Essex Property Trust Inc (ESS) 2009 Q4 法說會逐字稿

Greetings and welcome to the Essex Property Trust Incorporated fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instruction). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Keith Guericke of Essex Property Trust, Incorporated. Thank you. Mr. Guericke, you may begin.

Thank you. Welcome to our fourth quarter earnings call. This morning, we're going to making some comments on the call which are not historical facts such as expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements which involve risks and uncertainty, and could cause actual results to differ materially. Many of these risk are detailed in the Company's filings with the SEC and we encourage you to review them. Joining me on today's call will be Michael Schall and Michael dance. John Eudy and John Lopez will be available for Q&A after the comments.

Last night we reported core results net of nonrecurring items for the quarter which reflected FFO, $0.02 ahead of consensus. Our strategy to focus on occupancy, which ended the quarter at 97.4%, was an important part of that success. Maintaining strong occupancy positions as to have maximum pricing power. Our market is as impacted as any by job losses. What we have going for us in 2010 is that we do not have significant new supply of either single family or multi-family units coming at us.

To summarize, the new housing supply projected for 2010 as a percent of existing stock by market follows, in the Seattle region, we expect to see about 0.6% of new supply, northern California, about 0.2% of new supply, and in Southern California, 0.1%. In addition, home prices and affordability are also moving in our favor. As we mentioned over the last few quarters, we expected our California single family markets to recover. The trend of declining year-over-year prices to end. This has happened.

In northern California, median sale prices are up 20% from the bottom which was in Q1. Year-over-year prices are up 9%, and transactions are up 16%. In Southern California, median sales prices are up 12% from the bottom. Year-over-year, prices are up 2% and transactions are up 27%. For the economy to recover, we believe the single family market has to recover. Let me just comment a little bit on California. I know many of you are concerned about the impact that the California budget problems are going to have on the state's ability to grow jobs and create opportunities. I don't have answers to the problem, I'd like to remind everyone that there are many positives in California. The biotech industry is flourishing in California because of the University system. Google is in Silicon Valley because of Stanford University. Large tech companies have hundreds of billions of dollars on the balance sheet waiting to be used at the right time.

There remains significant synergies for start-ups to be near our tech centers. 50% of all venture capital money is spent in California. As the Pacific Rim continues to become more important, California exports will grow with that demand. And finally, the climate and the quality of life here still beats the hell out of most of the country. With that just update on the Prop 13 issue, we still have no visibility. Both sides continue to raise a significant war chest. We assume the issue will probably get to the ballot. In our market, cap rates on economic grants have remained lower than most expected and have actually continued to trend down. In Seattle they range from 5.75% to 6.25%. In California, both north and south, the range is in the 5.5% to 6.25% range.

We are starting to see more opportunities and surprisingly we're seeing some foreclosure opportunities from the construction lenders. In the fourth quarter, we purchased a very high end condo project in Irvine, California from a construction lender at approximately a 6% cap and at a discount of about 40% to the original developer's cost. For 2010 we have a target of $300 million of acquisitions, currently we have two large transactions in contract totaling $175 million. One with contingencies removed. We'll touch on development real quick.

Refer to our supplemental financial information schedule, S-9. Projects under development are on track to be delivered in the first half of this year. Of the total cost to complete, approximately $27 million is being funded by a construction loan. The remainder is being funded by the balance sheet. Of note, total cost at Berkeley and Seattle projects have been reduced by $9.5 million. This is a result of cost efficiencies we are obtaining.

We're going to continue to evaluate our predevelopment projects. There's two on that schedule. And if we see the appropriate opportunity, we could start one of those projects in 2010. As discussed in our press release, we purchased a site in Dublin for $5 million. Our cost represents a cost of less than one-third of what it had previously sold for. We're going to continue to look for opportunistic land acquisitions in 2010. We do not have a specific goal built into the 2010 guidance.

Before I turn the call over to Mike Schall, I'd like to take this opportunity to thank and congratulate everyone at Essex for tackling the challenges 2009 threw us, working hard and doing their best to serve our residents as well as produce results for our shareholders. Now I'd like to turn the call over to Mike Schall.

Thanks, Keith. And thank you everyone for joining the call.

Our fourth quarter results followed the pattern of gradual improvement that began in mid-2009. The apartment supply/demand picture remained largely unchanged. That is, demand driven by jobs has stabilized but remains in a weakened state, given high unemployment and uncertainty. We see this continuing until job growth resumes, which we expect to begin in mid-2010. On the supply side, the pipeline of new apartments and condos being rented as apartments continues to be delivered, a trend that will continue into 2010 and will affect the timing of the recovery of each West Coast submarket. During the quarter, market rents on Essex's portfolio declined slightly, market rents were 8.9% lower at year-end versus December 2008.

