Essex Property Trust Inc (ESS) 2010 Q1 法說會逐字稿

Greetings and welcome to the Essex Property Trust Incorporated first quarter 2010 earnings conference call. (Operator Instructions) 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. Gehrke. You may begin.

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

Joining me on today's call will be Michael Schall and Michael Dance. John Eudy and John Lopez will be available for Q&A. The core results net of nonrecurring items reported for the quarter reflected FFO ahead of consensus by $0.14. Our strategy to focus on occupancy, which ended the quarter at 97.5%, was an important part of that success. Maintaining strong occupancy positions us to have maximum pricing power. As Mike Schall will discuss later, we'll be less sensitive to occupancy during the next two quarters while we push rents.

On the last call, I discussed at length the positives of the California economy and our residential markets in particular, which we felt were overshadowed by the concerns of the California budget deficit. The deficit is 1% of the California GDP, which we don't believe will sink a recovery. Looking at the first quarter employment, single family activity and apartment market data, we reiterate that view.

According to the industry survey, March versus December jobs in our sub-markets grew by an estimated 0.4% versus 0.2% for California as a whole and 0.1% for the U.S. These numbers exceeded our expectations. We've revised up our expectations for job growth, we are now basing our regional outlook on a million jobs for the US which represents 0.7% of job growth. We've revised upward our outlook of job growth in our portfolio to 0.9% from 0.4%.

It's clear from the GDP numbers the economy is not just recovering, but expanding. Typically recoveries are led by housing and commercial expansion. That's not going to be the case in this cycle. Markets that are more heavily reliant on construction jobs will lag in this recovery. Our markets are not reliant on construction jobs, and we currently have ample commercial space to meet our job growth expectations for this next cycle.

We believe tech will be the driver in this cycle due mainly to the need to upgrade in developed economies and the need for basic tech infrastructure in emerging economies. Our strongest metros in Q1, according to the industry jobs survey, were our tech centers--Seattle, San Jose in Northern California and Orange and San Diego in Southern California, where Q1 growth was at or above 0.5%. We think those markets will continue to outperform the US, hence our strongest revisions upward were in those markets.

Finally, I want to give you a snapshot of our California for sale housing recovery from the bottom, which was Q1 of last year these prices reflect condo and single-family transactions. In Northern California, median prices are up 23% to a current median price of $417,000. In Southern CAL, prices -- median prices are up 10% to about $345,000. Transaction volume is also up in Northern California at 6% up and in Southern California it's up 8%.

As can be seen from the schedule on S-15, affordability in our markets is back down to 81% for our portfolio. Only New York would have a lower affordability than our markets.

Now, I'd like to update cap rates and our acquisition activity. For the last few quarters, I've sounded like a broken record reporting that cap rates have trended down for the quarter. Well, nothing has changed. Cap rates trended down during the first quarter again. Today cap rates for well located B+ to A- quality assets calculated on today's economic rents range from the low to the mid 5 cap rate. The caps -- cap rates are being driven by enormous amounts of equity in the market coupled with debt, both GSE and corporate unsecured at rates in the low 5% range.

Despite cap rates that appear irrational, we believe acquisitions today represent good value. When you consider rents are down from their peaks in 2008 as much as 25% the price is being calculated on significantly reduced NOI. We believe that rents in the markets we're investing in will recover to their former highs and go from there. We have an active acquisition program with $300 million targeted for the year.

During the quarter, we closed 349 unit building located in Orange County. The property was purchased from the construction lender for $128 million or [366,000] a unit, which represented approximately 55% of the cost to build it. These are very high-end condos that we're going to sell for prices ranging from $800,000 to $2.4 million for the upper units. In addition today we're closing a note purchased from an insurance company that was secured by 165 units plus 38,000 square feet of retail space in Los Angeles. The note was purchased for $21 million, which represents approximately 80% of the par value of the note and 103,000 per unit. On this transaction, there are two possibilities--We will either own the units or be paid off in November 2010 when the note matures. Either way, we will be happy with the outcome. In addition, we have three properties in contract for approximately $100 million. As demonstrated by our activity we are seeing more opportunities coming from lenders. On the development side, we've been encouraged by the success of the purchase of the Dublin site that we reported last quarter. As a result, we have established parameters for planned purchases at prices that we haven't seen for the last 20 years. Our development people are actively pursuing land within those parameters, looking at traditional land holders as well as land held by REO in the banks. We are seeing some traction but no specific deals have materialized to date. During the quarter we started construction on the Tasman Place property which represents 284 units in addition to the retail pad we committed to build due to a previously negotiated lease. We will be delivering these units into the heart of the recovery. Now I'd like to turn the call over to Mike Schall.

Thank you all for joining the call. First quarter operations were significantly better than expected as job growth reappeared in surprising strength. Our vendors are now reporting job growth throughout the West Coast and the nation with tech appearing to be a leading contributor. On Essex's multifamily portfolio, market rents increased 1.4% on a sequential basis and declined 2.1% year over year.

