas have been issued this year, 45,000 versus a 65,000 cap, and those lost jobs translate more directly into lost households as they are forced to leave the country. Minimal residential supply and rising home prices and improved jobs point to improved market conditions in mid 2010.

And in southern California, we have raised our job loss estimates in southern California to negative 208,000 or 2.9%, from negative 196,000. Job losses began earlier in southern California as compared to Seattle and northern California, and have slowed dramatically in 2009. Our job loss revisions in southern California are not material relative to the 436,000 cumulative job losses that have been experienced in southern California since Q1, 2008.

Rent declines also started earlier in southern California, given the renter base more time to adjust, moving from the outlying areas to higher quality apartments in better locations given lower rents. We now forecast rent declines of 7.2% versus the prior forecast of 9.5% in southern California, and have increased our overall market occupancy estimate 20 basis points to 93.8% due to a 50 basis point increase in Orange and Ventura Counties.

The supply pipeline is fully delivered in Ventura, and near completion in both San Diego and Orange County. In LA County, the supply pipeline has more deliveries than downtown, including 1,100 units in six communities in the CBD to be completed over the next two quarters. West LA and Woodland Hills supply pipeline will be substantially completed in the next few quarters.

Improving occupancy is expected to return in mid 2010 in those markets with the least new supply, and late 2010, early 2011 in the other sub-markets. Thank you for joining the call today. I would like to turn it over to Mr. Dance. Thank you.

Thanks, Mike. Today I will start my comments with the highlights of the capital activities that occurred during the quarter, and finish with an update on the revisions to our 2009 guidance.

During the quarter, we issued approximately 1,131,000 shares of common stock at an average price just over $75 a share, and the proceeds were primarily used to retire $82 million of the series G convertible preferred stock at a yield of 7%. Year-to-date, the retirement of the series G has added $50 million to our net asset value, while reducing our fixed charges by approximately $7 million per year, and increasing funds available for common stock distributions.

At the end of September, we closed on a $40 million fixed rate secured loan due in 2019 at 5.4%, or approximately 200 basis points over the 10-year treasury. As of September 30, we have cash and marketable securities, plus capacity on our lines of credit that totals approximately $500 million.

We recognize that our current liquidity and our modest leverage of 42% debt to total market capitalization has some dilution in the short term, and we believe the long-term benefits of this access to capital will become apparent as we deploy it to investments with attractive deals.

We are currently in the process of obtaining a new, unsecured facility to replace our current $200 million facility that matures in March 2010. Preliminary feedback from expected participants has been very positive. We expect the financial covenants to be comparable to our current facility, and we will disclose the pricing terms of the new facility after our commitment is finalized.

I will now finish my comments with some updates in the 2009 guidance. Our 2009 FFO guidance, excluding non-routine items, has increased by approximately $0.04 per share from the guidance provided in August. This increase in guidance is primarily due to the firming of market rents during the quarter, while maintaining higher than market occupancies.

Our current estimates for year-over-year same property revenues will be down approximately 3.5%, and same property net operating income will be down approximately 5.5% in 2009 compared to 2008. We expect a $250,000 reduction in the fourth quarter's general and administrative expense, as a result of the cancellation of the equity based plan that was described in our press release. Accretion from the capital activities described earlier will also be slightly accretive in the fourth quarter and year to date results.

Our fourth quarter's core FFO is expected to decline approximately $0.10 per share from the core FFO in the third quarter. Results in the four quarter will be negatively impacted by the continued convergence of the in-place ramps and economic ramps, which is expected to reduce net operating income by almost $2 million or $0.07 a share. The increase in our outstanding debt and the reduction in capitalization of interest on the development pipeline will increase interest costs in the fourth quarter by $500,000 or approximately $0.02 per share.

As Keith mentioned in his comments, we have stopped the capitalization on interest and overhead costs on the $66 million investment we have in Landhill for future development, until such time as the San Jose and Moorpark developments become economically feasible to start planning construction activity. As a result, our run rate on capitalized interest is approximately $2.5 million per year, which compares favorably to our peers with similar size development pipelines.

Savings and general administrative expenses and the reduced series G dividend will be more than offset by dilution from the additional common shares outstanding. The negative dilution from the additional shares outstanding will continue until such time as the current cash balances are accretively invested.