We experienced the typical seasonal decline in the fourth quarter, which we planned for by reducing turnover to an annualized 45%. We continue to absorb gain to lease, which we define as a percentage of scheduled or in place rents exceed market rents. As a result, the 4.7% gain to lease reported in last quarter's call has declined to 3.8% at the end of the year. Home purchases surged in the fourth quarter, representing 14% of move-outs, versus 10% for the quarter ended September 30th, 2009, and 11% in the fourth quarter of 2008. We continued to use concessions on a limited basis in Q4 for all but the properties in lease-up, and we expense concessions up front, a more conservative approach than most other companies.

We issued earnings and guidance press releases yesterday afternoon. In addition, we provide our market rent forecast for 2010, which is included as page S-14 in the supplement. Overall, we are forecasting flat market rents in 2010. However, market rents are expected to continue a gradual decline through June, and recoup that loss in the second half of the year. Market occupancy rates declined in 2009, and are expected to partially recover to 94.5% in the West Coast markets by the end of 2010.

We have assumed that occupancy levels in our portfolio will average 96% in 2010, which remains significantly above the expected market occupancy levels noted on the market forecast, but below the 97% occupancy reported in 2009. The combination of flat market rents, a 3.8% gain to lease, and 100 basis points of lower occupancy are the primary components of our projected 5.5% same store revenue decline in 2010. Our 2010 plan assumes that operating expenses will increase from 0 to 1%.

Now I'd like to briefly review each major part of our portfolio. Starting in Seattle, in the fourth quarter, market occupancy was down 25 basis points to 93%, again, attributable to continued deliveries of new housing. On the Essex Seattle portfolio, market rents continued to decline during the quarter, and for the year, we're 15.7% below December 2008 levels. Jobs in Q4 were down 6,000, although we see signs of stability, most important, we have seen jobs in professional business services stabilize and actually increase in Q4 after falling sharply for post of last year.

Seattle lost 11% of its manufacturing jobs since August 2008, which includes a 6% loss of jobs at Boeing Seattle facilities. Going forward, the manufacturing sector is beginning to stabilize. Cumulative job losses in Seattle since August 2008 total 78,000 or 5.5%, which is the same as in northern California but greater than Southern California which was 4.7%, and the US average at 4.5%. Looking to 2010, we forecast additional market rent decline of 2.5%, with weakness in the first half and a slow recovery beginning in Q4. Job growth is expected to be slightly positive at 0.5%.

Condo and apartment deliveries are slowing down, but there are simply too many units available in the marketplace. For 2010, we see 3500 multi-family units, that's 0.9% being delivered, almost all in the first half of the year. Single family deliveries in 2010 will be at the lowest level since we tracked the Seattle market. We expect 2500 units or 0.4% of stock. We expect Seattle to be the last Essex market to recover.

Now on to northern California. In the fourth quarter, market occupancy was flat sequentially, at just under 95%, and down roughly 100 basis points from fourth quarter 2008. Market rents were down slightly on a sequential basis, mostly due to seasonality. On the Essex northern California portfolio, market rents declined slightly in the quarter, and for the year were 9.6% below December 2008 levels.

Looking forward to 2010, we expect jobs to be roughly flat overall in the first half of 2010, although the Fremont submarket will likely experience moderate losses in Q1 due to the expected closing of the NUMI plant which employs about 3500 workers. Overall, market rents in the Bay Area are expected to increase 0.2%, although we see rent declines of 2% in the Oakland MSA as a result of the expected NUMI plant closing. Northern California should be the second West Coast region to recover, due to increasing job growth in the second half of the year, along with minimal supply of new housing. We expect the better areas to be downtown San Jose, the Peninsula into San Francisco and downtown Oakland, areas that are in the heart of jobs and face little or no new supply.

Now on to Southern California. In the fourth quarter 2009, job losses in Southern California slowed, beginning in the third quarter and actually had job growth resume in the fourth quarter. On Essex's Southern California portfolio, market rents increased for the second consecutive quarter, although they were down 5.9% for the year. Looking ahead to 2010, we expect Southern California to lead the West Coast markets out of recession, all four Southern California counties are showing signs of imminent job growth primarily because job losses are abating in the lagging construction and manufacturing sectors.