For the quarter, Essex's Seattle portfolio led the way with a surprisingly strong 3.6% increase in sequential market rents. This result for Seattle occurred despite the delivery of approximately 2000 multifamily units during the quarter and the overhang of significant market vacancy. This increase in market rents in Q1 represents the first significant improvement since the recession began and leads us to believe that the cyclical low in rents is now behind us. As a result of rent growth and turnover gain to lease, that is the extent to which in-place rents exceed market rents for the Essex portfolio was 1.6% of scheduled rent at March 31, 2010, which is less than half of the 3.8% gain to lease reported during the fourth quarter call.

As a result, we've updated our forecast of Metro market rents on page S-14 of the supplemental financial package which is available on our website. Overall, we nearly doubled our West Coast job growth expectation from 46,000 to 92,500. That change significantly improved the 2010 market rent forecast, which is now 2.4% rent growth as opposed to 0% on the previous forecast. In the interest of time, I won't review the other changes to the forecast. Again, it's available on our website.

Turnover was at 42% for Q1 2010 versus 52% a year ago. Renewal rents average about 2% below expiring lease rates or about half the gain to lease number reported in Q4. Same property delinquency is down 30% from a year ago. We continue to use concessions on a limited basis in Q1 for all but the properties in lease-up, and we expense our concessions up front a more conservative approach than other companies. Operating expenses were up 1%, consistent with our guidance.

We now have three properties being leased for the first time and a fourth Access 2,300 in Irvine scheduled to begin leasing in June. Access 2,300 and Skyline at MacArthur place are both brand-new luxury condo projects located in Orange County that we will operate as apartments. No condo units were sold in either project. In April, we commenced leasing of our 349 unit Skyline property and have leased 27 units so far. Our plan is to lease an average of 22 units per month, completing the lease-up in June 2011.

Thus far, rents are slightly above pro forma and concessions range from zero to two months, depending upon location and the unit type, versus our underwriting assumption of two months. We also commenced leasing at two development communities that are nearing completion. Occupancy of the first phase of our Fourth and U property, a Build it Green certified community in Berkley, California commenced in April 2010.. We have leased 51 units so far, consistent with our plan. Traffic and leasing activity has increased in the last several weeks. Rents on the market rate units are about $2.75 per square foot; and we are offering a one to two month concession.

Finally, phased completions of our 295-unit Jewel Broadway community in Seattle began in March 2010. We have leased 136 units in just over two months, far exceeding our absorption expectations, with rents at about $2.25 per square foot. At Jewal Broadway, we have been able to increase rents and reduce concessions during the initial leasing activities, which we attribute to its highly desirable location and the renewed strength of rental demand in Seattle. Home purchases in the first quarter represented 11.6% of move outs versus 14% for the quarter ended December 31, and 8.5% in the first quarter of 2009.

Now, I'd like to briefly review each major part of our portfolio, starting in Seattle. Approximately 2,000 new multifamily units were delivered during the quarter, leaving approximately 2,000 units to be delivered later this year. By the end of 2010, we expect total residential supply to drop to 0.4% in the Seattle Metro area, the lowest level that we can recall. The industry job survey indicates that the Seattle Metro added 8,600 jobs since bottoming in November 2009. All sectors of the economy except construction are growing. Retail trade was especially strong.

Rents as a percentage of median income levels indicate that apartments are highly affordable in the Seattle Metro area, leading us to expect higher levels of household formation with continued job growth. For the Essex Seattle portfolio, market rents jumped 3.7% as compared to December 2009. In Northern California for the entire Bay Area, market occupancy increased 15 basis points in Q1. However San Jose contributed most of the overall increase. San Jose alone was up 60 basis points. Overall market rents were up slightly in Q1.

Again, San Jose provided most of the growth with market rents up 1.6%. Jobs are positive in San Jose, but were down in San Francisco and Oakland. Toyota's closing of the NUMMI plant in Fremont was a significant contributor to the lost jobs in the Oakland MSA. Early indications are that technology could be a leading source of jobs as the economy recovers and several of the giant tech companies are located within minutes of our portfolio, and they have lots of cash.

On the Essex's Bay Area portfolio, market rents increased 1.4% as compared to December 2009. Now, on to Southern California. Job growth resumed in Southern California in the first quarter, easily exceeding our limited expectations after bottoming in December 2009, jobs are up 39,000 by March, an annualized growth rate of 2.4%. Orange County led the job growth in Southern California, adding 19,000 jobs, almost half of the jobs -- which represented almost half of the jobs added throughout Southern California. That's per the industry jobs survey.

We picked Orange County and San Diego to lead the recovery in Southern California, largely due to their concentration of tech businesses and limited housing supply. On Essex's Southern California portfolio, market rents increased for the third consecutive quarter growing 0.6% since December 31, 2009. Approximately 1,600 multifamily units were delivered in Q1, leaving approximately 3,400 to be delivered for the remainder of 2010. Of the remaining deliveries, about 2,000 units are in L.A. County, 1,100 in Orange County, and 300 in San Diego.

As before, these additional deliveries along with the overhang of 2009 deliveries will slow the recovery in certain sub-markets, including west LA, Downtown LA, Woodland Hills and parts of Orange County. Now I'd like to turn the call over to Mike Dance. Thank you for joining us.