At the beginning of the year, we provided a range of $1,100 to $1,400 per door in expected capitalized expenditures for the same property portfolio. This wide range was predicated on the expectation that we could obtain attractive bids for oil-based roofing and asphalt projects. The assumption that the drop in oil prices and the recession could reduce these costs significantly has not proven to be the case so far. So we will perform these improvements in the normal course of our business.

Capitalized cost per door in 2009 are expected to be less than $1,000 per door, which includes our estimated revenue enhancement capital spending for the year. Approximately half of our controllable expenses are comprised of maintenance and repairs and turnover cost. Year-to-date we have spent approximately $890 per door on repairs and maintenance expense.

This ends my comments, and I will turn the call back to the operator for questions.

Thank you. (Operator Instructions). Our first question comes from the line of David Todey with Citigroup. Please proceed with your question.

Good morning, guys. Michael Bilerman is here with me as well. My first question has to do with your occupancy strategy and bulking up. And I'm wondering, what's the signal about the next six to nine months relative to that strategy, and how would you describe the cost relative to dropping concessions?

This is Mike Schall. I would say that our strategy is changing, and earlier this year it was pretty clear that rents were headed downward and it was our choice to hit the bid, find out where people were leasing apartments, and essentially maintain occupancy at that level. Not dissimilar from what all the investors do with common stocks. They either hit the bid or they don't. But I think it's a sense that the market is going down, they tend to want to execute on what is available in front of them.

So that was pretty clearly the case earlier this year. Obviously with market rents flattening and actually up a little bit in the third quarter, that strategy needs to change, and we need to be more, hold the line more or push rents to a certain extent, which we have tried to do or which we have done -- actually did during the third quarter.

You will note that, actually the turnover, we did, especially in southern California, you will note that the turnover rate increased a bit in southern California as we were trying to push rents a little bit. And we had -- we're talking about $10 to $25 off in most cases. And we found that it's difficult to do in this environment.

So you saw a little bit of us holding the line on, especially the properties that are located away from the new lease ups in the marketplace, since that changes the dynamic of the market. And we had some success -- not a lot of success -- in terms of giving a little bit as to occupancy and holding rents. But I think, as conditions improve and we expect them to improve throughout 2010, that our occupancy first strategy will moderate a bit.

I guess I would add one other factor, and that is there is an element of seasonality in our west coast markets, particular in Seattle. And as a result, going into the fourth quarter we want to maintain high occupancy just sort of defensively because, if we do have any significant amounts of move-outs, obviously we control our expirations but if we have significant amounts of move-outs that are not expected, it's difficult to correct in the fourth quarter.

Keith, this is Michael Bilerman. I just had a follow-up. As you think about the OPP plan and terminating that, I recognize the hurdle rate would have been probably about a minimum of $130 stock price by next December, and while we all can hope that that's the case, that's probably not fully in the cards at this point. Just how do you think about, I guess, terminating it but also putting in place a new plan to -- for intentive (inaudible) for the team?

Well, I mean, you said it well. We saw the hurdle and we recognized that it probably wasn't the best plan out there, and frankly we had the ability to write it off against some other revenue we had this quarter. We don't have a plan in place. And we're going to evaluate all the various options we have there.

We have about a (inaudible) of about 20 people who are VPs or more, and we're very concerned about the mid-level people. We want to make sure that they are compensated and that they have long-term goals and long-term equity comp that's there to keep them focused and in place. So, we don't have anything currently. We're evaluating the opportunities, we're working with our comp committee and we'll probably won't put anything into place until some time next year, just because we want to make sure that we've evaluated everything.

And there's a positive G&A impact in 4Q and next year, right? By accelerating all the vesting-- not vesting but termination?

That's correct. If we did not meet the price target by December of 2010, then we would have had to take the charge for the plan at that point in time, which would have been a couple million dollars.

So, recognizing that the plan was not going to be --or that the chances of the plan would be a success and writing it off in the time that we recognize it, much like a real estate project. We recognize a real estate project is not viable, you take that charge in the period you recognize it. And so we really equated the OPP plan very comparably and said, it's not going to be successful and let's terminate it now and then that removes that charge for next year.

Okay, thank you.

Our next question comes from the line of J Habermann with Goldman Sachs. Please proceed with your question.

