Essex Property Trust Inc (ESS) 2010 Q2 法說會逐字稿

Greetings and welcome to the Essex Property Trust Incorporated second quarter 2010 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 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. Guericke you may begin.

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

Joining me on today's call is Mike Schall and Mike Dance, additionally John Eudy and John Lopez will be available for Q&A.

On the last call, I discussed at length what we saw as an improving employment market from our original forecast in January. We have again increased our 2010 job growth forecast in both the US and our markets. We've raised our forecast for the US job growth from 0.7% to 1% which equates to 1.2 million jobs. We've increased the forecast for job growth in our markets from 92,000 to 104,000 jobs, which is also 1%. The growth rate we are forecasting for our markets is consistent with the nation and consistent with the vendors that we use. We've also increased our forecast for portfolio growth from 2.4% to 3.7%, primarily due to increases in Seattle and Southern California.

Let me touch on jobs a little bit. As of June, the US added 880,000 seasonally adjusted jobs which was 0.7%. During the same period our markets added 67,000 jobs, or 0.6%, that we believe that the US benefited from an estimated 0.1% higher census worker increase than our markets did. According to the household survey, unemployment in the US has fallen from 10% in December to 9.5% currently. During this period, the number of employed increased by 1%.

We do not have adjusted data by metro, but for California and Washington, unemployment rate from fallen from 11.8% to 11.7% while the number employed increased by 1.3%. California and Washington have seen a much larger growth in the labor force than the US, 1.1% versus 0.4% for the country, which is why we believe the unemployment rate has not fallen as sharply despite the larger growth in the number of employed.

Across our portfolio, growth has been concentrated in the tech areas, Seattle, San Jose, Orange County and San Diego. Like the US, these markets have benefited from stronger than expected manufacturing growth. In addition, the professional and business service sector has improved considerably during the course of the year, which are the sectors that drive our markets.

There are headwinds in the economy, less stimulus budget deficits at both the federal and state levels and consumer debt burden. However, on the positive side, the US GDP growth has significantly outperformed expectations through Q2 at 3.2% year-over-year. This growth is coming from business investment and tech infrastructure rather than housing. Interest rates remain extremely low, and access to the cheap capital is improving. Consumers continue to pay down debt, global GDP growth is improving which is key for our exporting markets. Global tech demand is clearly rising which again disproportionately benefits large tech firms in our markets.

So in conclusion, jobs in our West Coast markets are keeping pace with the US despite the perception that we are behind. The household survey statistics point this out very clearly. The labor force in our market has grown 1.1% versus 4% excuse me, 0.4% for the US, and the number of employed has increased 1.3% in our markets versus 1% for the US. The current phenomenon of low supply of single family and multi-family homeownership rates dropping and unbundling has got the multi-family sector moving in the right direction. We will need to see continued improvement in the job sector to keep the rent growth growing.

Now let me update acquisitions and cap rates quickly. Today, in today's world, cap rates in our West Coast markets for well located B+ to A- quality assets are in the 5% to 5.5% range. These cap rates have continued to be driven by just tremendous amount of equity in the market coupled with historically cheap debt, both a GSA ten-year debt in the 4.75% range and corporate unsecured at-- which is in the low 5% range.

We've been active since the last call, closing three acquisitions, plus a note secured by 165-unit condo community in downtown Los Angeles. The cap rate on the three acquisitions range from 5.4% to 5.8% on economic grants. We have a goal of closing $300 million of acquisitions for the year. Currently we are on pace to see that goal.

Development, let me touch quickly. Given the lack of construction in our markets, we've had-- seen a huge increase in the quality of subs that are available which is-- we've seen the cabinet project that we have in Sunnyvale, 284-units which we started in the first quarter, we're ahead on our construction schedule and we are seeing costs trending down. As far as land, we're continuing to pursue new land opportunities as well as work on our existing pipeline. However, there are no new starts projected for the remainder of the year. No I'd like to turn the call over to Mr. Schall.

I'd like to thank everyone for joining the call this morning. We're pleased to report that the second quarter operations will significantly stronger than expected, as tepid job growth reappeared sooner than originally anticipated. Limited job growth when combined with affordability improved consumer confidence and extremely low levels of new housing proved sufficient to push rents upward. Looking ahead, coastal California housing supplies will be at the lowest level experienced in the last 30 years. As a result we have once again updated our forecast of metro market rents on page S-14 of the supplemental financial package which is available on our website.

On Essex's multi-family portfolio, market rents increased 2.9% during the second quarter and 4.3% since December 31, 2009. As a result of rent growth and turnover, loss to lease, that is the extent to which market rents exceed in-place rents for the ethics portfolio was $3.6 million or 1.1% of scheduled rent activity at June 30, 2010 as compared to a loss to lease, a negative loss to lease or gain to lease, of $7.3 million or negative 1.6% at the end of March. Relative to expiring leases, renewal rent increases for the quarter were approximately plus 1% as compared to approximately minus 2% in the first quarter of 2010. New leases were still down 1.6% in Q2. In July 2010 both renewals and new leases, again relative to expiring lease rates, turned positive for the first time since 2008.