Thanks Mike. Today I'll provide an overview for the significant changes to the current FFO Guidance. I apologize for the confusion as to the revised guidance and as to why the reported FFO results were over or under consensus. In our initial guidance we stated that gains from marketable securities $5 million was recognized in the first quarter. This gain was in our FFO guidance and I believe most analysts have this in their FFO models as a nonrecurring first quarter event. Our reported quarterly FFO results were better than we expected by maintaining better than market occupancies, sooner than expected increases in economic rents and the timing of operating expenses. The increase in our guidance does not change our original guidance for operating results, but simply reflects the favorable impact of selling a 53% interest in the Skyline asset to a joint venture and the April sale of marketable securities. The midpoint of our guidance is $4.90 per share, compared to the previous midpoint of $4.75 per share. This $0.15 increase results from these two changes in the original guidance as follows--In April, we recognized $4 million of gains on the sale of marketable securities or $0.125 per share. This increase in other income will be partially offset by reduced interest income of $2 million or $0.06 a share. The run rate for interest income for the remainder of the year will be contributing or be approximately $2 million per quarter.

Contributing the 53% of the $128 million Skyline asset in Orange County to a joint venture resulted in $500,000 in acquisition fees were not recognized in the first quarter, and it changes our original guidance, where we estimated that the lease-up of this asset would -- if we put it on our balance sheet, would cost about $0.10 to $0.15 of dilution. Now, with the formation of the joint venture partner, this dilution will be cut in half. All of this dilution will be recognized in the last three quarters of the year.

To be clear, the increase to our guidance is limited to these two items and does not reflect the increases in market rents experienced in March, and as continued in April. If we annualize the first quarter's operating results, we will achieve the high end of our FFO range. If the economy continues to improve, as forecasted on S-14 and we continue the pace of the improved apartment fundamentals, we will, of course, update our revenue and FFO guidance when we report our first-half results. I'd like to quickly point out that the one -- the $1.28 core FFO reported in the first quarter will be reduced in the next three quarters for the following items. The $0.02 per quarter for reduced interest income, approximately $0.06 per quarter for the seasonality and timing of operating expenses, and $0.07 for the lease-up activity and the dilution from the startup costs that get expensed during the lease-up without having corresponding revenue for the concessions that we offer during the lease-up phase. This is the end of my comment, and I will turn the call over to the operator.

Ladies and gentlemen, we'll now be conducting a question-and-answer session. (Operator Instructions) Our first question comes the line of Jeffery Donnelly with Wells Fargo. Please proceed with your question.

Thanks. Good morning, guys. Actually I was curious about the Essex Skyline project, just thinking about your ability to exit that down the road maybe through condominiumizing your interests. You paid 366 a unit which is less than what half the developer originally paid to construct it. How does that basis compare to the market price on comparable units in that market today?

What are you calling a comparable unit? I mean there really are no comparable units. You couldn't build an apartment with that quality for anywhere close to that so.

I'm thinking for sale residential housing.

For residential, If you are going to build an apartment/condo excuse me an apartment in that market, I would suspect that the cost would would be somewhere in the $400,000 to $425,000 dollar range for just apartment specs, average size, 890 to 950 square feet.

Actually I think -- let me just add a quick comment, which is we looked at the condo market when we were evaluating the purchase of skyline. And, there were certainly prices well in excess of our basis in the property. I think the issue was more the velocity of the condo projects, because there were just not a lot of sales. We didn't view it as a viable condo scenario, which is why we viewed it as an apartment scenario. We're looking for a better exit on the for sale side for the condo down the road at some point in time.

So we saw there was some marginal gain if we exited as a condo right away. But again, if that differential was too great, then somebody would have bought it as a condo and paid more for it than we could have as an apartment. So from our perspective, it was a very high end, high quality apartment deal, obviously, better than virtually anything in the market from our perspective and certainly has a higher and better use as a condo given the spec and the overall building. And so we sort of have the optionality to exit as a condo at some point down the road and we believe that's what will happen. Not sure exactly when but you know it's a very suitable good apartment deal in the meantime.

Not to dwell on the property; but given the uniqueness, how are you thinking about setting rents at that as it right now? How are you pricing it, and I guess what has been your experience so far?

Well, we priced it well above anything in the local marketplace, including, you know, a lot of the Irvine apartment properties, because it's a much higher spec. It's not an apartment speck, it's a high-end luxury condo spec. It's a high-end luxury condo speck. For example, it has Viking appliances, it has lap pools, wine cooler -- you know, wine storage areas. It's just a very unique property.

Again, it's -- the highest and best use is clearly a condominium, luxury condominium project. So it's priced above the existing high end of the Orange County market. And we are achieving those rents. We are slightly above our pro forma, which is about $2 per square foot and giving away one to two months in concessions, versus our underwriting which was two months. So $2 a square foot doesn't sound like an unreasonable rent. You have to consider, however, these are large units, so the coupon rent is pretty high.

Thanks just one last question. Switch gears. Is how are you sourcing the opportunities to buy mortgage notes on multifamily and considering the one you mentioned you're purchasing today, can you talk about what the returns you expect if you're paid off versus take ownership?

On that specific deal, it will be -- if we are paid off in November, it will be close to 20%.

