Essex Property Trust Inc (ESS) 2011 Q3 法說會逐字稿

Greetings and welcome to the Essex Property Trust, Inc. third quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael Schall, President and Chief Executive Officer of Essex Property Trust. Thank you. Mr. Schall, you may begin.

Thank you and welcome to our third quarter earnings call. As a reminder, we will be making comments during the call which are not historical facts, such as our expectations regarding markets, financial results, and real estate projects. These statements are forward-looking statements, which involve risks and 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.

Eric Alexander and Mike Dance will follow me with brief comments on operations and finance respectively. John Eudy, John Burkart, and John Lopez are here for Q&A. I will discuss two topics on the call today. Our Q3 results and a strategy update. On to the first topic. Q3 results.

As you know, last evening we reported core FFO of $1.42 per share, a 14.3% increase compared to Q3 2010. Although that result was consistent with Consensus estimates, the same property performance was below our expectations for the quarter, primarily due to occupancy.

As Eric outlined on last quarter's call, we chose a strategy of creating higher rents for lower occupancy, which was mostly successful as rental rates increased 2.4% sequentially, and 5.3% quarter-over-quarter. However, our plan to increase occupancy toward the end of the quarter was not realized, as consumers reacted to the uncertainty surrounding the Euro Zone and global economic issues. I am disappointed in our speed of reaction to these changing market conditions, and we all realize that we must do better. In my 25 years in this business, I have learned that the road to economic recovery is not smooth but rather a bumpy path.

Having said that, I believe that you will all feel much better about where we stand after the call this morning. During the quarter we remained active on the investment front, having closed three acquisitions for $298 million, and representing 1,383 units. That brings the total closed acquisitions and preferred equity investments through September to $489 million. We have several transactions in the pipeline in Q4. Cap rates remain in the low to mid-4% range for A property in A location. And high-4% range for B property in A location.

We also announced a new development project Fountains at La Brea, located in West Hollywood, as outlined in the supplement. Development deals can take a long time to put together, and we have been working on this deal since 2010. There are three other potential development deals in our pipeline. If they come to fruition we should be announcing them in the next several quarters. Thus far in 2011 we started construction on four apartment development projects aggregating almost $350 million. Development cap rates are in the 5.5% to 5.75% range, based on today's rents for deals that will be construction ready within the next six months. There are a significant number of potential development deals being shopped around, most of which fall below this cap rate level, and therefore they may not be started soon.

Financing development deals requires a big balance sheet and the companies with big balance sheets are increasingly occupied with their committed pipeline. As a result, I am more confident now that apartment supply will not be as big a factor as I thought several quarters ago at least until 2014. We continue to watch the supply picture closely. We are pleased to increase our 2011 guidance as indicated in the press release. Mike Dance will review the guidance change components in his comments.

Now I will do my second topic which is strategy update. We expect to issue our 2012 guidance in late December or early January. The following comments relate to our outlook and focus for the Company for the next several years. Our overall goal continues to be growth in core FFO per share, to the extent it is consistent with NAV growth. This is essentially the same basic goal that we have pursued for the last 17 years. We remain strongly optimistic about the apartment market over the next five years, and believe we are in the early stages of recovery in rents, driven by the rebound in rents following the 14.5% reduction in market rents that we experienced from September 2008 to December 2009. At September 30, market rents were still approximately 2% below the prior peak.

Given these factors, and with an assumption for a slow but steady paced economic recovery, we believe that our portfolio will experience weighted average market rent growth of approximately 28% over the next five years. Our confidence is based on the following observations. The West Coast recovered later and thus has more room for growth before hitting natural limits, such as rent to median income ratios. Second, a better than average job growth outlook led by the tech sector. Third, for sale development continues to be at very muted levels, and it will take at least a few years for apartment supply to recover. Four, demographic tailwinds including retirement and downsizing by the baby boomers and their desire for accessible units, and the Echo Boomers entering their prime rental years.