The multi-family pipeline is nearing completion with only 5,000 units, 0.2% of stock, throughout the four coastal Southern California counties remaining to be delivered in 2010. As before, these additional deliveries along with the overhang of the 2009 deliveries, will slow the recovery of certain submarkets, including west LA, downtown LA, Woodland Hills and Orange County.

Thank you for joining the call. I will now turn it over to Mike Dance.

Thanks, Mike.

Today I will recap our 2009 accomplishments and provide some color on our 2010 guidance. Our 2009 core FFO of $5.43 per diluted share was down approximately 4.8% from our core FFO in 2005. Normally, a year-over-year decline in same store net operating income of 4.8% would result in a much larger percentage decline in FFO because of the negative impact of leverage from debt with fixed interest rates. However, we successfully mitigated the expected negative impact of this decline in net operating income by reducing our G&A costs by $3.2 million, and opportunistically creating a positive arbitrage from retiring our Series D preferred partnership units at the end of 2008, retiring the Series G convertible preferred stock during 2009, purchasing over $100 million in unsecured REIT bonds at an average yield at 10% and by using the proceeds from dispositions at a fixed cap rate to buy back 350,000 shares of common stock at below $58 per share.

We believe that in spite of being in markets that have felt the brunt of the economic recession, that our 2009 same store NOI decline and the core FFO decline of 4.8% will be among the better results in 2009 of our peers. Reported FFO of $6.74 per share increased by 11.8% over the 2008 FFO of $6.02. Both these years include the impact of the non-cash component of interest expense on convertible bonds. On page S-3 of our fourth quarter supplemental financial information, we provide a detailed reconciliation of non-core FFO items reported in 2009 and 2008. The mid-point of our guidance for 2010 is $4.75 per diluted share, which includes $0.16 of non-core FFO gains from the disposition of $42 million in REIT unsecured bonds sold in January, at an effective yield to put to the buyer of those bonds of approximately 4.5%. We intend to use these proceeds to invest in higher yielding external growth opportunities.

Our 2010 guidance assumes interest and other income of $13 million, which is comprised of approximately $7 million on the marketable securities, $2.5 million from existing structured finance notes, and an additional $3.5 million from new investment opportunities expected to occur in 2010. The 2010 guidance assumes a range between $4 million and $5 million or approximately $0.14 a diluted share, of dilution in 2010 from the lease-up of the 581 apartment homes expected to be delivered in 2010.

The dilution to FFO from lease-up activities is attributable to three items. First, we used the cash method to recognize rental income for free rent. So we don't recognize income until the resident makes their first lease payment. Second, we engage in significant free leasing activities and we incur normal operating expenses before the asset reaches stabilization. And lastly, two of the development sites being delivered into operations have approximately 40,000 square feet of retail space that we have assumed will remain vacant throughout 2010. The 2010 non-same property results will increase by approximately $2.2 million from not having the negative impacts from the 2009 lease-up activities at Belmont Station in Los Angeles and the Grand in Oakland.

Our 2010 guidance also assumes dilution of $3 million to $5 million from external growth pipeline that assumes we will acquire one or two additional condo developments that will be converted from their current for sale condition to rentals requiring the build-out of leasing offices and the dilutive costs of incurring upfront and operating expenses during a lease-up and our cash basis accounting method noted earlier. Additional dilution from 2010 acquisitions is expected from condo units as we convert these units to for rent. On a normal apartment development that has ground-up construction, the property and interest is capitalized while construction activities continue to occur during the lease-up activities. This is not the case for condo development.

As of the end of December, we have over $150 million in cash and marketable securities and of $200 million in capacity on our secured line and unsecured bank facility. Based on 2010 net operating income, the assets that secure the debt with 2010 balloon payments are expected to generate over $100 million of additional proceeds that can be used to fund all our 2010 capital requirements. Our guidance assumes that external growth activities will be done predominantly on balance sheet and financed with 50% debt and 50% equity. A new institutional investor fund, or a possible joint venture structure will be considered when we intend to use additional leverage and/or when fees earned from sponsorship will significantly increase the expected FFO accretion over a balance sheet financed investment.

Our assumption for interest expense is that the Federal Reserve will not begin to increase rates until after several months of sustained employment growth. Given that our rent growth assumptions do not assume increases in employment until late into 2010, we are assuming a slight 25 basis increase in interest rates in 2010 that will increase the cost of variable rate debt, and we are assuming an effective rate of 6.8% for long-term debt refinancing activities to occur in the second half of 2010. The 6.8% effective rate includes the amortization of additional financing cost from settlement payments on the forward starting swap contracts.