Good morning, everyone. Keith, I know at the start of the year you were expecting rents to be down about 10% across your markets, and I know you're starting to see a bit of an inflection point in obviously the changes you referenced. But I guess as you look out to next year, can you speak to the impact of what you referenced in terms of single-family perhaps, homes being rented, condo rentals as well. And then also can you address the stimulus impact that you referenced in terms of, how much of an impact do you think that will have on California and the unemployment situation.

Okay. Well, I'm going to maybe bifurcate this and let Mike Schall talk about some of that because clearly that's his bailiwick, but maybe going to the homes and the stimulus. First of all, in California, because of all the craziness that we have with respect to our environmental issues and just bureaucracies, a lot of the shovel-ready projects that were supposed to be kicked off immediately were not kicked off because they had to go through the process. They had to go through the bureaucracy.

And so there are numerous road, transportation, various projects that are on the table to be -- that should have gotten kicked off but haven't gotten kicked off, it looked like they will be funded. I think only, something like 20% plus of the stimulus package has actually been committed or spent to this point. So we believe that there's going to be pretty significant spending going forward that's not going to fall off the table the first quarter of 2010. It's going to go through 2010, and hopefully be there until such time as we see some decent recovery in jobs later in 2010 and 2011.

With respect to single-family, I mean, what we look at -- and everything when we talk about housing and when we talk about new supply, we don't talk about new multi-family supply by itself, and the reason we don't is because we recognize that all supply, all housing competes with itself. And so all the numbers we've ever given you guys has been total new supply, single-family, condo, multi-family, rental. And if you look at what's in our markets at three tenths of 1%, new supply -- that just is not going to move the needle because it's all getting lived in.

And the fact that we've get the single-family homes -- now we have our supply is down to historical lows and obviously we probably have another round of foreclosures coming at us. But the market seems to be absorbing that stuff and it is not sitting out there vacant. And the stuff that is vacant, as I mentioned in my comments, is out in the Inland Empire, out in the Hinterland, the Sacramento Valley, and that stuff is not competing with our portfolio.

So I just -- I don't think that there's going to be another late down with respect to those two issues.

And you mentioned, just to follow-up, you mentioned a gap, I guess versus your in-place versus current market, but do you think market rents at this point have bottomed. Do you think that, again looking out to 2010, are you expecting market rents to be much lower than the current levels?

Jay, this is Mike. We don't see a lot of movement either direction. I think things could trend a little bit lower, given especially in the areas that have the significant development activity, so Seattle once again -- I mentioned those development numbers that are now being delivered.

We're sort of in the worst part of the cycle when it comes to development deliveries in Seattle, less so in southern California and less so in northern California. So we do see some weakness in the markets that are competing directly against newly-developed products.

So the best estimate I would have is, I think that the first couple of quarters of next year will be maybe a little softer, and we see firming toward the end of the year.

And just quickly, the unsecured bond, are you still holding those or are you planning to dispose of them in the near term or do you think you'll hold them until your exchangeable notes come due next year?

They're yielding anywhere between 5.5% and 6.5%, which is pretty attractive compared to money market funds, so until we have investment opportunities that are more accretive than that, we will continue holding those until either maturity or until the investment opportunity gives us a reason to start liquidating that position.

Okay, thank you.

Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.

Thank you. Good morning out there.

Hey, Alex.

Good morning.

Just quickly, just two topics -- the first one is, as you guys, obviously it sounds like the banks are becoming a little more copacetic on the line of credit. What are you hearing from your bank friends as far as opportunities for product that is sitting on their books, where they're on the short end of the loan and they're looking to get, take over the property and get it to better hands? Are they speaking to you guys at all or are they still trying to sit on it and hope that somehow it works out on its own?

Obviously we've got good relations with all of our line banks and others. On the development side, Mr. Eudy's seen some opportunities where they've had land REO where it appears that there might be some give in the pricing, and we're looking at some of that stuff.

On the note side, we have approached several lenders who have had loans that were on apartments or condos that were unable to be refinanced. Unfortunately we've never been able to sort of close the gap and get to the place where it made sense for us. So yes, we're seeing it. In my comments, when I was talking about cap rates -- despite the fact that we're-- I think we have banks that are reluctant to do anything and take the write downs because they don't have to and they're going to kick the can down the road.

But we are seeing more opportunities. it's just the pricing hasn't come in yet. So I would expect that we will continue to see opportunities, and I'm hopeful that the fourth quarter there might be, it's not going to be a disgorgement but that there will be some sort of cleaning up of balance sheets at some minor level, and we might see one or two opportunities, but it's not going to be massive in any way.