Thanks, guys.

Thank you. Our next question comes from the line of Paul Morgan with Morgan Stanley. Please proceed with your question.

Good morning. So just on the guidance, suffice it to say, you know, that if the new guidance you have for job growth materializes, then there's meaningful upside to the range you provided, none of that is reflected in your new (inaudible) number.

That's correct.

Okay. Just going to back to skyline real quick, is the lease at pace? Sorry if I missed this. Consistent with what your expectations were.

Yes. I commented, we leased 27 units. We started in April. Our target is 22 per month. So we are ahead of that pace at this point.

Okay. And then just on the development side, do you think, that you know, given the pace of what you're seeing in terms of the recovery, that that there are more opportunities are going to pencil out along the lines of the Sunnyvale project and what your pipeline might look like there in opportunities for land?

On the land side, the struggle that we have is finding the opportunities where we can get it at the right price. You know Keith mentioned that we're looking at land prices from 20 years ago. There aren't many sellers at that rate so it's hard to put deals together, but you will see some start to occur over the next several quarters from different people in good locations. And you know, benefits in the short term are construction costs are down almost 30% from the highs in 2007. So it's getting closer, but it's still -- there's not enough -- better to buy something at a (inaudible) discount to its replacement cost, like the Skyline deal and Dupont deal than it is to actually do a start on the construction deal.

What is the yield premium you look for for development? You said you like cap rates where they are now. What's kind of the spread?

We're looking at -- we've historically said we want to see a hundred to 150 basis points above acquisitions to take the development risk. That's still pretty consistent. If we can buy land at the numbers we're talking about, that are sort of 20-year-old prices and we've seen construction prices come down, we can hit those. However, the existing land in our portfolio, we have to work at that a little bit to get there. We're going to continue with our entitlements and be in position to jump on that when the time is right. But it is a little more challenging.

Thanks.

Thank you. Our next question comes from the line of Dave Bragg with ISI Group. Please proceed with your question.

Hi, good morning to you. First question. Just on the guidance, I think you made it pretty clear to what's in there, but just want to ask, what held you back when adjusting for higher revenue growth? Are there some risks that are in your mind over the balance of the year?

Each month got progressively better, but a quarter doesn't make a year, and our best month was March. That continued in April, but we didn't close the books for April until just recently. So it's not. Basically the whole year, there's still three quarters left. And just kind of waiting to see if the trends continue.

Okay. And then Mike Schall, just on occupancy here, you're obviously running well above your target for the full year. Could you talk about where you expect it to be at this time during -- of this year, and then thinking forward, how do you take advantage of this elevated occupancy? How much more aggressive can you get with pushing rents, especially on renewals?

All good questions. We think that obviously the best case scenario is we're able to maintain occupancy. We assumed in the guidance it would be off a 100 basis points. The best case scenario is we maintain it and are able to increase rents.

The only issues I see with that is a fairly heavy expiration schedule, lease expiration schedule through the summer. We turn a lot of units in the summer. So we need to make sure that -- so I hope that we're able to maintain that occupancy, hit the higher expiration levels and get higher rents. We use the lease optimizer, Yield Star. It works very well in pushing rents up, we found. Doesn't work so well in the hundred year flood scenario that we experienced over the last couple of years; but, you know, I'm confident that, if we are able to hit those expirations, we will lose occupancy, but won't be a 100 basis points.

It could be 25 to 50 basis points, and we will be pushing rents pretty aggressively. That's what I hope happens. Again, our crystal ball is not perfect here as Q1 demonstrated. And, therefore, we remain hopeful. I personally think Mike Dance is a little bit conservative as it relates to the guidance. But we'll see what happens. The only thing that holds me back is a stronger expiration schedule over the summer.

Got it. Just one follow up there. You said -- I believe you said that renewals are down 2% versus expiring in the first quarter. Can you provide the number for April?

I can, actually. It's almost flat. So -- What has continued to happen is market rents have continued, as Mike pointed out in April, and the gain to lease. And, again, we're just dealing with. I haven't reviewed the results.

This is preliminarily. The gain to lease is virtually gone, which means that you're not going to have that differential between market rents and expiring leases that we had before. I think we're in good shape as it relates to expirations going forward.

Okay. Thank you.

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

Good afternoon. I don't mean I guess to beat a dead horse. But I'm trying to understand, can you repeat what you said about the difference between the 128 run rate , and what's going to happen in the next two quarters? Was it two pennies per quarter of lower investment income, $0.06 of lower expenses and $0.07 for the lease-up of the

Right. Typically the first quarter is lower than the rest of the year's expenses. If you look in the prior years, we typically have a low first quarter. That's kind of a seasonal and a timing issue. Then you'll see expenses get significantly higher as we have more turnover expenses in the high turnover months. So, yes, you got the numbers right.

Okay, And the $0.02 number is a quarterly number and the six penny number is a quarterly number, or am I thinking about that incorrectly?

Pretty close ,

So it's going to be, but the $0.07 for the lease-up that's not a quarterly number is it?

Yes. They're all quarterly numbers.

So it's $0.21 total?

No. It was $0.02, $0.06 and $0.07. I have -- $0.15.