General administrative expenses for 2009 totaled approximately $24 million, and our guidance for 2010 assumes that $700,000 decrease in executive based compensation that is tied to achieving stated performance goals. If it becomes probable that the performance criterion for 2010 will be achieved, then our 2010 G&A costs will increase over this guidance amount. We will not be providing quarterly guidance, other than to point that we expect same-property net operating income to decline sequentially through the third quarter, with a slight sequential increase in net operating income in Q4 2010.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment while we poll for questions. Our first question is from Michael Salinsky of RBC Capital Markets. Please proceed with your question.

Good afternoon. Just on the capitalized interest front there, looks like it picks up decently, yet you're completing a lot of projects in 2010. Are we to assume that some of those projects where you stopped capitalizing interest, you're going to start capitalizing again as you move forward potentially down the development pipeline?

No, that would be capitalizing on the delivery for the first six months of the apartments that we're delivering, and then this typically stays where certain units are delivered while other construction activities are going on. So even during the lease-up, we're continuing to capitalize. In addition, when we acquire condo projects that convert from for sale to for rentals, there will be some capitalized interest on the assumed acquisitions of completed condo projects.

Okay. As you're going out buying land right now, just curious, I mean, you talked about cap rates very low in the market still. What kind of spread would you need to begin to look to develop again?

We basically said historically that we need 100 to 125 basis points. So I don't think that changes and looking at 5.5 to 6 caps on acquisitions, that's putting us in the 6.5 to 7 range on development. Frankly, right now it's hard to see those things pencil out. Although we do think that as -- if we can buy land very opportunistically, it sets us up for the future and the one deal that we did buy in Dublin was, as I said, on a per unit basis was at prices we have not seen in many, many years.

Okay. And finally, just maybe just a final follow-up question here. In terms of the line of credit there, most of the activity in the fourth quarter was put on the line. Is there a plan to turn that out? I thought on a previous call you had mentioned the plan to sell the exchangeable bonds, to plan to sell the bonds that you purchased to take out the exchangeable notes.

We sold $40 million of bonds in January, so we paid down the $10 million on the bank facility, but the rates on the Freddie-secured facility are very attractive and we'll probably try to maximize the balance on that line.

Okay. Thank you.

Thank you. Our next question is from Rich Anderson of BMO Capital Markets. Please proceed with your question.

Thanks. Good morning to you guys. Can you talk about the $175 million of acquisitions you have in contract or under contract, are they kind of core-ish or are they opportunistic? Is it a combination? What do you have there?

There's two transactions. One is very opportunistic. It's basically a broken condo project in Southern California where we would be buying it from the lender and the second deal is more of a core deal in northern California.

For the condo acquisitions that you did and maybe plan to do, I guess how -- this isn't the right word, but how condo-ed are they? In other words, how occupied are they of owner occupants and what's the length of time it takes to really kind of turn them around into full-scale rental buildings?

The first transaction that we closed on in the fourth quarter actually is we're finishing construction and we'll start leasing up in the third quarter of 2010. The deal that we have in contract in Southern California now is complete, has not been sold, so it will start leasing up. There is no issues with reducing the -- or getting rid of existing tenants. It's not a broken condo deal. It was built as condos but never sold.

So how much of the $300 million that you're targeting for this year do you think will be of this kind of broken condo variety?

It's hard to tell. I mean, opportunities come and go and we're going to be aggressive if the opportunity, we see them. Currently the one deal is about $125 million, so I would guess there's probably -- I wouldn't count on anything more beyond that.

The one that's under contract is $125 million?

Correct.

Okay. In terms of financing, you said you would go 50/50 debt to equity. Where you trade now, are you comfortable raising equity to finance acquisitions on that 50/50 sort of basis or would you raise equity in some other way?

Probably the latter. I think when we see the equity drop, it just raises the bar for what it takes to do an acquisition. So as the cost of capital goes up, we need to find more attractive acquisition deals. But we have flexibility with debt capacity that we could increase leverage a little bit more if need be.

Okay.

Rich, could I ask you a question? Are you getting a feedback reverb? Because we're getting it on our end. We just want to make sure you guys can hear.

I'm not hearing. You sound clear as day. I'm often not sounding very clear anyways, at least according to you. Thank you guys.

Thank you. Our next question is from Dustin Pizzo of UBS. Please proceed with your question.