Okay. And the follow-up question is just on the capital front. The exchangeable bonds, I think they're puttable, I think it's next year. Just want to get your sense if you guys would consider tendering for them, and then also just further out on the capital plans, your general thoughts on other forms of financing, converts, preferreds. And then also how much is remaining on the ATM and if there's anything in the guidance for the ATM.

Those are a lot of questions. Let me see if I can get them all straight. On the first, the indicative value of our bonds, if we were to tender, I think the bid is close to $1.04, so paying a premium for bonds with a three and five eighths coupon is not very attractive execution to us, so we will wait until those mature.

On the available capital, we do consider all of those with our current cash position and marketable securities position. I'm not feeling that we need to,-- and if we were to do it, in a new convertible bond or a convertible preferred or an equity issuance, I don't know where I would accretively put the cash.

So to answer your question, we're not going to be accessing the ATM until we have the investment opportunities that make that work for us, and I think we still have about two thirds of the ATM shares still available to us.

Great, thank you.

Our next question comes from the line of Karin Ford with KeyBanc. Please proceed with your question.

Hi, good morning. I wanted to ask about investments. I thought I heard Keith right that you guys are looking pretty hard at some transactions and might have something in the hopper for late this year, early next. Could you just talk about what markets those would be in and what type of volumes you guys are looking at?

Well, I mean, we're -- one of the ways we try to make our investment decisions is we look at growth rate and we try to allocate our new capital commitments to the best growth rates out there. Right now, we're seeing growth rates -- it's pretty tough to look out very far and see any robust growth rate. So we're looking to cap rate.

And we have a couple of deals that we're looking at. We think that we will have a few in contract by year end. I don't think it will be greater than $60 million to $70 million, max. And we're looking at cap rates and trying to maximize our cap rates, and the cap rates I gave are what we're seeing out there. And if we can get something at that top end of those cap rate ranges in the bay area -- 6.25%, in southern California, 6.25%, 6.5%, we would think those would be successes given that we can get GSE financing at about 5.5% today.

Helpful. Just one other for my follow-up, given the importance of the single-family market to the recovery, do you think there's any chance that you could see the recent improvements there fall back again once the tax credit expires, or has that not really had much of an impact given the price of housing in California?

Karin, this is John. Look, as you know, in our prices, in northern California, southern California, it's just not a big component. It's not irrelevant, but I don't think that ending would really change the magnitude of the direction of the home prices growth.

Okay, thanks.

Our next question comes from the line of [Saroop Yuno] with Morgan Stanley. Please proceed with your question.

Hi, this is actually Paul Morgan. Saroop is here too. I just wanted to go back to the acquisitions. Keith, the tone I think from the last call, I felt at least, was pretty negative about the prospect for acquisitions given where cap rates had gone, and your commentary this morning is similar in terms of where cap rates are. But more constructive on acquisitions. And I'm wondering whether, is it just opportunity specific that you're seeing or did you kind of change the way you're looking at your cost of capital and how accretive it might be to do deals?

I think it really relates to opportunity. We were, as of the third quarter -- or excuse me, last quarter when we made our comments, I think I, and I don't remember the numbers now, but as I recall, I ticked off how many transactions had been done in each market year to date, and it had been a handful, and there was pretty significant demand out there for that. So the ability to compete for those transactions in the marketplace was difficult, and that was the reason for my negative view.

As I said, we're just seeing more transactions come to market, and they're coming from a lot of different directions. We're seeing, in a couple of cases some lenders who are active, we're seeing some smaller players who have properties that maybe they're willing to take a haircut on. Just more players out there with opportunities, and that's the reason for my optimism, not that we're changing anything with respect to our view of the world.

Is there any bias towards As or Bs?

We have always focused on market first and then generally been a B player. Obviously if we can buy As in similar pricing as Bs, we're not opposed to that. But I think everything we're looking at now is primarily in the B bucket.

Okay. And my follow-up is just on whether you're seeing any noteworthy shifts and reasons for move-out over the past quarter or two, and whether that might vary by market.

This is Mike. I'll comment on that one. Actually, we have seen things much more normal in terms of move-out activity. The home purchase number, as I mentioned in the script, were back to where they were effectively a year ago. Losses due to loss of job were down. They're still higher than they were a year ago. But they're down from where they were earlier this year.