On total housing supply, we believe that it will take several years for supply levels to recover. In Seattle, for example, total housing supply is expected to be 0.4% of existing housing stock in 2011, growing to approximately 1% in 2014. Following a similar pattern in 2014, housing supply is expected to reach 0.6% of stock in northern California, and 0.7% of stock in southern California. Thus even with limited job/demand growth the West Coast markets are expected to have an undersupplied housing condition.

We also studied various East Coast markets and have chose to remain focused on the West Coast largely because of the factors noted above. We have made significant improvement in the overall quality of the portfolio through our recent acquisition and development efforts. With distress abating, our focus will be on well-located B quality property. We expect to remain an active investor for the foreseeable future.

As in the past, we will focus on acquisitions that are accretive to the portfolio's cash flow, NAV, and growth rate. For practical purposes those acquisitions will need a minimum 9% unleverred IRR to be accretive. 9% to 11% fixed returns on structured finance investments, which we will likely limit to about 5% of total capitalization. Development deals with a 10-plus percent unleverred IRR, with the Company's unfunded commitment to development expenditures targeted at 5% to 7% of total capital. We will expand our property sales activities over the next several years. Mostly to cull the portfolio of property with lower financial return expectations, and the sales fund, too. Our valuation thus far indicates up to 20% of our property will be available for sale over the next several years.

The key considerations in the sales decisions will continue to include use of proceeds, competitive cost of capital options, the effect of Prop 13 in California, and also growth rates and cap rates, both relative to the portfolio and to the stock price. As an example, we have sold one property this year, and have listed several others that were originally acquired as part of the merger with John M. Sachs in 2002.

Redevelopment is an important part of our overall strategy. Our coastal markets are producing less than 1% of housing stock in the typical year, thus, over 20 years we will produce somewhere around 20% of stock, meaning that 80% of the existing housing stock will be in excess of 20 years old. Given that environment redevelopment is an essential part of our overall strategy, with a drop in construction costs amid the Great Recession, we completed more than ten major exterior modernization projects, which are now ready for interior unit turn programs. We beginning in 2012, we will ramp up our unit turn program to from 1,000 to 1,200 units per year. We expect redevelopment to contribute 8% to 10% cash on cash returns, and a high-teen IRRs.

With respect to the balance sheet we expect to continue to operate the Company in a thoughtful and conservative manner, given the volatility and uncertainty of the current environment, we have employed a match funding approach to investments, whereby capital commitments are matched off against capital sources without significantly increasing our financial exposures. In this environment, having access to many capital sources is desirable. We continue to utilize joint venture partners for a significant portion of our external growth to control our forward commitments and get paid for our real estate expertise, and maintain access to this important capital source.

Now, I would like to turn the call over to Eric Alexander. Thank you.

Thank you, Mike. It is a pleasure to be here to report our third quarter operating results, and give our view of the rest of the year. The rent gross momentum that I reported on last quarter continued to be strong into the third quarter. And allowed us to post the best sequential gain in scheduled rent in more than three years. As you might have predicted, this growth was led by northern California and the Pacific Northwest. Southern California showed modest growth as well.

The third quarter was really marked by two distinct periods for Essex. The early strong part of the quarter in September. Encouraged by the acceleration in new rents, strong renewal activity, lower turnover and high occupancy during the second quarter, we aggressively pursued a strategy to push rents during the peak demand period. As expected we did see an increase in availability, the traffic remained strong, and renewal efforts were also successful throughout the period.

In August I think we he experienced a bit of a head fake. Even though traffic remains strong, and existing residents were accepting higher rent rates, prospective residents seemed less confident, and reported looking at more communities before making their decisions. We took on some additional notices and our net availability grew. We made appropriate pricing adjustments throughout August, but entering September we felt that trying to find that optimal balance between occupancy and rent levels during this period of customer uncertainty could prove to be risky for the fourth quarter.

Therefore, we lowered our offered rates during September and into October to ensure higher occupancy, and a more manageable availability during the fourth quarter. Those adjustments proved to be wise, as occupancy at the end of the quarter was 95.5%, with a net availability of less than 6%. And just a month later, we hit a peak of 96.6%, and our occupancy was a 4.9% availability.