As with Q1 2010, turnover remained at low levels, 54% for Q2 2010 versus 62% in Q2 of 2009. Same-property delinquency is down 30% from a year ago, concessions continued to trend downward and are at the low level of $112 per turned unit in the Essex same-store portfolio, less than half the prior year level. Operating expenses declined 0.2%, which is better than our guidance.

We now have four properties being leased for the first time and I will comment on the status of each so far. At Skyline our 349-unit Twin Tower near Irvine business district, we leased 100 units in the first 100 days since commencing leasing, which is ahead of plan, and have 127 leases as of August 1, or 32 per month, averaging 32 per month. Rent levels are consistent with our original expectations and average approximately 3,000 per unit. Concessions range from one to two months, less than we had anticipated depending upon location and unit type.

At Fourth & U, our 171-unit newly developed green certified apartment community near UC Berkeley, we have leased 147 units since beginning occupancy in April 2010, or 37 per month. Excluding the BMR units, rents currently average around $2,000 per unit, and we are offering one to two months in concession.

We pushed back the expected occupancy date for Axis 2300 to mid August to resolve unanticipated construction issues. You may recall that Axis 2300 was a partially completed luxury condo property we bought from a bank earlier this year. Several issues were experienced in the initiation of the mechanical systems which took additional time to troubleshoot and resolve. Leasing efforts will improve once we have access to the leasing office and construction activity abates. Thus far, we've leased 35 of the 115 units including 18 BMR units. Excluding the BMR units, current rents average $2,600 for a 1,500 square foot high-end condo unit.

Finally, leasing continues at a brisk pace at our 295-unit Joule Broadway property in Seattle. We now have 271 units, or approximately 92% of the property leased and are well ahead of schedule. We've leased more than 50 units per month and have raised rents throughout the lease up. Current rents, again excluding BMR units, average about $1,700 per month before concessions of approximately one month.

Now I'd like to briefly review each major part of our portfolio, starting in Seattle. The multi-family delivery pipeline driven by the condo boom which is now mostly apartments is nearing the end. Approximately 1,000 new multi-family units were delivered during the quarter, 3,000 year-to-date, leave approximately 1500 units or 0.4% of stock to be delivered in the second half of the year. The job market continues to surprise to the upside. We are again significantly increasing our estimated job growth for the year from 14,000 to 20,000 new jobs, that's 1.5% growth. Jobs at Boeing were flat in Q2 but could improve given increased industry-wide aircraft orders including Boeing 787 Dreamliner. We have again upgraded the metro market rent growth forecast from 2.5% to 5%. Recall that it was negative 2.5% at the beginning of the year and we expect Seattle and San Jose to be our top rent growth markets for 2010.

For the Essex Seattle portfolio, market rents were up 5.8% from December 2009 and 2.1% in Q2. So the recovery is strongest downtown followed by the East side. In Northern California, we're lowering our job growth estimate to 14,000 or 0.5% job growth from 20,000. The change reflects 6,000 newer jobs in the open MSA, open has a relatively large exposure to state and local education, creating a drag on job growth. Open was also hit in manufacturing for the 4,000 plus job losses at the Toyota NUMMI plant and the impact on it's suppliers.

On a positive note, during the quarter, Tesla announced that it will use the NUMMI plant to produce electric cars in partnership with Toyota and is expected to hire roughly 1,000 workers to produce their first sedan. Eventually, Tesla has indicated that they could hire as many as 5,000 workers at full capacity. We've increased our job growth forecast in San Jose from 10,000 to 13,000 jobs, that's 1.5% job growth, San Jose's tech sectors providing the majority of new jobs in the region as Keith indicated. In addition, the market has a low exposure to state and local government jobs.

We've raised our forecast for market rent growth from 2.3% to 2.5% due to the upward revision in San Jose from 4% to 5%. San Jose has very little total supply and continues to recover quickly. The single family market has rebounded from having median crisis of 450,000 in early 2009 to the current levels of approximately 570,000. On the Essex Bay area portfolio, market rents increased 2.5% during the quarter and 3.9% year-to-date. San Jose was the strongest market of the Bay area portfolio generating a 5.2% increase in market rents since December 2009.

And then finally to the Southern California, our job growth continued to strengthen in the second quarter. We have revised our 2010 forecast for job growth to 70,500, 1.1% job growth from 58,500. The majority of this increase was in Orange County where forecasted job growth has risen to 32,000, 2.4% job growth from 19,000. Job growth in manufacturing has slowed as expected. However, growth has strengthened in professional business services, and the region has seen a boost in tourism-related jobs.

Apartment market conditions continue to strengthen ahead of our expectation in Q2. We revised our estimates for rent growth from 2.5% to 3.8%. On Essex's Southern California portfolio, market rents rose 3.5% during the quarter and 4.1% since Q4 2009. LA and San Diego lead the Southern California recovery.

Approximately 2,100 multi-family units were delivered in Q2. That 3,700 year-to-date, that's 3,700 year-to-date, leaving approximately 1,900 or 0.1% of stock to be delivered for the remainder of 2010. Of those remaining deliveries, about 1,400 units are in LA County and 600 are in Orange County. That concludes my remarks and I'll turn the call over to Mr. Dance.