Thank you. Good afternoon, guys. And Keith, just so you know, we actually were getting a little bit of feedback there. John, as I look at your job forecast in the supplemental, the expectations for the number of markets are fairly meaningfully above those estimates from economies. com and some of the others. For example, in LA, they're looking for a loss of 20,000 jobs, Q4 to Q4, versus your 15,000 increase. So can you help us get any more comfortable with your forecasts and if the jobs were to remain negative in markets like San Francisco and LA, do you envision any recovery in positive market rent growth getting pushed back into 2011.

Let me address the first part. If you look at for example at Orange and San Francisco, where we have, what, about 5,000 jobs, 6,000 jobs in orange year other year, fourth quarter over fourth quarter, we get our numbers plugged in, annual growth numbers for economy.com. So that equates to about 13 or 14 year-over-year negative. I haven't read the report on their actual breakdown by quarter but we also use Roseman consulting so we're not exclusively on economy.com. I can tell you Roseman is more aggressive in Orange County than economy.com is. It's not that we only use economy. com and we choose to be more aggressive.

It's a blend of both our our researchers we've used throughout our history and your second point, obviously we need some job growth. Most in the second half to get that rent growth. But we don't expect that through the second half. In those markets where we expect some rent growth, expect slightly negative to flat the first half. We'll know by mid-point if we're not getting job growth and that will have us adjust our numbers downward. I don't know if that answers what you were looking at there.

Has very little impact on the 2010 guidance, in that we don't have that much leases turning in the fourth quarter anyway. So it doesn't have that big a change in the revenue that we've given guidance on.

Just what we do is we look -- these are our markets we live in and analyze constantly. What we've looked at in the recent trends, we think we might have a little bit better on-ground information. Particularly in Orange County, an example is Southern California's been improving and the business services jobs have become very strong and that's disproportionately important to Orange County and so we think that driver, if you look at US numbers and Southern California numbers and Orange County numbers, manufacturing losses are abating, business services expected to outperform and that disproportionately drives Orange County ahead of most markets. We just think that we've got very good coverage. We use our vendors, but we also update what we see as current trends because their forecasts are not always real-time forecast, up-to-date.

Okay. Fair enough. And then Keith, given your commentary on Prop 13, if there were potential repeal or modification, can you update us what the one-time hit to NOI might be?

I think it's in the $6 million to $7 million range at the NOI level.

Okay. Thank you.

Thank you. Our next question is from Michael Levy of Macquarie Group. Please proceed with your question.

Great. Thanks. I'd love to get a better sense of what's going on in Seattle. Can you give -- can you elaborate a bit on the timing as to when you might see some pricing power there?

Sure. This is Mike Schall. The problem with Seattle hasn't really changed or deviated from the pattern that we've been talking about for some time, where they had a development pipeline that was getting bigger and bigger and bigger and it all was delivered -- pretty much all of it was delivered in the last 12 months, plus the next six months. So it's just way too much supply on the one hand and then the other part, which I alluded to in the call, is the job losses in Seattle, cumulative since August 2008, 78,000, negative 5.5%, were worse than the US and average was 4.5%, so you have both sides of the equation being affected, too much supply and greater than average job loss. And those are the key factors up there.

The better news in the whole thing is that that pipeline is being delivered and pretty much we'll be through it by the end of this year, towards the later half of this year, and as a result of that, Seattle typically is able to outperform the nation when it comes to job growth when that resumes, and so we think we will hit a period probably in early, mid-2011 where you're through the supply pipeline and you have better than average job growth and that will lead to a strong recovery in Seattle. Again, I think that's the last market of Essex, in the Essex portfolio to recover, and I think it begins in late 2010 and picks up steam in 2011.

Okay. And that's -- so the lack of -- the absence of Washington Mutual and other companies that have either gone away or are struggling mightily there, that you think is going to be compensated just by the natural growth that has been going on in that market over the last 20 years or so.

Exactly. If you look at that market, it has had some of the best job growth of any of our Essex West Coast markets. And again, that cycle or that pattern has been interrupted but we don't think it's been interrupted for good. We think it will resume that normal pattern, just based on the technology component in that marketplace, the trade with Asia and other places. We think there's some fundamental very good positives of that market. So by no means are we taking a step back from Seattle. But in the short term, it's got some problems that that has to be dealt with. We remain long-term bullish on Seattle, short-term it has the biggest drag in our portfolio.

Great. Just one follow-up if I could. Just hearing all the talk of acquisitions that you've done so far this year and the talk of development, how likely is it that you'll end up acquiring more than $300 million in assets? Is it reasonable to assume that that number is just a conservative estimate and you might end up acquiring more?