Not surprisingly, we experienced more vacancy loss during the third quarter. Much of this increase in vacancy was concentrated among three student dominated buildings where the traditional second wave of demand never really materialized, amidst a national leading fee hike of 21%, an increase in availability for on-campus housing, and more doubling and tripling up of students than seen in prior years. Additionally in Ventura County where 12% of our portfolio resides, occupancy was slower to recover and required more aggressive pricing for lower availability. It is true that the greatest sequential vacancy loss actually occurred in the Pacific Northwest, followed by northern California, but that is where we achieved 3.6% and 3.7% gains in scheduled rent for the period, and that will certainly be a benefit next quarter and into 2012.

The average rent gains for 4,100 new transactions during the quarter was 7.5%. Additionally rents on new move-ins during the third quarter were 3.7% higher than the new move-in rents achieved during the second quarter. I think these facts showed clear evidence that market rents continue to rise in our region, and are consistent with what has been widely reported in independent market surveys. Therefore I believe the loss to lease in our portfolio at the end of the third quarter was only reduced by our summer harvest and stands at 5.8%. The cost addition of this loss of lease also remains the same, with the Bay Area and Pacific Northwest having the most room to grow.

Renewals also continue to grow during the third quarter, and were 7.8% higher than expiring leases on 4,200 transactions. October renewals have not dropped off either as renewals were executed at an average gain of 7.5%. Therefore, the combined result for achieved rent during September as well as October, were actually higher than what we achieved in June on a combined basis. As we approach the end of the year, I do expect to see some decline in our gains on renewals, as market rents historically moderate compared to the summer season.

Overall, we continue to believe there is an ample opportunity to increase revenue within the portfolio in the coming year. Now with respect to operating expenses all of the drivers remain similar to the second quarter, in that real estate taxes, insurance, management fees, and administrative costs were relatively flat compared to the third quarter of 2010, resulting in a modest increase over last year of 1.5%. Utility costs remain within expectations, and are up only 1.7% from last year at this time.

Turnover is up compared to the second quarter and the third quarter last year,and is now equal to 2010 on a year-to-date basis. Therefore our expenses were up in this category during the quarter. Additionally, cost per turn is up in all regions, as we continue to improve the quality of our product in an effort to achieve higher rents. This approach applies to our renewal efforts as well, as we seek to satisfy our existing residents by granting reasonable improvement requests to their home in conjunction with higher rental rates. We expect turnover costs, repairs and maintenance to decline in the fourth quarter due to lower volume and fewer one-time expenses, and we look for the other expense categories to be relatively flat to down.

Now with respect to our new lease-up activities during the third quarter. Following the stabilization of Skyline, Muse, and Allegro last quarter, Ellerines, Reveal, Santee Village, and Via all made excellent progress during this period. We continued our final phase at Via during the quarter, and are currently 64% occupied, and 75% leased at this new development. We expect to reach stabilized occupancy early in the first quarter of 2012. Santee Village was leased up ahead of schedule, and was 92% occupied, and 95% leased at the end of October. Bella [REIT] also leased up ahead of schedule, and was 95% occupied and 100% leased at the end of October. And finally Reveal is leasing ahead of schedule, and is currently 78% occupied and 85% leased.

Now I will comment on each of our regions. In Seattle market rents were up sequentially 1%, and based on submarket location we are now within 3% to 6% of our previous peak in 2008. At the end of September, occupancy in Seattle was 94.9% among stabilized assets with a 5.6% net availability. And 96.5% as of October 30, with a 4.9% availability.

The job picture continues to be strong in Seattle. Boeing has added 6,800 jobs year-to-date, and is expected to add more in 2012 to keep up with production. We believe that unemployment in the region will drop below 8% next year. Continued office space absorption foretells more jobs in the coming year, as Seattle has absorbed more than 1.8 million square feet so far this year, or nearly 2% of stock.

In northern California market rents were up 3% sequentially, based on submarket location we are now 3% to 5% above the previous peak in 2008. At the end of September, occupancy was 96.1%, 5.6% net availability. And 96.7% as of October 30 with 4.8% availability. On the strength of hiring activity in the Silicon Valley we are revising our jobs forecast up from 36,000 to 44,000 for 2011.