That's per quarter?

Right. The run rate should be closer to $1.13. If you back that out from the quarter of $1.28.

Okay. That's what I meant by $0.21. That was $0.07 times 3 for the lease-up. Okay. And is that -- you know, if you do a better job of retaining tenants than you did than you did last year as an example, would we see higher numbers or lower expenses than you're projecting?

We experienced lower turnover in Q1. So I'll just refer to that, and I wouldn't see any reason why it would be different going forward; and so our turnover expenses were significantly under budget in Q1. However, there was -- the utility number was surprisingly high. So they essentially -- they offset one another. So I would expect, if we had expense growth of 1% in the quarter, again, it's seasonal, but it matches pretty well.

So I think we're still pretty much on target to our overall guidance on expenses of 1% increase. Again, I think there will be some benefit from turnover cost, but seems to be somewhat offset by the utility overage.

Okay, but so one would assume that if the turnover didn't continue to improve that the again the number would be conservative.

Yes.

Okay, thank you.

Thank you. Our next question comes from the line of Jay Halderman with Goldman Sachs. Please proceed with your question.

Good morning, everyone. Maybe just a question for Mike. Just on Seattle, you mentioned some of the job growth since late last year. When do you think we'll see job growth having some positive impact, out weigh the supply overhang?

Well, I think it's happening. If you just look at the lease-up of our Broadpoint title, we had exceptional leasing activity there. You know, the quarterly sequential increase in market rents of 3.6%. So, you know, toward the end of this year, you know, the development pipeline is fully delivered. There will be maybe some overhang, because I think we still have projected market occupancy in the 94 range; but nonetheless I think that it happens in the next -- I would say third quarter of this year. It's going to be, will become a very tight market.

Okay. And I apologize. I did get on this call a little late. Can you walk through your assumptions just broadly for market rents, I guess, by some of your key markets for the balance of the year.

Yes, John Lopez is here. So, I'm going to ask him to go ahead and give you that information.

Yeah. The update is in our supplement. Basically, we went from minus two and a half that started the year in Seattle to up two and a half. So we're seeing traction of those jobs. And in Northern California we're looking at about 2.3%. The upgrade in San Jose was flat to 4% from what we saw in the first quarter,and then overall looking at 2.5% in California. That's up, because we increased our expectations in Los Angeles from flat to up 2%. So overall what that did is raise our expectations from flat to two and a half. So Seattle was a big driver in that.

Okay. And then just a final question in terms of -- I know you announced the gains on sales so far for the marketable securities. Do you have, is there about another $4 million yet to go? I mean I assume you don't have that built into your guidance; but is that assumption correct?

You're asking how much gains are still left to --

Yeah, in terms of what will will be the remaining balance? Are you assuming no more sales for the rest of the year? And I guess what is the remaining gain?

The remaining gains unharvested are about $5 million, and you know what we're looking at is that as a future source of equity. For deals. So basically the (inaudible) sold in April and were going to close on the loan that Keith mentioned in his comment.

Excellent. Thanks, guys.

Thank you. Ladies and gentlemen, our next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed with your question.

Thanks, good morning to you guys out there.

Good morning.

I'm sorry on the guidance, but there's one piece I don't understand, is the lower lease-up solution now with Skyline and the joint venture. Sounds like the total property would be $0.42 dilutive if you owned it entirely, but just $0.21 dilutive in the 50/50 joint venture; is that right?

No. Basically, the guidance hasn't change. The total dilusion for the asset was estimated to be between $3 million to $5 million depending on how fast we lease it up. So that will now be between $1.5 million and $2.5 million.

Okay. So what's this $0.07 of lease-up that includes everything?

We also have a lot of other --

Other stuff. Okay. I was thinking -- okay. Thanks. Regarding, you know, the sort of bigger picture on Skyline, I don't know who this is for; but you guys are kind of known for a more moderate price point kind of product, and this is you know kind of a different angle. Do you see yourself getting into the kind of higher sort of tier in terms of rents in the next couple of years?

I'm going to start and I'll start and let Schall take over. You know Rich, we've really been focused on markets, and that's our goal has been to get the markets right. And this is consistent with that, to get the market right. This product is. You're right: We are known for being sort of B products and A market kind of guys; but frankly all of the stuff that UDI delivered in the last few years in development have been an A kind of product.

We have a number of high rises built, et cetera, so it's not different. You know, we're not changing our scope. We're still going to be market-focused, get the markets right and follow with the best deal we can find in the markets. Having said that, I'll let Michael talk about our focus on product.

Actually Keith stole my comment there but I guess I would just add that we are so specific as to location that you almost have to be broader as it relates to product, because if you look at a map, we're in really three locations on the West Coast, and that's it. So expanding our product mix by including you know loans, for example, or higher end product or whatever, you know, leasing those assets is not a lot different from leasing the existing assets, again, if you get the location right. So that's all I have to add. Hopefully that helps.

And then I'll follow on to that. You mentioned the highest and best use for Skyline would be condo. So are you saying you guys might get into the condo conversion business again?