Thanks, Mike. At the end of the first quarter we increased the midpoint FFO guidance by $0.15 a share to reflect the gains recognized from the sale of marketable securities and the favorable impact from the formation of the Skyline joint venture. this quarter we are increasing the midpoint of our FFO guidance by 6.5% from a midpoint of $4.90 per share to $5.22 a share. The $0.32 increase in guidance is almost entirely due to the improvements in our operating results as we are forecasting a year-over-year decline in the net operating income from the same-property portfolio of 5%, or a 400 basis point improvement, compared to the 9% decline that we forecasted at the beginning of the year.

The third quarter is expected to have sequential same-store revenue growth. And the fourth quarter is now expected to have a 1% increase in the year-over-year same-store net operating income.

For the second half of the year, the run rate of interest costs should increase by approximately $2 million per quarter, as we reduce the amount of interest capitalized on stabilizing developments and from the capitalized costs to finance new investments, net of the interest savings from the $130 million in debt refinanced in July.

The 2010 guidance for general and administrative costs is being increased to $24 million to reflect the compensation costs expected from achieving the performance criteria for the executive long-term incentive plans, and the additional due diligence costs we expect to incur to underwrite this year's external growth opportunities. Our original guidance included accretion from the planned $00 million in external growth less some dilution from $100 million in disposition.

With the compression in cap rates and the improvement in apartment fundamentals, we intentionally delayed this year's disposition program, and our revised guidance now assumes minimal FFO dilution in the current year from dispositions ranging from $25 million to $50 million expected to occur in the fourth quarter.

We are also forecasting an increase in interest income from the origination of approximately $40 million in mez loans to be funded in the second half of the year with unleveraged yields ranging from 10% to 13%. We are looking forward to see many of you at our investor day, a week from today in Orange County. Please contact Nicole Culbertson if you have not registered and plan on attending. This ends my comments and I will turn the call back to the Operator for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from (inaudible) with Morgan Stanley. Please proceed with your question.

Hi, good morning. I'd like to talk a little bit about homeownership rates. As the homeownership rates are decreasing, I want to hear your thoughts on what you think is the percentage of homeowners who will be shifting into apartments rather than renting a single-family home?

Yes, this is Mike Schall. I can answer that question. We draw a line down the middle of California at the inland part of California and the coastal part. The coastal part is more supply constrained. There are fewer homes built here. The inland areas, which we don't invest by the way, have a lot more housing, for sale housing that was built and therefore the shadow supply issues are much greater there. So we are -- by virtue of where we're located, we don't have as big of an exposure to the shadow pipeline issues.

Just to give you a couple of statistics, in Seattle, home purchase activity was 15% of our move-outs for the quarter versus 13.6% a year ago. Again, the year ago numbers were depressed given the state of the markets back at that point in time. So that was in Seattle.

Where we saw the biggest move-out to home purchase was in Northern California, it was 15% versus 10% a year ago. But within the 15%, we have had more than 20% move-outs in the Silicon Valley. Again Silicon Valley had very rapidly escalating median housing prices that was I think in my script I quoted roughly $450,000 at the beginning of 2009 to $570,000. So that for sale market has recovered quickly and we've lost more of our renters to homeowners in that market as compared to any other market.

And then in Southern California, let's see. Southern California move-out activity to homeownership was 9% versus 7.8% and it was not such a big factor, anywhere-- in any of the major MSAs in Southern California. So clearly-- and I -- it's interesting because I believe that homeownership rates in-- or move-out to homeownership will probably decline in Santa Clara given the 20, or approximately 20% in median housing price and has been at relatively muted levels everywhere else. I don't see that as a huge factor. Again, I think the reason for that is that we don't have to deal with the shadow pipeline issues that inland California has to deal with.

(Inaudible) this is John Lopez. I just want to add that in our market, the homeownership rate is about 57% in California. That number isn't as critical because who owns the building isn't the relevant component. If it's a owned house versus a rented house, it competes with other (inaudible) the key market-- the key metric.

Okay. Great. And just one more question on the new acquisition in Campbell. What kind of, what kind of improvements are you looking to do there? Can you give us a little bit of magnitude of additional dollars you need to invest in there?

Sure. This is Mike again. We are going to do quite a bit of improvement. This is an area that-- it's very well located property. The physical asset we think has some deferred maintenance issues and given the location which we think is a B+ type of location, we think there's a better place in the rental market for it, and we will -- we want to be toward the top tier of the local competition in that area. To achieve that and to achieve the rent levels that are associated with that, we're going to essentially re-side the building and do a lot of exterior renovation.

Most of the property has had unit turns. So I think there are 72 remaining that have not been turned. We're going to wait ton unit turn decision to see-- effectively test the market and see what we're able to achieve once we complete a fairly substantial major exterior renovation. Again it involves residing the entire building, so it's going to be a major upgrade. The cost of that, I don't have the cost. Does anyone have it, to $5 million? Yes it runs $5 million about $5 million in total costs. I think the exterior renovation was probably $3.5 million of that, somewhere in that range.

Okay, that's very helpful. Thank you.