The future remains bright in the region as office and R&D absorption continues to be positive. An additional 800,000 square feet of office space was leased in San Francisco MSA during the quarter, while San Jose added 1 million square feet of leased office space, and an additional 800,000 square feet of R&D space, following a huge absorption in the prior quarter. San Jose has now posted four straight quarters of positive absorption, keeping us confident in continued job growth for the region, and bullish on the demand for apartments.

Turning to southern California, market rents up 0.8% sequentially. Based on the submarket location we are now within 1% to 6% of the previous peak in 2008. At the end of September, southern California was occupied at 95.1% and had a 6.3% net availability. By October 30, occupancy stood at 96.5% with a 5% availability.

Last quarter we revised our jobs forecast down for the region and our forecast remains unchanged this quarter. However, we have seen some improvement in the professional and business sectors in Los Angeles versus prior quarters, where it was flat to negative for the category. The quarter did see some layoffs or job relocations in venture Ventura County specifically, including Farmers Insurance, Amgen, and Bank of America. Commercial space absorption was up during the quarter, with noted improvements in downtown Los Angeles, Glendale, Burbank, and Pasadena. In conclusion, we are obviously pleased with our lasting gains in scheduled rent, occupancy is back, and we are poised for a good fourth quarter and beyond.

With that, I will turn the call over to Mike Dance.

Thanks, Eric. Today I will provide some additional details on our 2011 guidance, but before I do that, I want to highlight the changes to our debt structure, that contributed to S&P's increasing their senior unsecured debt rating from BBB- to BBB. Pursuant to the $250 million secured Freddie facility, we were notified during the third quarter that Freddie would be increasing the spread on the facility effective December 1, from the current 99 basis point spread over the Freddie reference rate to a 235 basis point spread.

In preparation for the Freddie repricing we were finalizing a new bank credit facility, and opted to terminate the secured Freddie facility, and expand the unsecured bank facility from $275 million to $425 million at 125 basis point spread over LIBOR, with a five year term including the two 1-year extension options. The termination of the Freddie facility resulted when the acceleration of the unamortized loan fees totaling $700,000, of which half is included in the third quarter as a noncore loss on early retirement of debt, and the other half is in the guidance as an increase to the fourth quarter's amortization of deferred financing costs.

The Freddie facility is secured by 11 assets. After the facility is paid off with unsecured debt later this month, the secured debt to growth asset value will be 36.5% and 44% of our net operating income will be unencumbered. With upcoming maturities of secured debt and oncoming acquisitions the Company is considering a 2012 debut of a public unsecured bond offering, if the public debt markets are attractive.

Now turning to guidance. The increase in same property NOI guidance that was provided last quarter expected a higher vacancy and a higher maintenance and repairs expense, as we aggressively increased rents and caused more resident turnover. The net operating income guidance was also predicated upon achieving the 2.4% increase in scheduled rents during the third quarter, with the decline in occupancy of approximately 70 basis points. With actual vacancy increasing 130 basis points during the quarter, our new same store net operating income guidance was reduced 60 basis points to be an increase of 5.4% year-over-year.

For the month of October, financial occupancy was 96.2% with continued increases in scheduled rents from both higher renewals and new leases over expiring rents. Our preliminary October same property results are reporting an increase of $410,000 in sequential monthly gross income over September, and $577,000 higher than the average gross income for July, August and September, giving us confidence that we are well-positioned to benefit from higher scheduled rents and occupancy in the fourth quarter, and into 2012. The revised midpoint guidance for 2011 projects a 3.9% increase in the same property revenues for the year, and a 6.4% increase in same property revenue revenues for the fourth quarter year-over-year comparison. We are also projecting a 1.1% increase in 2011's same property operating expenses, and a 1.2% decline in the fourth quarter same property operating expenses compared to the comparable quarter in 2010.