Not at all. I think that our preference would be to at will at the right time -- and I'm not sure when that's going to be and no projections here. But, our preference would be to and again, it's a joint venture, so consistent with our partners' expectation is to look for the best exit; and, you know, that best exit could be the sale to a converter. It could mean, you know, in the case of the Essex at Lake Merit, for example, where we were part of the conversion entity, we were a third of the conversion entity. We brought in a home builder and a marketing group as our partners. So there's a lot of different strategies for executing the sellout. Based on what happens at the time, we'll pick the appropriate strategy.

Okay. And I still wonder how that might disrupt the tenanting of the place, but maybe you're just not telling them enough. I don't know.

Not the case at all Rich. .

Okay. And finally, I don't know, Keith if you went through this, and if you mentioned I can find it. But you mentioned buying 80% of the debt. On what properties is that? Did you mention that?

No. Here's the deal. It's a deal we're closing today, so it's not in the press release. So it's a deal we're closing today. It's in Los Angeles. It's a multifamily loft deal with retail on the bottom. We're buying the note from an insurance company. It's due in November. We bought it at 80% of value; and , you know, the outcome is either going to be the borrower will pay us in November, or they will default, and we will own the property. So we think that it's at 106,000 a unit is, you know, a very very high cap rate, and we would be excited to own it. But we'd have a great return if we are paid off

And I do have one more question. Thank you for that. On Seattle, I'm not asking you to comment on BRVs observations in Seattle, but you sound much more optimistic than them. Do you think that's a location thing or something else? What do you think that is?

It's -- you know, we operate different from them. Mike, I don't know. I listened to the call. They said some positive things and maybe not so positive things about it; but overall I think we have to look at what we see. And, it might be a little more aggressive than them. I don't know what was behind their comments.

Fair enough. Thank you.

Thank you. Our next question comes from the line of Eric Wolf with Citigroup. Please proceed with your question.

Thanks, guys. Michael Bilerman is also on the line. Just another question on the Skyline acquisition. And, I'm sorry if I missed this, but why did you end up deciding to use a JV structure rather than just purchasing on balance sheet?

Primarily because it's a large as it, a $128 million deal. It has unique components to it; i.e. , the condo conversion element, and so we thought it was the appropriate sort of risk reward plate to joint

Okay, and just based on where things are trending today, it seems like sequential trending growth should turn positive in the second, early third quarter. Is that your expectation as well, or --

Yes, it is. Exactly.

And just one last question: As far as the lease-up dilusion that you're expecting, could you provide with us a quarterly breakdown for that, or is it going to be pretty evenly spread throughout the remainder of the year?

Yeah. I'll. Probably the bulk of it will be sooner rather than later because as they lease-up it is reduced. But it's during the heavy leasing months that you have the bulk of it.

So mostly second quarter and then a bit into the third quarter as well.

Yeah. And hopefully most of it gone by the fourth.

Right. Thank you.

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

Thank you. Good morning.

Hey, Alex.

There are a few things here I want to get at. But the first thing is I want to see where you guys stand on the unsecured front. Clearly you guys are you know slightly different credit quality than Avalon or Equity, but they were noting how now their unsecured price inside of Fanny and Freddy. Want to get a sense from you guys if you think that your spread is close enough where it, you know, makes sense to pay up for the unsecured.

It's getting close. But, I don't think we're there yet. For us, the GSEs, CS is a great sponsor, and they continue to tighten just as fast as the unsecured bonds are tightening. So the spread is still probably 60 or 70 basis points premium for us to do an unsecured bond.

Okay. And then as far as the acquisitions first, the $300 million that you've outlined for the year, does that include debt purchases or that's just fee purchases, which is as?

Fee purchases.

Okay. And do you have a sense -- do you have a budget for debt, or as that -- as that sort of stuff comes up in the markets and locations that you're looking at, that would just be incremental?

That would be on or opportunistic incremental stuff.

Okay. And then, finally, Keith your comments on California, you know, were sort of loud and clear; but just curious, going to Silicon Valley specifically in your neck of the woods, the talk of revamping Angel investing, it seems a little restrictive, and just curious if that's put a damper on job creation in that market as people think about, you know, higher higher levels for Angel Investing?

You know, there is a number of things percolating out there. I'm not exactly sure how to respond to your question because there are so many sources and as one source maybe gets changed a little bit others percolate up. So I'm going to punt on your question because I'm not exactly sure how to answer that thing. I'm sorry.

This is John Lopez. We saw last quarter an increase in capital and into proportion, Silicon Valley. We don't think that was a mistake. Those are trends that happened before. We're still below where we've been in the past in venture capital spending. We've always mentioned, it was a source in other areas. We think that's going to continue.

I guess the question more is from the perspective that the heyday, you know, was obviously the late 90's where we had a lot of IPOs and this past cycle we hadn't had that. So I didn't know if anything had changed as far as the zest for venture capital and angel investing; but from your comments, sounds like, you know stuff is still brewing and the area is still doing well.

Absolutely.

Absolutely.

Okay. Thank you.

Thank you. Our next question comes from the line of Michelle Koh with Bank of America. Please proceed with your question.