Thank you. Our next question is from Dave Bragg with ISI Group. Please proceed with your question.

Thanks. Good morning. Keith, in your comments you mentioned that you need job growth to keep the rent growth going. And given your job growth expectations, which I believe at least in California, are nicely above or at least a bit above long-term average growth in that market. What level of job growth are you, are you thinking about that would keep this momentum going?

Well it's a -- what we're looking at is I think the new normal is kind of what we think is a minimum. And that would be, if we can continue to see the 1% kind of job growth. The other thing that we look and we didn't really comment on in our prepared remarks, is that we have historically spent a lot of time thinking about affordability and looked at what median rents are relative to median household incomes. If you believe, and we do believe, that our residents are employed, have jobs, we've turned the corner, and look at where rents have gotten depressed to. If you take each of our markets in Seattle being probably the most dramatic, to get the current rents back to historical levels of median household income, we could raise the rents there about 20%.

So again if you got very little new supply and we've got some job growth and we've got median household incomes that are high in all of our markets and we've rents that are, that have been depressed, we think-- we actually believe that and I don't think that we're probably not naive enough to believe that we could get 100% of that compression. But if we could get 60% of it it, I mean would be in our markets anywhere from 12% probably in Seattle to around 8% to 9% in the our other markets. So I don't know if that helps you or not, but we are relatively positive about that.

That helps. And on that point actually, how concerned are you about wage growth?

About wage growth?

If we get the jobs, what about the wage growth component?

Yes, Dave, this is John Lopez. If you look historically in our markets and across the country, during typical (inaudible) long run growth in our markets, it's about 3%, but during expansion periods that goes up to 4.5% to 5%. So unless there's something new about the job growth going forward, which I don't believe there will be, that we're looking at pretty solid income growth coming at us.

Okay. Thanks. And one last question, Mike Schall you mentioned positive renewal growth and new move-in growth in July. Can you quantify those?

Yes, they were roughly -- they are-- where are my July numbers? They were-- renewals were up about 0.75% and new leases were up almost 2% in July.

Got it. Thank you.

Our next question is from Steve Swett with Morgan Keegan. Please proceed with your question.

Thanks so much. Keith, you mentioned the cap rates and you guys have clearly had some success in finding opportunities within each of your markets, but can you talk about the types of things you're looking at in the markets today, are they still a mix across all your markets or are you seeing more opportunities in one of your regions?

Well given that we would like-- we, as Mike said, we think that probably the best growth going forward is going to be in Seattle and San Jose. So historically we've tried to allocate capital to the fastest growing markets. However, given that we've generally believe that we're going to have reasonable growth across all of our markets, we are active in each of the markets. And we're continuing to-- I mean the two new condo deals that are on-- they're being finished up and leased up now are types of things we're looking at. The Campbell deal was 30 years old and it needed a rehab.

So we're looking at-- what we're really trying to do is find well priced assets and look at compared to the cost of capital, and again given tenure GSE debt in the 4.75% range, we think that we can make these cap rates. And again as I said, I think the markets cap rates for these kind of deals are 5% to 5.5%, we were lucky enough to do the deals that we did in the 5.4% to 5.8% range, so slightly better than the market which is very accretive coming out of the box. And again all of these assets have-- we think are going to have very good job growth, excuse me, very good rent growth over the next three to five years. So our preference is Seattle, San Jose, but we're selectively looking at all of our markets.

Okay. And then just my last question, I'm not sure which Mike it's for, but some of your competitors have talked about success this year in getting reassessment on property taxes coming down and that been a benefit to their expenses. Can you remind me how it works in California, I know you benefit most of the time from limits in increases and in some cases you've built up a big gap between a market value and assessed value. If values do come down, are you still going to have say a 2% increase as opposed to a reduction, is that the way it works?

Well for most of our assets, that's right. We'll get 2% increases across the portfolio. But then there are exceptions where if we bought something--

Right.

Probably in 2007 or later, that's the current value might, it might be less than what we paid for it.

Right.

But we can get a temporary appeal and get a reduction. But as soon as the prices go back up, it goes back to the original Prop 13 assessed value with the 2% increases.

Okay. Thanks, Mike.

Our next question is from Eric (inaudible) with Citigroup. Please proceed with your question.

Thanks. Just on Seattle, I saw the worst sequential revenue decline of any of your markets this quarter, and it looks like your same-store rents dropped by 0.7%. The commentary from you and your peers would suggest that Seattle has seen one of the healthier recoveries thus far. So I'm just wondering whether the sequential decline was the fact that you've maybe had above market rents and needed to get into the market. Just trying to get some more color on that?

Yes, this is Mike Schall again. The quarter-to-quarter results can vary quite a bit depending upon what's happening, what the year ago rent levels were for example. And they're fairly widespread differences in the recovery in Seattle. As you'll recall, it has been the most volatile of all the markets over the last couple of years. And therefore, what the previous rent was and the current rent level is important. For example, in downtown Seattle, rents-- market rents are up 9%, closer to just under 6% on the east side and about 3% in the north and south areas of Seattle. So there's been-- there's tremendous amount of differential in the recovery and the different, different areas. And therefore, the results from quarter-to-quarter, can vary quite a bit.