You know what? I would say that $300 million is our best guess. If we saw some just fabulous deals -- I mean, it's really going to get down to what's the cost of our capital and what are the opportunities out there. The cap rates have held up and there's a tremendous demand out there -- every deal that's marketed probably has 15 to 20 bidders on it. So what we tried to do is find deals, source deals that are off-market and not gone through the bidding process and there's a limited amount of that kind of supply out there. So if we could find more, we have the capacity to do more, but I think $300 million is our best guess of what we could do.

The remaining, if I were to think about that strategy, if I were to think also about where the rest of the acquisitions might come from this year, it would probably be from the foreclosed developments or stuff like, similar to what you've already been doing?

That stuff is very hard to find. As I said in my comment earlier. I don't know that we will find any more of those. I think we were lucky to find -- there's a couple more out there that we're looking at right now, very honestly, but it's difficult, it's just difficult, so I would think that probably you're going to see more good core kind of stuff in core markets that -- in California, primarily.

Thank you very much. Have a great weekend.

Thank you.

Thank you. Our next question is from Alexander Goldfarb, Sandler O'Neill & Partners. Please proceed with your question.

Thank you. Good morning out there. Just continuing on, on the foreclosure and the OREO sales, the banks that you're speaking with, are they marketing these or are they trying to keep them low, sort of off the radar, so as not to attract anyone's attention to their loan portfolios?

Well, these were -- actually I guess the one that we bought in Irvine, there was a broker involved. But it wasn't widely marketed. I don't think that the banks are necessarily trying to hide anything. We are talking to all the regional banks. We're talking to, frankly, all the banks and to the extent that they have something that they can afford to get rid of, they're willing to talk to us. So I don't think they're trying to keep anything secret.

Okay. And then the Dublin site, this is near Avalon's deal?

It's -- this is John Eudy. It's further west at the Dublin Barge Station as opposed to the main -- the West Dublin Barge Station as opposed to the Dublin, Pleasanton Station.

Okay.

It's a brand-new station that was just completed last year.

Okay. And then on the security front, are you guys still buying marketable securities or have you stopped that?

We have not purchased any REIT unsecured bonds. We've disposed of $42 million in January.

What about aside from REIT bonds, other types of marketable securities?

We will look at those and underwrite those if we feel that there's appropriate risk/reward, we will invest in those.

And then finally. You made the comment earlier about 50% of capital being spent in California. What's the talk out there with the potential to tax, change the carried interest tax? Are people thinking that this will cut down on job growth or that sort of like the California situation, it's not really going to matter and there will still be tons of VC investment in jobs out there?

We haven't focused on that and I don't know. I mean, I don't have an opinion right now. So as we get closer to what it means, I don't think that the VCs are going to dry up overnight because of these issues. It's just, it's a cost of doing business for them, frankly. So I think that there's still going to be a fairly healthy VC investment portfolio out there.

Thank you.

Thank you. Our next question is from Jay Habermann of Goldman Sachs.

Can you walk through your outlook for same store expenses, I guess 0 to plus 1%. You're trending below where you were for full year 2009.

Yes, hi, Jay, this is Mike Schall. The only places that we see pressure on expenses next year are property taxes, where as you know, California has Prop 13 so the effect of Prop 13 is evaluations are lagging and, therefore, we'll have an increase in property taxes under Prop 13. It's limited to a maximum of 2%. So that is one category of expense pressure upward and the other one is the utility expenses which we have a couple percent increase assumed. We have less visibility on that one. But again, I think that is the other area that we see some pressure upward on cost. Otherwise, we are almost across the board assuming flat expenses to down expenses.

Okay. And then in terms of the acquisition assumption, the $300 million, what's the rate you're assuming or the yield for the full year?

I mean, we're working in the 5.5 to 6.25 range. The deals that we are currently working on are in that range, the ones we have in contract. So that's the assumption in the 2010 guidance.

Keith, if you're starting to see some distress, I know it's very small at this point, is your assumption though that that will increase over time and perhaps you're going to see better opportunities as you look out to 2011 or even beyond?

We don't think so. I mean, for a couple reasons. Number one, there's a tremendous amount of money out there, chasing these deals. Number two, unless the GSEs do blow up, and I don't think they will, you've got that money out there at 5 .5 and 6%. I don't think you're going to see cap rates moving to 7 or -- I don't think you're just going to see the cap rates moving up significantly. I think you might see a little bit more product come to the market, but right now the amount of product on the market is historical lows. So I think that there's plenty of demand out there to keep the cap rates low.

Who are you competing most with at this point in terms of when you're looking at these properties?