Thank you. Previously you mentioned that for some acquisitions you thought that the rents were off from prior peaks of about 25%. I was just trying to get a sense for how much, you know, your rents are down, and how much upside there is. So, you know, I was wondering if you could tell us, you know, how much concessions you have at this point at this point. Just because I was thinking if you have, like, one month concession or two months' concessions, then that will be, you know, 18% to 16% increase crease; and after that, you can still have rental rate growth of maybe another 5% to 7%. So then you can get a total of somewhere between 15% and 25%.

Right.

And I was just wondering if that was the right way to think about things.

Michelle we talk about rents being down. They were down -- 25% was the peak in the Seattle market, and that's really effective rents, including concessions at the peak, which was we define as November of 2008.

Yes, 2008, November 2008.

Today effective rent, so which would include concessions so and actually Mike has the numbers. You can talk about our portfolio and what the rents were down sort of by sub-market.

I don't want to go too much into detail on this end. It's something we study to try to have an advantage from an acquisition and investment standpoint, because we believe, to a certain extent, we believe the magnitude of what happens from the market high to the market low, will probably uncouple itself and go the opposite direction within the foreseeable future. But as Keith said Seattle was the greatest decline, ranging you know from 15% to 25%, and then there were other significant declines that were less than that. Southern California generally had loss of an overall decline although you could argue that Southern California's peak was earlier a year or two earlier, a year and a half earlier than the September 2008 date that we referenced. So it's a little bit all over.

But I think our focus will be based on you know these numbers and other considerations. Our focus, we love Seattle, like certain parts of Northern California, and we certainly like Orange County. That's one of the factors we're considering.

Okay. And just generally what were the concessions that you had for the first quarter?

They are very low, Michelle. We don't use a lot of concessions, and I think our concession per turn number was somewhere in the $200 range. It was 209 -- $200 per unit or per turned unit. So we don't use a lot of concessions. But again, I would argue that that doesn't matter.

I think concessions are part of the pricing equation overall. So I don't think that, you know, those that had large concessions are going to get larger increases in rent overall. I think the consumer is smart enough to figure out net effect of rents, and I think the percentages growth will be consistent whether you use concessions to a greater extent or not.

Okay. And then, you know, just going back to, you know, the earlier comment that you're still going to have, you know, $300 million in acquisition this is year, you know, I guess how much are you planning to have more of that, you know, in some of these bond deals? Because that's looking more attractive at this point; or, you know, maybe you could talk a little bit about, you know, are you seeing enough opportunities out there?

Yeah. Michelle, right now, we've closed the one deal in Orange County, our half of it is about, say, $60 million, $65 million. We have a $100 million in contract right now in the markets that we're targeting. And that gets us sort of into the second quarter, and we have a 100 -- about half of the 300 focused on -- there are more opportunities coming up. I think you have to really hunt and peck for them, and we have got four acquisition people, an we're very aggressively out there talking to lenders, talking to brokers. You know, talking to our relationships that we have with existing owners; and, you know, I think the $300 million in property will be there.

You know, whether we can have some additional opportunities on the note purchase side. The problem with the note purchase side is you never really know whether you're going to get paid off or foreclosure on the property. We're assuming, if we get paid off, we're happy with the return we can make on the investment in the note. If we own the property, and we want to make sure the cap rate is something that makes sense for us. So, we're looking at note purchases as sort of an on or opportunistic way that would maybe increase the amount over $300 million. Does that answer your question?

Yes. Thank you. And then just lastly, you know, cap rates have been compressing as the fundamental outlook has improved and you know given the limited supply, you know, where do you think ultimately, I guess, cap rates go from here? Are you seeing more product go to market as the values improve, which could increase the cap rates, or are banks bringing more product to market ?

You know, I think probably the greatest risk to cap rates going up or down is interest rates. And I think, i f you see interest rates stay where they're at today, you're going to see cap rates maintain there's so much equity in the market looking for deals. I think that -- and, again, in our markets, the banks don't control that much, though I pointed to a couple of deals that we got from lenders. You know, it's really going to be the existing owners, and maybe some of the deals that are in funds or whatever that have higher clocks ticking that are going to come to market. But I don't think there's enough product that you can flood our market with that could cause cap rates to significantly change. I think it's really more tied to interest rates.

Thanks so much. All those comments were so helpful.

Thank you.

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

Good Afternoon. Keith in your prepared remarks, I through you mentioned three properties under contract. Can you give us a sense of where pricing is on those and where they're located and when you expect those to close.

Yeah. They're sort of in the five and a half cap range, and one is the Silicon Valley, and it will close this quarter for sure. Two are in Southern California, excuse me one is in Seattle and one is in Southern California. And they should close this quarter as well but they are not as far down the road.

Second question for Mike are you guys still looking at [Mezza] originations for the year and the second half of the year?

Yes, we are. That's in our guidance. We expect to do $50 million of MEZ, and we think that we'll accomplish that goal.

Okay. Have you guys already begun work on that stuff?

Yes, we have. We have a pipeline lined up that would give us -- support our expectations that we would meet that goal.

Okay. Then final question. You guys have talked in detail of how you look at the stock prices of barometer for your cost of equity in the calculation. Just curious as to where you see your cost of equity today, and also where the return thresholds are today to make the numbers work.