I-- we keep track of this over time, and I look at, in fact I've got a sheet the front of me that comps our Seattle portfolio against all of the peer groups, and other the last five years we've, if you look on sort of an accumulative basis what we've done relative to others, we are very-- we've got very good results in Seattle. So again I wouldn't look so much at the shorter term. I think you got to take of longer term view. We had a significantly different strategy in Seattle a year ago. We were high occupancy strategy, and that-- and especially given the volatility that we had in Seattle, that strategy mattered and it can change results from quarter-to-quarter. So I-- we'd ask you to do what we do which is kind of look at the broader picture and I think we are very competitive in that market.

Okay. That's fair. And just on your guidance, your current guidance midpoint of $5.22 would imply a recurring FFO of $4.92, I guess adjusting for the $0.30 in one-time items this year?

That's right.

Within that $4.92 I believe you're factoring in about $0.20 of dilution from the start up costs and concessions on your lease-ups that you won't have next year; is that right?

We'll have a little bit on the Skyline joint venture and the Axis 2300 but by the end of year, Joule and Fourth and Joule will be stabilized and we don't expect any dilution from the larger on balance sheet developments. That's correct.

Right. So I guess if looking at next year if you saw absolutely they have no growth in core FFO next year, your results would be about $0.20 higher or so from the $4.92 this year?

About $4 million higher, yes, so not quite $0.20.

Not quite, okay, $0.20, all right. And then just this last question, you've been somewhat unique among your peers in that you've kept up the pace of your acquisition activity even as cap rates compressed in our markets, I'm just wondering what makes you more comfortable with purchasing in the low to mid five cap rates. I mean do you think you have a cost of capital advantage or maybe your NOI expectations are a bit higher? Just some color on how you're looking at the acquisition environment and how you're underwriting it?

I think we look at a couple of things. First of all we're very focused on growth and we do believe that these markets are going to have significant growth, and that is number one. Number two is as I said in my previous comment, we have GSE debt at 4.75% today, ten-year debt. And we think that our cost of capital with the GSE debt in there makes these very accretive. And then finally, given where rents, how badly rents have been crushed, I mean these 5.25% caps are producing all-in costs that are significantly below current replacement costs.

So if you sort of line up all the metrics, we think it's a smart thing to do. We think that-- and we think that we're aligning ourselves in markets that are going to have pretty significant rent growth.

Got you. And so I guess going forward, do you think that we'll see you kind of keep pace with this acquisition activity or do you think we'll start seeing more like recycle capital like you mentioned with funds and assets through the end of the year and potentially ensuring more equity to buy?

Well I mean things change, and as-- I mean if you have followed the West Coast, remember a few years back we were seeing cap rates that were in the low fours. So there will be a point that it becomes-- where we will not participate, but at the current range, given our cost of capital and given our anticipation of growth, if cap rates stay in this range, we will continue to be active acquirers.

Good. Thank you.

Our next question is from [David Cody] with FBR Capital Markets. Please proceed with your question.

Hi, guys. I just wanted to follow some of the threads on development. I know you've mentioned that a lot of the acquisitions you're looking at-- you're considering below replacement costs. But given the upward trajectory of fundamentals and the inversion that you're seeing, and the low cost of capital, wouldn't some development begin to make some sense, a number of your peers are sort of there already?

This is John Eudy. Yes, we have a few deals as you know in our pipeline that we have been tracking. We started the Tasman deal in February and March, and we have a couple others that we're re-evaluating, we're repricing, positioning to start. And you're right with the rebound in rents and the ability to go back to cities on these exactions that we're paying is making it better and I would anticipate that you could see some other starts going into next year.

Right. And then, what's the tone with lenders relative to construction loans in your markets today?

They don't like making construction loans. I mean in general, which is good because it abates anyone overheating the market with premature starts. So from the overall perspective we have the ability to get the financing, but their equity requirements are still very, very conservative, probably 40% to 50% cash equity to get a loan.

Okay. And then just moving over to the acquisition pipeline, how would you say that what you're looking at would break out in terms of assets versus broken condo deals versus notes or mez pieces?

Well, we're looking at all of the above. The first couple of deals that we did were essentially REOs or notes that we purchased. Currently we are looking at a deal that is a note, that's a fairly large significant deal. And then we've probably got another three just solid assets that we're looking at in the various markets. So we continue to look at the notes or the REOs, but that's becoming less-- it's just becoming less because some of it's already worked its way through and there's more competition for it. So I think probably going forward you're going to see, of the acquisition we do, probably more just straight up acquisitions.

Okay, are you seeing any change in terms of the size of the assets that you're seeing in the market? Are you seeing any large portfolios?

There are no large portfolios on the West Coast that I know of, it doesn't mean that there aren't any, but I don't know of any. But we've primarily seen one off transactions that are being sold for various reasons. Whether it's just people need capital to recapitalize other pieces of their business or whether it's in REO, but we have not seen any large portfolios.

Okay. That's helpful. Thank you.