So I think that pretty much everything across the board has gone back to a more normal pace, which we think is good. I think that when you look back at what happened over the last nine months, you realize how unprecedented it is and how it affected virtually every aspect of our business. So, and I think that what we saw in the third quarter is things resuming to a more normal pattern.

Great, thanks.

Our next question comes from the line of Michelle Ko with Bank of America, Merrill Lynch. Please proceed with your question.

You have no development starts right now, but I was wondering if you could tell me about how you think about development, at this time, and that versus acquisitions right now and into next year, how you view it and if you think you might be more interested in acquisitions next year over development.

This is Keith. We recognize that development has some risk and as a result of that we want to see a premium to that. A premium to the acquisition yields that we can see out there. As I said, we're seeing in the low six yields on acquisitions.

Developments right now are pretty tough. I think most everything that you underwrite is probably in the 5 range, maybe a little bit better than that, but it's less than the acquisitions. So, we're truly going to be focused on acquisitions.

And as I said, we have two opportunities that are in our predevelopment pipeline. Both of them are unique, and it's possible that we could see rent spikes in either of those communities that would cause us to -- (inaudible) coupled with reduction in cost, that would get us to those kind of yield parameters. But I think you're going to see our external growth primarily come from acquisitions next year.

Okay, great. And can you give us more color on the asset that you sold in Seattle this quarter?

It was a small property. Over time, through small tools or acquisitions of various properties we've acquired a number of properties that were smaller in size, 50, 60 units, and they're just not very efficient for us. And during the beginning of the year, we chose to eliminate some of the smaller properties.

I think over the first part of the year, we sold three or four other properties that were all in that sort of smaller outlying area, and this sort of fell into that same kind of category, it was a small property and probably not very efficient to run. And we were able to sell it at a relatively good cap rate in the mid 5 range. So we thought that was a good execution.

Mid 5 on an economic basis?

Yes.

Okay, great. Thank you.

Our next question comes from the line of Rob Stevenson with Fox-Pitt Kelton. Please proceed with your question.

Hi, good morning, guys. Question for Mike Schall. You guys have done a good job year-to-date on the expenses, up less than a percent on the same store. Yet when you take a look and think about your controllable expenses, where is the opportunity to continue to drive those down, and where do you expect to see the most upward pressure going forward?

Sure. I'll comment on that. Actually, so we had 1.8% increase in expenses. Actually most of that was due to technology initiative and a more conservative capital policy, so considering those items, rents were very flat.

And part of that is driven by our on-site staffing, which we have a salary freeze in place this year and a hiring freeze. So, some of that cannot be sustained going forward. But I don't see a lot of pressure on salaries, either, for 2010. So there will likely be a small increase there.

As you know, most of our portfolios in California -- California has prop 13, which limits property tax increases to 2%, and there is some roll forward from the past, so we expect property taxes will go up somewhere in the neighborhood of 1.5% type of range going forward into 2010. Utilities were down this year. I don't see pressure on utilities next year, especially given the price of natural gas. So I think that remains relatively flat.

So I guess to answer your question, I would say that we don't expect a sort of the same level of, essentially flat expenses going forward. However, we don't see a lot of pressure on expenses. If you say that the typical expense increase is around 3%, I think that for the foreseeable future it will be significantly less than that, but it probably won't be zero.

Okay. And then just lastly, I mean, in terms of -- when you are looking at acquisitions today, I assume that 2011 is probably the first year that you would have a positive rental rate growth on a year-over-year basis modeled in. How aggressive do you think that the bounce would wind up being in 2011 and 2012? Is it, it's your point is this modeling in 3% or 4% rental rate growth or are you going more aggressive than that at this point, coming off the bottom and given the supply in the market?

This is Mike again. Reasonable people can disagree as to this answer, so anyone else want to chime in, that would be great. But our view is that given that we are going to deliver the supply pipeline, both single-family, multi-family over the next year or so, I think there's a very high likelihood that you get job growth and virtually no supply sometime out there -- I don't know exactly when -- 2011, 2012. And the nice thing about this business and being in a supply-constrained markets is, we don't need that much demand growth in order to solidify things and take occupancy rates into the high 90s.