Well, the first condo deal there was some local players. The one that we have in contract, there were a couple of -- one other REIT that we were aware of and then a fund. And the other deal, sort of the core deal was an offmarket deal and I don't think we had any competition on that one.

Great. Thank you.

Thank you. Our next question is from Michelle Ko of Banc of America corporation. Please proceed with your question.

Just along those same lines, I was just wondering if you had to fund your acquisition through debt, is it more attractive to look at the secured right now or the unsecured? Water hearing that some your peers are raising unsecured at pretty low levels.

That's an ongoing evaluation that we're continuing to consider both. But I'd say right now the benefits of the secured is you get a slightly lower rate. The benefit of the unsecured is you're creating more debt capacity for the future as your NOI grows. We're kind of looking at pretty low NOI rates. We're pretty optimistic will be a lot higher in 2012. If you get the unsecured on that, you're able to increase your debt capacity in the future.

If you had to issue unsecured today, what rate would it be at?

Hard to say because we have not ever been in that market. But I would say for us, with an initial debut, it's probably low sixes.

Okay. And do you think you could give us some -- the cap rates on the recent acquisition of the Regency and the disposition on the Maple Leaf?

Yes, the regency was around a 6 cap and Maple Leaf was around 5.6, 5.7, something like that.

Okay. Great. And then just lastly, I know you talked about this a little bit earlier, but could you just go over again why you think Southern California will recover faster than northern California?

This is John Lopez. It started out in 2007 with its recession and so on the upfront part it just went in faster and made the cuts faster and what we've seen is it's probably about one or two quarters ahead of Seattle and about a quarter ahead of San Francisco and a lot of that is primarily because outside of the East Los Angeles we don't have as much manufacturing drag in those areas where more manufacturing in Northern California and Seattle. That will be sort of less drag in there and the business services there's a bigger sector down there and will be a leader out. Is leading already.

I would add the to that that we actually have seen market rents increase for the second consecutive quarter there where we didn't see that in Northern California or Seattle. So we actually have some on the ground real information that indicates that's the case.

Okay. Great. Thank you so much.

Thank you. Our next question is from Karin Ford of KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning. I think you said on the last call when you guys were beginning to think about acquisitions, and looking at what looked to be fairly low cap rates, that you were underwriting double-digit rent growth in 2011 and 2012 to sort of get you interested. Is that still your underwriting assumptions as you've been going forward?

This is Mike. I think it was high single digits. I think there actually will be a double-digit rent growth out there. I don't know exactly where. But I think the underwriting was high single digits in 2011 and 2012. And actually -- there may be a double-digit number out there. I think of the last couple of underwritings we did, it was high single digits.

Has that changed at all as you've been going through the last few months of acquisitions?

No, our outlook has not changed.

Question for Mike Dance. In the guidance for interest and other income of $13 million, did you say $3.5 million of that was going to be from new activity and, if so, what kind of things would that be?

It's from basically using the proceeds from selling bonds that investors are willing to pay 4.5% for the bonds that we purchased at a 10% yield, and we have basically taken our Seattle acquisition person and put him in charge of kind of joint venture, mezz, second deeds. There's not a lot of -- there's attractive GSE debt that gets 70%, and if you can get 70% financing at low 5s, 5.5%, it leaves the the investor a lot of opportunity to put an additional 10% loan on it at very attractive yields to us on properties we would like to own. So we see that as one of the few players on the West Coast doing that, and if we're able to get low teen type returns on a deposition on assets we want to own, we think that's a good move for our balance sheet and for our shareholders.

Okay. What type of volume would you expect to do potentially in mezz type investments?

We're targeting 50 throughout the year, but probably most of that to happen in middle of latter half of the year.

Okay. Thanks.

$50 million.

Great. And just last question, the uptick in move-outs for home sales, did that concern you at all? Did you think it was just tax credit related? Are you worried that it might eat into the jobs recovery once it comes in the second half of the year?

This is Mike again. We're not that concerned about it. We're more concerned about overall increase in new housing, be it single family or multi-family. I think that this is really trading within some multi-family or rental housing and the single family stock. Ultimately we think that's on balance, a net zero for the most part. So the big picture, the things that we concern ourselves with most, are jobs driving demand and overall levels of production of housing.

Okay, great, thank you.

Not that concerned about it.

Wonderful. Thanks.

Thank you. Our next question is from David Toti of Citigroup. Please proceed with your question.