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

Just to go-- reference back to an earlier question that someone had asked. I was just wondering if you could comment on how far off are each of your markets from the prior peak rents? And I think in an earlier comment, you had said with some modest job growth you could get 12% growth in Seattle and then maybe 8% to 9% in some of your other markets. If that -- how much off the rents are from prior peaks? Or --

Yes, I can give you those statistics. Keith made the comments earlier, and these support them. Peak to trough rents in Seattle on the Essex portfolio were off 21%, so that's from September 2008 to December of 2009. And so far this year, we've picked up 5.8%, so there's about 15% left. In Northern California, peak to trough rents were off 15%, market rents off 15%. Again we've captured 3.9%, so we're at 11-- a little bit over 11%. And in Southern California, peak to trough rents were off almost 10% and we've captured 4.1% so far, so we're about 6% below there. But I guess the other point is that these are the large MSAs and our large regions, and if you drill down into more of the detail, you will find that there are some opportunities within some of the MSAs that are obscured to a certain extent by the averages.

Okay, thank you. That was helpful. And then, just to also talk a little bit about developments from some of the prior comments, developments versus acquisitions, I was just curious, is the reason why you're pursuing more acquisitions at this point is because there's more product to market versus you're seeing more opportunities than acquisitions, so you'd rather do that versus developments? Or if you could talk a little bit about your decision?

Well, Michelle, this is Keith. It's not-- we like developments and the problem with development is that if we said today we're going to do $500 million, I mean it would take us two to five years to get that done just because it takes so long. Right now, John's got a pipeline he's working on. But even if we pushed hard on a couple of deals that are close to being ready, we couldn't start until the first quarter of next year. Today, in today's world where we're seeing cap rates and where we're seeing acquisition, I mean those are things that we can execute in 30 days. And so if we're going to get the external growth, it would be silly for us to not do the acquisitions in favor of this-- of the development just because development takes so long to get done.

Right. No, that makes sense. Just as long as I guess you're seeing the volume of product out there.

Yes I mean we're seeing some volume and we're trying to create transactions. One of the things that Craig Zimmerman who's our, Head of our Acquisition Group, has pride himself on-- is to try and create transactions and that is going out and writing on solicited offers and doing those kinds of things and putting prices in front of people that-- in a changing market, people aren't always aware of what prices might be and everybody's been beaten up over the last two years of thinking that the world has come to an end, and you put a-- even if it's a 5.25% cap which on depressed rents might still be a good deal for us, they may have not seen a number of that big for a long, long time. And so we're able to create some transactions. So it's a matter of yes, there are some natural transactions in the marketplace and then we're out there trying to create additional transactions.

Okay. Great. Thanks so much. That's very helpful.

Thank you.

Our next question is from Paula Poskon with Robert W. Baird. Please proceed with your question.

Thanks very much. Keith you mentioned that you're looking, of course you have priorities around the opportunities, but that you're really taking a look at [officials] at all your markets, are you taking a look at new markets as well?

No, right now we are not. We're focused on the West Coast, we recognize that the supply constrained markets aren't necessarily all on the West Coast, so we do recognize that the mid Atlantic and a couple of those other markets are actually performing better than we are right now. But I think that if you look at-- if we were going to make some kind of move, we're constantly looking at growth and we say do those markets have better growth than we have potentially over the next few years?

And I suspect they probably don't just because they haven't gotten hammered as hard as we have, number one. And number two, some of the calls I've listened to, and Michelle has been very good about asking the same question to everybody, peak to trough, and a number of the peers who have product in the mid Atlantic regions actually said that their current peak is greater than their previous peak. So I don't think you're going to see the kind of growth out of those markets that we have and therefore we're going to focus getting growth out of our markets and we do recognize that someday we may need to go to a-- get more diversity.

And then secondly, are you out looking to add to these land bank and if so what are you seeing?

We've been in the market as during this cycle trying to take advantage of it and to buy opportunistic purchases. Most A location, A- locations sellers have not acquiesced to the fundamentals of what that means in terms of the prices that we have offered. We did buy one deal the end of last year from a bank at less than a third of what it traded for in the peak. And we are-- we've got one other that is in the works that is pretty opportunistic. The reality is there are a lot of deals out there floating right now that are recycled 2007 prices and they're not going happen and we're not going to buy them. So--

Okay. That's all I have. Thanks very much.

Yes.

Our next question is from Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Good morning. Couple quick questions. First one for Mike Shall, now you guys have been active buying class A properties over the past several years here. And you also have a very good mix of Bs. Just interesting if you could talk about what you're seeing in terms of the ability to push rents on the A versus the B side?

Sure, Mike. We-- it isn't really that we prefer one versus the other. We tend to be very location driven as you know. And we will therefore because we're so focused locationally, we will try to be a little bit more, I would say forgiving or opportunistic or whatever, as to the physical assets. And we have a pretty large redevelopment organization, so we believe that we can fix, much like the Commons deal, we believe that we can fix those deals pretty effectively. So we can fix the property, we can't fix the location.

In term of As and Bs, the general rule, which I think is probably in place here, is that during difficult periods of time, they compress, As compress on Bs and then when conditions get better, there's a decompression that happens and I think that that's happening slowly. I think that we're just in the first or second inning of this recovery. And therefore it's just happened to a certain extent, I don't think it's happened to any great extent. But we continue to follow both. I would expect though that As will do a little better than Bs coming out of this recessionary period.