Now, when that has happened in the past, that has been followed with very significant double-digit type rent growth, and I'm not sure that's going to happen, but that would be my opinion, and as to what we would buy. Now we have this debate a lot internally, and there is some dissension from this, I think John Lopez has, and he's here so he can comment. But he doesn't have market rents, the overall market average rent growth growing quite that much. And so I think that asset selection within markets can get us to the higher end of what might be the otherwise sort of market rent growth rate.

But I see, in 2011 and 2012, I see very high rent growth. I see virtually no supply -- in fact, I was looking at the numbers that are in the supplement, where you have the single-family supply in our market at around 0.2%. We have not seen that little supply on the single-family side that I can remember at any time in our career. So I think there's a very significant bounce that is before us at some point.

Anyone else want to comment?

I think you said it well.

Thanks, guys.

Our next question come from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Good morning, guys. You talked a little bit on the transactional front in terms of acquisitions, I think last quarter you had mentioned you were looking at possibly rolling out a new fund or a joint venture possibly. Obviously the stock price is up now, just kind of wanted to get your thoughts on how you're looking at acquisitions going forward whether on balance sheet or you're still trying to progress with that fund.

Well, clearly cost of capital is important to us, and the other thing that is important to us is the number of transactions available. Right now, given the very few transactions available and at cap rates that, given our cost of funds are combined costs with equity and debt, probably we would tend to be balance sheet priors for the near future as we see opportunities increase.

Clearly we continue to look at the fund business, we continue to look at joint ventures. But the reality out there is, the structures and the cost and the promotes that were there a couple of years ago aren't there today, and frankly we are not going to do these things unless they make sense for the Company. We aren't inclined to do something whether it's not a decent promote or a decent opportunity for us to make or promote, and I think that the money capital partners are out there today are shell-shocked and they're keeping their money pretty close to their vest. And I think that the balance sheet is going to be a better place to finance opportunities in the near-term.

Okay. Where are returns right now, where are return expectations rather? And this is the follow-up question. I was wondering if you could talk about the gain release on the portfolio is right now.

I gave that. Effectively, gained a lease what I was talking about when I said in the script that in place or scheduled rents on our portfolio, our properties, again more in concessions, exceed market rents by 4.7% as of September 30. And that's down from 7.4% as of June 30, and 7.1% as of March 31, so essentially what happened last quarter is market rents were flat and we were burning through gain to lease.

Okay, thank you.

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

thank you. Mike, you mentioned, and I apologize, I missed this, and so just don't take too long to respond because everyone else probably heard it but me. You said down 8.1% in Essex markets, and you said that was a good thing. I know it was comparing to something else but can you just fill in that blank for me?

Yes, I'm sorry. I think it was a little rough there. Basically in our portfolio, the Essex portfolio, market rents from December 2008 to September 2009 have declined 8.1%. If you look back at June, it had declined 8.5% from December 2008 to June, so actually we picked up about 40 basis points in the quarter. So it's the first time that we've had, sort of market rents improve even though it's a small number. It's the first time since 2008 that we've seen that, and again, we adjusted downward from 9.9% to 8.8% our market rent forecast that's in the supplement.

Okay.

Two positive pieces there.

Got it. And then as a follow-up -- I guess when we were looking at our NAV model, we have this adjustment for prop 13. And in light of everything that's happened to property values and such on the west coast and elsewhere for that matter, how has this property tax catch up issue changed in your mind? Is it still -- do you care to sort of comment how much of an impact it might be to somebody's NAV model.

Yes, this is Mike Schall. We had got as high as about $20 million, and we think kind of the best estimates now is around $7 million. There is discussion out here on the west coast about a split rule and some changes to prop 13 because as you all know, California has some minor budget issues. And so that discussion is out there now.

Having said that, that same proposal has been out there many times before, and it's been defeated each time. But the prop 13 adjustment overall is about $7 million currently.

A split rule? I'm sorry, I don't know what that means.

Yes, split rule means that commercial property would be treated separately from residential property. Now, where you put apartments in that process, it's debatable.

Okay, understood. Okay, thank you.

Our next question comes from the line of Michael Levy with Macquarie Capital. Please proceed with your question.

Hey, guys. Most of my questions have been answered but I have some follow ups. The first follow up is David Todey's earlier question. Looking at the results so far this quarter, can you give some color on renewal pricing and turnovers, specifically for those tenants that took advantage of the lower rents and moved in once the markets started to head south in early October? Are they moving out in any greater number, and for those tenants that renew, at what change to the effect of rent are they renewing at?