The way we're looking at it is right now, using about 50% equity, taking the stock price into our revised guidance close to five bucks, you know, and on the equity a little below a five cap; and then with the cost of debt being in the low fives, probably averaging around a five cap. So if we can buy a five percent cost of equity, if we can buy a five and a half percent cap deal we can make that (inaudible) for shareholders. And then obviously we are looking at areas that we think will grow faster in our portfolio. So, you know, with the stock price where it is, makes us enables us to do the acquisitions, and that creates some value while we're doing it.

I guess, kneel, the other point I would make is that we think that this ATM program that we're using absolutely fits that program well, because we can match off our capital as we find opportunities. We're not going to up and having to load up our balance sheet with a bunch of equity and sit on it. So I think it's a very efficiently way. And I know there's some controversy out there. Some people believe the ATM is not the bright way to go, but we think to be able to match the cost of our equity to the cost of our debt with the opportunities we see is going to make us a much more efficient operator and user of capital than otherwise would be available to us.

And just real quickly at a 5 cap rate then from an IR standpoint, what does that pencil to?

I'm sorry. Say that again.

The IR you guys are penciling to on the five cap rate transaction you mentioned.

Again we have pretty substantial growth expectations. So they pencil to an unlevered 10 to 11, and a levered mid teen.

Excellent. Thanks, guys.

Thank you. Our next question comes from the line of Lindsey [Yow] with Robert W. Braid. Please proceed with your question.

Yes. Just continuing on that portfolio strategy conversation of the acquisitions. You were talking about footprint versus product type, are you guys looking to expand beyond your existing market that you said?

No. We're very happy with our exposure to the markets we have. We think the markets that we have right now especially right now given, you know, the turmoil that we've been through for the last 18 months and the potential growth that we have given we have given out forward, we think our markets are going out perform most of the markets in the country. So for us to go into another market in the country, we're going to dilute our growth. So makes no sense to us.

Okay. And then just on the revised job forecast numbers, has it had any impact on, you know, any corporate housing contracts that you guys might have?

We generally don't use a lot of corporate housing contracts, except on the lease ups, and yes, we've had some more frequent housing contracts for the lease ups given the renewed job growth. Yes, we've seen that.

Okay. Thank you.

Thank you. Ladies and gentlemen, our next question comes from Karen Ford with KeyBanc Capital Markets. Please proceed with your question.

Hi. Just one question. On your JV page footnote for regarding Skyline, it mentions that in the JV, a senior executive of the company has a 3% interest in the asset. Did one of you guys buy a condo, or is that -- why was it structured that way?

It was structured that way. It was not one of the -- it was not the CEO -- CEO or CFO. And there was a senior executive that found the deal, believed in it strongly and asked to buy a piece of it; and so it actually is an owner of the deal, not a specific condo in the deal.

Got it.

Under the same terms as the joint venture partner.

Exactly. Really an expansion of the JV.

Okay. Thank you.

Thank you. Our next question comes from the line of Jim Wilson, with JMP Securities. Please proceed with your question.

Thanks. Good morning, guys. I was wondering what the numbers look like, move-outs this quarter for purchasing homes?

They were 11. 6% down from about 14% in Q4 and you know comparable year ago quarter at 8.5% was the all-time low we tracked in our portfolio. As you recall, a year ago it was a very unusual time. So about 12%. So I think there's a trend toward fewer moves outs to buy homes, and Keith mentioned the increase in single-family prices, which I think is helping us close that door to a certain extent. So it's about where it has historically been if you look at long-term averages.

Okay. And is there much variance among your three regions in that number.

Let's see. Actually I don't have those right in front of me. Seattle was -- Seattle was 13%. Northern California was 13%; and Southern California was 10%. So a little variability. Not a lot.

Okay. And then last question: On the development, and let's see I guess either of the two developments you're leasing up right now, Jewel and U, any change in your thoughts on on what fully stabilized yield of return will be on those?

Stabilized is always the question. When it's fully occupied and we've burned off the concessions, they'll be in the high five range on today's numbers; but on the growth numbers, they'll go into the mid six range.

Okay. All right. Very good. Thanks.

Thank you. We have a follow-up question coming from Michael Levy with Macquarie Capital. Please proceed with your followup question.

Just a quick one. Could you let me know what turnover looked like in April compared with April of last year?

I don't have that number with me, the April turnover. I don't have that number. I haven't gone through the April numbers in any detail at this point in time. So I don't know. I don't think -- I think there's a trend toward a little bit lower turnover as people are renewing more leases. So I think the trend that you saw in Q1, I have no reason to believe it wouldn't continue into April.

Even at -- oh, wow. Even at the same -- I mean, the drop-off --

No. Seasonality. Look at the percentage, not the absolute, because Q1 there are fewer expirations. So we turn more units in Q2 and Q3. But if you look at the year over year I think we're about 20% lower turn over. Again I'm guessing but I don't see why that would magically change in April.

Right Right. So you are looking at a mid fifties or low to mid fifties type number for the second quarter?

Yes. That's probably about right.

Okay. Thank You.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thanks for joining us. We'll see some of you or maybe all of you in Chicago. Thanks, bye.

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