That's is what you see in the portfolio though today, correct?

Yes, it's (inaudible)-- again it's just too early to really draw any conclusions I guess is what I'm trying to say.

Okay, fair enough. Second question for Mike Dance, just can you give us an update on the mez front there, you guys have talked about potentially doing $50 million in mez lending here mid year to later in part of the year? I 'm just curious as to where you stand on that front right now.

Yes, we have applications from perspective borrowers that are in process under-- we're wrapping up the underwriting. And it's-- we're just kind of waiting for the borrower to need the funding. And one we expect to be later this month or early September and another one probably late September or early October.

Okay.

It was about 4-- total of the dollars that are in application process are about $40 million at this point.

Okay.

There's an opportunity maybe do $10 million more but the application hasn't come in for that additional $10 million at this time.

Okay. In terms of guidance, the second half of the year, there's no plans to sale any additional marketable securities, correct?

That's correct.

Okay. And final question, just looking in [yield star], I think you mentioned renewals are up 75 that's in July, as you look out to September/October, where are you guys looking at renewal increases based upon what yield starts throwing out right now?

I think they will get too the plus 2% range, about 2%. I think it will be-- I think we'll ask 2% and we'll probably end up at about 1.5% in the third quarter.

Okay. Thanks, guys.

Our next question is from Jay Habermann with Goldman Sachs. Please proceed with your question.

Hi, guys just a question on turnover. I know lower turnovers helped on the expense side. I'm just curious, are you starting to see any trends where as you begin to increase rents that perhaps in certain submarkets or even properties where turnovers starting to increase a bit?

We are seeing that. It doesn't tend to be area specific. What happens is you jumble all these numbers together and they create a picture which again if you look at the pieces, it is not same. So, but in certain areas we will have renewals up 1% and the expiring leases or the turns units will be down 7% or 8%. That spread in our view is too big. We like to-- because obviously this is a-- it's a balancing act between renewals and new leases. And to the extent that you're too aggressive on the renewal side, you hurt yourself because you have more availability on the other side when it comes to pricing your (inaudible) that are turning, you put too much pressure on it. So the numbers overall averages are what they are, but it's constantly a sort of a battle and a management issue to manage between what you're getting on the renewal side and what you're getting on the new leases. And it's all over the board.

Okay. And you mentioned in Q4 seeing same-store NOI turn positive. You mentioned that the last to leave at this point,. What sort of level of NOI growth are you anticipating for Q4?

Slightly positive not-- mainly because we had a lot of expenses Q4 2009 that we don't expect. So a lot of that will come from a slight decrease in revenues with expense improvement.

Okay. And just touching on the line for a second, what's the balance today? And I guess as you seek to increase that over time either through acquisitions, what are the expectations for issuing equity in the back half of the year?

It's really about matching funding with the acquisition opportunities. Don't see a real need to stock pile cash and not have it earn anything more than a 10 basis or 20 basis point money market fund rate. So it'll be matched funded as we find opportunities. Current line balance is about $75 million.

Okay. Thank you.

Our next question is from Alexander Goldfarb with Sandler O'Neil. Please proceed with your question.

Thank you, good morning.

Hey, Alex.

Just a few questions on downtown LA. One, want to get a little more color, and maybe I missed it up front, but on the Sante on the fourth in LA deal, what your thoughts are, if the guy's going to pay you back or you think you may end up with the property? And then what the impact is in the guidance, Mike?

We -- this is Keith. The property is currently being marketed and at a price that clearly, if they get it, they will be able to pay us back in full, which would generate a $4 million plus profit in the fourth quarter from that repayment. We're not sure they are going to get that price, and so we don't know if they have other sources of capitol to repay us. So it is really going to-- I suspect it's going to turn on whether or not that can achieve the price they're currently marketing it. And beyond that I can't tell you, I can't tell you-- I mean we would love to own the property. It is 165-unit condo deal, 12-foot ceilings, loft kind of property. It would be very nice to add to the portfolio, but at this point in time we have to assume we're going to get paid off.

And the -- okay. So I guess two things. One is I assume that the profit is not the guidance? And then two the value that you're saying, is that above your discount or that's above PAR?

Above PAR.

Above PAR. Okay.

And we are recognizing the loan under original issued discount type accounting where we're amortizing the discount over the expected life of the loan.

Okay, but the point is, that if it's successful and you get the $4 million, that's incremental to the guidance?

No, no, the $4 million discount is original issued discount that we're amortizing over the life of the loan. So what-- that's coming into income as interest income.

But if it stayed off in Q4, most of the $4 million--

It will be -- it's recording on interest. Most of it is being-- it will be a little bit more, but most of it is being amortized into interest income currently.

Oh, I see, okay. Okay. And that's helpful. Second is, LA was a buzz during the height with all of the towers that were built and condos that were built. What's going on now, has most of that settled out, are people still transacting those properties or has most of that stuff found a home or found a way to be worked out so we won't be seeing more acquisition opportunities there?