Yes, this is Mike. I'll comment on that. Renewal rents, so if the market rent loss is let's say on average 8%, typically we're giving up about half of that or around 4% on average on a renewal. Having said that, we're getting -- the renter is becoming more savvy out there, more knowledgeable, and there's more pressure to move those renewal rents closer to the marketplace.

And I think that, again, you saw a little bit of that in southern California, which is the market that we sort of chose to push rents a little more aggressively than northern Cal and Seattle. There was a, sort of a related blip up in turnover as a result. So it would continue to push that equation but if I compare now to late 2008 or early 2009, the marketplace sort of wasn't educated on where market rents had fallen, and therefore you were able to sustain renewal pricing or keep renewal pricing higher than I think you are now. You are getting more pressure now as the renter becomes more savvy and more understanding of the marketplace.

Oh, okay. But more narrowly than that, that's helpful but more narrowly than that, it sounds like you are saying there's no real difference between whether someone moved in two years ago and his lease is up for renewal for a second time or whether the person has moved in a year ago. Would that be a fair characterization?

Yes. Every situation is a little different, and it's hard for me to generalize on what might be happening because the person that moved in two years ago in Seattle is a different scenario than someone that moved in two years ago in southern California. I don't know how to answer it in any more detail.

I think that, we look at the relationship between the expiring lease, clearly, and the current market rent and try to make an informed judgement and we try to give them a break almost in every respect, a little bit of a break. Your market rent is, you may be up to the first third of that difference between expiring lease and current market rent. We try to renew them at that level, maybe we give them a gift card, maybe we don't. And give them good news as a result of that because we're concerned about them having them go out onto craigslist or some of these other sources, and see what market rents are. We would rather close them at that level and save the vacancy and save the turn cost.

So, hopefully I'm answering your question. It's very difficult for me to address your very, very specific question because the world is much broader than that.

Okay, that's fine. And as a follow up to Rob Stevenson's question, do you think that the higher rents are going to come alongside higher incomes for your renters or do you think that these renters will simply end up spending a greater percentage of income on rent out of necessity? Maybe it's a question for John more than anyone else. But I was just curious to hear your thoughts.

Actually, this is Mike. And John is sitting right next to me, so he can comment. Median incomes have gone down a couple of percent here, but rents have gone down a whole lot more. So rent to median income ratios are near I'd say, John, 20-year type lows, if you look at that relationship? And so the fact that the renter has to pay a little bit more as rents increase, doesn't concern us very much because they are still way below what they have historically paid in rent relative to their income levels over the past several years.

And I would just add to that, across our portfolio, this is probably the best conditions going into recovery for that metric. And given our expectations of income growth, it won't take much claw back of that to get well above average rent growth.

Okay, that's helpful. One final question, if I could. I recognize that Essex is conservatively accounting for concessions up front but can you please remind me whether tenants that are being given concessions are seeing it as a free month or are the concessions being given as a discount to the monthly rent?

I don't know exactly the answer to that. The answer is both. But what exact relationship it is, I'm not sure. I would say it's about half and half. Again, we believe that the renter is most concerned about the amount that they're writing on the check each month right now, and so we will -- it's a little bit different by location but there are some locations that recurring concessions have been effective.

I would say the increase in concessions just for the quirks to comment on that-- relates primarily to some assets that are in a college town, actually it's by UCSB, and college towns tend to turn virtually their entire apartment building during the summer. So, that was sort of a unique one-time-only type of occurrence there.

Thank you very much.

Our next question comes from the line of Paula Poskon with Robert W Baird. Please proceed with your question.

Thank you very much. Good afternoon. Are you considering any acquisition opportunities that would take you to new markets?

No. Not right now. Again, we recognize that our west coast markets aren't the only supply-constrained markets in the country, but there's none that we're not in that are close enough to make it reasonable. So we would have to go all the way across the country and we are not in a position to do that now.

All right, thanks. How would you quantify what you think the opportunity is in the portfolio currently for increasing your redevelopment investments, and how would those opportunities stack up among your capital allocation choices?

This is Mike. We have scaled back our redevelopment spending over the last year or so, primarily because as rent's compressed and the rental compression issue has also compressed the returns on redevelopment. But also, maybe more fundamentally, ripping apart buildings when tenants have lots of choice is not something that we think is a good idea. So we have scaled that back pretty dramatically. I think we did just a handful of unit turns last quarter.