Hey, guys. Michael Bilerman and Eric Wolf are here with me as well. Couple of quick questions. First of all, do you think that your B price point helped you or hurt you relative to some of the declines you're seeing in market rates? Given the results in the fourth quarter, I would have expected it would have been a bit more resilient where you're positioned.

I guess Mike Schall's going to answer that question. I think it helped. We operate some A assets and B assets and for the most part I actually think the Bs have a little bit more resiliency than the As. Having said that, when you look at some of the development deals and how they're priced two to three months free rent and coupon rents that have been hammered pretty hard over the last year, I think that the Bs are doing better than that. But, it's certainly not perfect.

I mean, I certainly would admit that there's plenty of pain in the B section as well. I think that probably more important than that is ultimately the locational issue, in that what we think will happen for example in Seattle where we've had a number of -- we've had a lot of product being delivered in Bellevue and downtown Seattle, is that the secondary locations will experience more pressure as those people that now can afford to live in Bellevue and Seattle will move closer to where the jobs are. So I think where we see the the bigger difference is in the better locations as opposed to the product, per se.

Great. And then do you guys see any more opportunities or arbitrage opportunities such that you found with the exchangeable bonds in the line?

Could you repeat that? I couldn't hear you?

Sorry. Are there any sort of opportunities, arbitrage opportunities, like the exchangeable bond deal, that you have at the floor.

We believe we will be able to arbitrage out of the exchangeable bonds and so I think we're pretty confident of getting that $3.5 million additional interest and other income from those types of opportunities.

Great. Mike, just one small question. Can you remind us what's left if the current ATM program?

There's close to 5 million shares.

Great. Thank you.

Thank you, ladies and gentlemen. (Operator Instructions). Our next question is from Jeffrey Donnelly of Wells Fargo. Please proceed with your question.

Hey, there, guys, how you doing? I guess a question for Mike, maybe just more of a housekeeping question. I think in fund two, you might have addressed this earlier, I apologize if I missed it. I think in fund two you have some debt that's maturing in the construction lending. Was curious what your plans were for those pieces of debt.

We have the ability to extend those loans. Those were provisions in the original agreement. But they have rebalancing require machines, so we're looking at rebalancing with the current lender or seeing what terms we can get from other lenders that maybe don't have the same attractive spread but maybe have the ability to take out a larger loan. So again, weighing the benefits of both.

What's the impact of the rebalancing on those loans?

It's well within the capital in the funds, so no special capital requirements would be made. So it's -- I don't have the number of off the top of my head but it may be in the $9 million to $10 million for the two loans, approximately.

Okay. And then just one last question is I'm curious, when you unite I guess I'll call it the economic view from John along with what you see for asset pricing and market level fundamentals, where do you guys see the best relative value in your markets today and how you rank them for investment. I guess where I'm going with this is, do you have a plan to maybe more consciously reweight your portfolio through the next two or three years through recycling capital.

I mean, we've tried to do that over time and in our history, there's been a lot of times where there was more visibility, if I could say, as to where we thought the best growth was going to be. Today, I think we see near term Southern California having the best growth. Unfortunately, cap rates, we don't see a lot of cap rate differentiation. Cap rates are sort of the same in northern California, Southern California, so there's not a cap rate advantage so it really, you sort of have to look to near term growth. Near term growth is going to be best in Southern California.

I think that when northern California recovers, though, it's got, in my comments I talked about 0.1% of new stock - of new supply coming in 2010. So it's going to take a while before the single family and multi-family production can re-tick up so I wouldn't be surprised to see Northern California's growth rates be better over the next three to four years than Southern California. So, it's going to be really -- it's going to be a matter of balancing growth rates and cap rates for those markets as we evaluate opportunities, and I don't know that we're going to see any particular market get a greater share of activity going forward.

How do you fold Seattle into that? Just because as you guys have discussed, supply has certainly been a possible and I know while that's upon us, you might not want to sell into that weakness. Nevertheless, cap rates do feel fairly full there. Do you try to take advantage of that because it implies the core growth could be soft for some time.

The real problem there is NOIs have been hammered so badly, even though the cap rate at 5.75 doesn't sound that bad, the pricing on a per unit basis has just been crushed. The other issue up there, there aren't many transactions we're seeing up there to really understand what's going on. I think long-term as Mike said, we're bullish on Seattle. Short-term we're going to suffer through the consequences of having a portfolio there. But frankly, if we could find some great opportunities up there, we would not be opposed to looking at them as well.

Thanks, guys.

Thank you. That was our final question in queue. I would like to turn the floor back over to Mr. Guericke for final comments.

Thank you. We appreciate your interest and hope to have all of you on next quarter thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.