Hi, Al, this is Keith. I think that as far as the new starts are basically done, as far as the towers there was one tower that was owned by a small public company that I think has lost it, at a price that was about a 4.5% cap. Beyond that, there are a number of smaller deals that are floating around, but nothing-- and Mike just said--

Yes, there's about 400 units left to be delivered in downtown LA, Alex.

And one of those is the LA Live condo, and that probably will-- probably not going to come on right away.

Okay.

I think the broader picture though is rents because of all that activity is much like, it's one of those areas that got hammered pretty hard, both the downtown LA and the mid Wilshire area, and therefore it has I think a long way to recover. And if you look at-- if you look back at what downtown LA was ten years ago versus what it is now, it's changed dramatically, and there's a lot of just -- it is a great city to live in now. So I think that both of those things will bode very well for downtown LA.

Okay. And just a final question is, hearing what you guys are saying is pretty consistent with what we're hearing from others, is it almost sounds like while there wasn't much distress out there, what little there was almost seems to be coming to a close and more of the deals seem to be just straight up deals as sellers feel more comfortable with rent, people feel more comfortable with underwriting. So should we expect us to see more like plain vanilla type traditional acquisitions as opposed to interesting plays like the Sante deal and like others?

Yes, I think that's right. I mean there are still a few REOs out here, there still a few potential note purchases. But I would suggest to you that the majority of whatever you see us do for the remainder of the year will probably be pretty much straight up deals that we're going to try and place equity or capital end markets that we think are going to have better growth than the average.

Okay. Thank you.

Our next question is from Haendel St Juste with Keefe, Bruyette & Woods. Please proceed with your question.

Hi guys, good, I guess good morning for you.

Hi, Haendel.

And I want to go back to the renewals for a second. The July increase of 75 that's clearly slowing from the 2Q 1.6%, curious on what's the cause for that seeing the numbers for your peers going the other way?

I can't-- I mean you're talking about relatively small percentages. So I can't drill down that far and give you any color. I think it's more of the same type of trend. Again, it all depends on which unit renews and which unit expires. There's a vast difference between where we are relative to the expiring leases rate in many locations. So it just happens. I can tell you that we have some goals in managing that thing. As I said before this is a-- it's sort of a teeter totter. You're trying to accomplish a few things. One is you want to -- you want to benefit from the higher transit price but you want to keep availability low to improve pricing power on the units that you are going to turn and then ultimately saves the turn costs. So I would like to see the range of renewals versus new leases to be relatively close to one another, certainly within 3%.

As to most of our property, particularly in Seattle, it is-- in many cases exceeded that 3%. In other words, we're having success on the renewal side, renewals that some were around the zero to 1%. But on these leases we push too hard on the renewal side and it flipped around on the other side and we are off in Seattle 2% plus on the new lease side. Again, we don't want to see that spread get too large. We're trying to manage those two variables and in some cases, it's we push too hard on the renewal side and create availability and loss pricing power on the leases that we turn.

So again it's an ongoing management program to try to balance between the two and in managing that process we may-- it's going to vary a little bit, it's not going to just be a straight line. Ultimately we're trying to maximize NOI, that's our goal. So we're concerned about the turn costs, we're concerned about the renewals. We want the renewals to support higher rent growth and pricing power. And we are constantly moving those levers on a weekly basis to try to get it right.

Got you, okay. Can you give a little bit more color on the forward look though? You gave some initial August and September, what you're sending out, 2% on average. Can you give us that by region perhaps, your core regions, (inaudible) Seattle and the (inaudible)?

I don't have it broken down in front of me, Haendel.

No problem. Last question I guess for Mr. Dance, I guess I'm trying to understand on the mez front, can you help me understand the underwriting process and how are you're arriving at borrowing rates for the lenders? I just want to get some better understand of the process.

A lot of it is where we are in the loan to value. So the higher the loan to value, the higher the risk we're taking and the higher the rates going to be. Then some-- a borrower perspective with the very low GSE financing that they're able to obtain for say 55% to 65% of the loan to value, and we can add another 10% to 20% and still be in a relatively good position and have very attractive unlevered returns.

Okay, well I'll follow up both of you on that later. Appreciate the color, guys.

From the borrowers perspective, they're all-in cost when you add the 10% or the 13% that we're getting, is still high 5%, low 6% because they're getting 4.75% GSE financing for say 60% to 70% of the loan of the value of the asset.

Okay. Thanks, Mike.

(Operator Instructions) Our next question is a follow-up question from Mark Lutenski with BMO Capital Markets. Please proceed with your question.

Hi there just a quick question. How much of your outstanding debt is tied to the GSEs? And do you think that going forward you'll adjust that level?

All of the secured debt is either GSE credit enhanced on the variable rate demand notes, except for the one we just closed in July, that is a total return swap. And as long as they continue to beat the best execution by 50 basis points or more, we like going to that well, it's the best well out there. If insurance companies come-- or unsecured bonds we can get within 50 basis points of a secured financing, we'll stay drawing water from that well.

Got it. Thank you.

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

Thanks for joining us and hopefully see some of you in Orange County and the rest of you in NAREIT. Thanks a lot. Bye.

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