In terms of the opportunity to do it when things get back to a more normal level, we have -- we are, again, a B, typically a B quality apartment operator with exception of our development stuff in A markets. And so I think there's very good opportunities within our portfolio to rehab and improve economics and so I think that's going to be -- that's a core part of what we do and core part of what we do and we will expand once conditions are little bit better.

Thanks. Just a final question -- are you seeing any changes positive or negative in the credit quality of the applicant pool?

Delinquency rates have gone up a bit. They were about 50 basis points during the quarter. We typically underwrite them at about 25 basis points, but down from earlier this year. So we believe in trying to maintain the profile of residents, and we spend a lot of effort to do that, and so I think our vacancy rates, given what we've been through, I think are fairly modestly increased over what one could expect. So I think we have consciously retained tenant quality and tenant profile.

Thanks very much. That's all I have.

Our last question comes from the line of Andrew McCullough with Greenstreet Advisors. Please proceed with your question.

Hi, and good morning. One big picture question and a couple housekeeping items. When you look back to the `01 to `02 time frame, the last time fundamentals were really this bad, what do you see as far as change in the market rents from Q2 to Q3? My question essentially is how much of the relative stability that you're seeing right now is just due to seasonality versus demand actually improving on the ground?

Andrew, this is Mike. I think we saw -- I have a chart here somewhere on that, I'm not sure what I did with it. But I think we saw on the last cycle, that once things turn down from the peak around 2001, it was down for I believe 19 quarters, so the NOI went negative for 19 -- I'm sorry, 11 quarters. I have to find that chart. And then we had a very aggressive rebound where same property NOIs were in the double-digit range, and so -- I don't have that.

I've got it here. 11 quarters. So from third quarter of 2001 to the third quarter of 2004, we had 11 quarters of negative NOI growth and then it sort of troughed at that point in time. Then we had 19 quarters of positive growth from that point on, including several double-digit increases. So I don't know whether this follows the same pattern or not, but we had -- in fact the last two cycles we have had very dramatic double-digit type NOI growth in the course of the recovery. And just to add to that, on the last round, we lost cumulatively about the same number of jobs we have now, just over a longer period of time. It was much deeper in Seattle and northern California, but we also had more supply during that time period and more supply in the recovery period as well.

Okay. And then Keith, just on the cap rate that you mentioned at the beginning of the call, I just want to double check -- those are for average B quality product that you're targeting, right, not newer A quality stuff?

Correct.

And just one last question -- you guys said that you only had two properties in lease up and those are both in the fund, can I assume that means that the Grand and Belmont Station are fully stabilized.

Yes.

Great, thanks.

We do have one more question. Our next question comes from the line of Anthony Paolone with JP Morgan. Please proceed with your question.

Hi, this is Mike Lewis, actually, on Tony's line. I'm sorry for the false alarm there on the last question. I thought I was in the queue.

My question -- I think you've talked about in the past northern California potentially recovering faster than southern California, which is kind of counterintuitive. I wonder if you still think that's a possibility and why or why not.

Well, I think the main driver of that is, we have less overhang from the condo glut in northern California. It didn't go through that cycle as much, and also we still believe that tech export will be -- if not way ahead, a leader to recovery and those jobs are centered in Silicon Valley.

Okay, thanks, and then my last question -- your capital expenditures, I think the original guidance for 2009 was $1,100 to $1,400 a unit, which was a little elevated, and I'm wondering what's a good target run rate for CapEx, and when you expect to get back onto that pace

Yes, I talked about that Michael, on my comments. Basically the range that we gave in our guidance had the assumption that we are going to see big drops in asphalt and roofing, any oil-based product that would make attractive, so compelling that we would accelerate growths that are good for another three years, maybe go ahead and do them this year because they are going to last 25 to 30 years. And that assumption proved to be in error, at least we have not seen them yet, so we're basically on a normal CapEx. We're only going to spend, even with revenue enhancements, this year less than $1,000 per door, and we think that's a sustainable long-term rate of making improvements.

Great, thanks.

There are no further questions in the queue. I would like to hand the call back over to management for closing comments.

Thank you. And appreciate the call and the participation, and for those of you that will be in Phoenix, I'm sure we'll see a bunch of you, so thank you, see you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.