Consistent with the fourth quarter 2010 results property operating expenses are expected to decrease significantly the rest of the year, as we reduce the number of units that will need to be turned for new resident move-ins. The unfavorable change in the same store net operating income guidance resulting from the increase in vacancy has been offset by favorable variances from our 2010 and 2011 acquisitions, and favorable leasing activities from the consolidated development communities. As highlighted in our press release is, the empty condo buildings purchased during the year will all be stabilized during the fourth quarter and Via is expected to be stabilized early in 2012. The preliminary October results report an increase of $275,000 in non same property gross income in October compared to the September results.

Leasing activity of Wesco's joint venture Reveal property has exceeded our expectations, and the recently announced Wesco acquisition of Redmond Hill, has increased our estimates for income from coinvestments. The formation of a new joint venture for the Dublin development site, and the Wesco acquisitions just mentioned, have all increased our guidance for income from management fees. Lastly the lower spreads on borrowings from the new bank facility, and the drop in the Sigma Index on our are variable rate demand note debt, has reduced our projected interest costs for the year.

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

Thank you. (Operator Instructions). Our first question comes from the line of Swaroop Yalla from Morgan Stanley. Please proceed with your question.

Good morning. Mike, just to confirm so you say that you saw 110 basis points improvement in occupancy from end of September to end of October.

Yes.

So given that the rent trends are going in the same direction, you are seeing the same strength in renewals is it safe to expect about 3%-plus sequential growth in Q4?

Not quite. Just under 3%.

Got it. I mean I think I guess I was just trying to understand your NOI guidance change of 60 basis points? If occupancy is being gained back, and if rents are going at the same level, and also you have lower expenses, I was just wondering why the guidance is dropping?

Because we didn't anticipate the 130 basis points decline in occupancy. We were only anticipating 70 basis points. So to regain that occupancy we did buy back some occupancy in September that we were not expecting.

Got it. And this gain in occupancy, is it concentrated in any markets, or is it sort of more uniform?

It is uniform across the portfolio, but we had lost more in the Pacific Northwest followed by the Bay area, and then southern California. So we did get more back in Seattle, and the overall markets now are in that mid-96 range.

Alright. That is helpful. And a question for Mike Schall. On the development pipeline can you talk a little bit about what level of starts you anticipate going forward for the next couple of years? You did about $350 million this year, but from your comments I think it seemed like you are not seeing too many deals which are in the 5.5%yields on current rent currently?

John Buty is here, so I will make a couple of comments and then turn it over to him. We are seeing a pretty decent deal flow. There is a lot of deals out there being discussed. I mentioned that we have been working on three other deals that are not part of the supplement, and continue to be in negotiation, therefore there is no assurance that they will come to fruition, but we are confident that they will. So I guess from my perspective and our perspective we would rather develop toward the beginning of the cycle, and so we are trying to fill our development pipeline sooner rather than later.

Obviously the top of the cycle development deals even though the cap rates may be the same as the bottom of the cycle the IRRs are dramatically different. John Eudy and I talk about this all the time, and we work together to try to fill our development pipeline, and I think in total it could get to $650 million, thereabouts, which we are about half, because we are joint venturing most of the development deals, so we would have an unfunded commitment of somewhere around $325 million, something like that. John, do you want to add in terms of just the deal flow out there, because you are talking to a lot of these guys as John and I talk about a lot, this is a lot of stuff out there, and keeps circling around.

John, do you want to describe the environment out there?

In general from the spring of this year to-date we have seen a lot of deals that were being pitched that we didn't think met the threshold of the minimum 5.5% going in cap rate. And what we have found is that the ones that landed with capital partners like ourselves that has the ability to do it, have pretty much settled out. We have two to three more deals that are likely that we are going to be announcing in the next couple of quarters, that will keep us pretty much on pace with what we started this year for next year if everything comes the way we think it is going to happen. And the deliveries would be late 2013 into 2014 for the entire portfolio at that time.

We want to be a little bit careful with respect to the guidance part of this, because we are going to, that is why I tried to keep my comments to the next several years, as opposed to 2012 specifically. So please hold off and wait for our 2012 guidance discussion, which will be here in another month or two. I think Mike actually has one clarification, don't you, Mike?

I wanted to make sure I understood your question. I wasn't sure whether you were asking about sequential increase in gross income or year-over-year?In my prepared comments I said the year-over-year projected increase is 3.9%. The sequential increase will be closer to 3.2%.

The sequential growth, right, Mike?

Yes.

Okay, yes.

In gross revenue, Yes.

Okay. Thank you so much.

Thank you.

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

Good morning, guys. Mike maybe the big picture in terms of the asset sales you talked about, and the strategy going forward?I think you mentioned 20% of assets, so maybe around $800 million. Should we think of half of that as Fund II and maybe the other half is some of those other lower growth assets you mentioned, and maybe give us some sense of potential timing?

Jay, that is a good question. Timing is going to be strongly a function of the items that I talked about which are accretion, dilution, what we are going to do with the proceeds, the Prop 13 impact, and so I don't want to go into essentially being sort of focused on a certain amount of dispositions in any one year. We are trying to look for the best opportunities and if you look at a graph of cap rates for example, between A, B and C product, you will find that it compresses toward the top of the cycle. And so I guess the first thing we are trying to do is we are trying to get the best of the combination of cap rate and growth rate.

So we expect the markets to have significant amounts of growth. Therefore that is why we haven't sold more up to this point. But as we realize that growth and cap rates remain low, that will be the primary consideration for selling property. We want to I guess from our perspective, yes, there are some assets that are on our disposition list, and it is a pretty significant list.

But having said that, we are not in any particular urgent, there is no particular urgency with respect to what we are going to do, with the exception of Fund II is completing its investment cycle, its life cycle, so over the next couple of years we are definitely going to sell some Fund II assets. Rather than commenting about how much and exactly when, I would rather defer that until the 2012 guidance discussion.

Okay. And at this point the strategy is still to reinvest within existing markets, or give us some thoughts in terms of perhaps what you might be considering outside of your core markets at this point?

As I said in the comments, we will stay focused on the West Coast. Transitioning markets are good for us. I can give you an example. In the City of Sunnyvale which we have a very strong concentration in that city, that market contains 11% revenue growth year-over-year. Northern California is 6.2% per the press release. So you have 11% in Sunnyvale so that means there is a bunch of area within northern California that are in the 2% to 8% range.

In terms of real estate transactions trying to go to the areas that will benefit most in terms of growth. It is not all the same. It is not as if all of northern California experienced 6.2%. The variations are pretty dramatic and therefore that creates opportunity I think, in terms of our investment program to find the areas that we expect to recover next, and invest ahead of that growth. So we will stay within our existing footprint, but we will be very careful and mindful of how far rents have grown within each submarket.

And maybe just last question in terms of southern California, and I know it continued to lag. If you look out over perhaps into next year, I know you are not giving guidance at this point, but would you still expect southern California to lag versus the overall portfolio?

We have, John Lopez is here. And John spends his days trying to figure out supply and demand for each of 30 submarkets, and then try to figure out based on supply and demand what happens with rents. There are dramatic changes. You get a 20% rent growth estimate in Silicon Valley, for example, and if you look at his work, he has sort of Silicon Valley as a market performer, given the incredible amount of rent growth in Silicon Valley, by northern California I am just talking Silicon Valley specific, and so that becomes a portfolio performer. CBD, LA, east side Seattle, and what am I missing, John, Orange County become, pop to the top of the list in terms of where we think we will get the most rent growth. And so, John, do you want to comment. In that is a process that we follow, and so the top five markets in what was it two years ago, it was strongly northern California and Seattle, and now it is a mixture of both. What are they, John?

Our top markets, Jay, would be over the next few years the core in-fill Los Angeles market downtown, west LA, Woodland Hills, Tri-Cities, and then Orange County. Next year probably overall southern California will be a little bit below the portfolio, but that will be because of, we have expected San Diego to lag. It just didn't have the big drop that we saw in Orange County and LA. There is going to be a mixed back. Probably Ventura and San Diego will lag the portfolio, but we expect by next summer that Orange and LA will have popped to the above portfolio growth. It is kind of a dichotomy there.

Great. Thank you.

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

Good morning.

Good morning, Alex.

Want to go back to the occupancy thing. Certainly the bar is set pretty high for your guys. Some of the other companies spoke about being able to push more on As, and having some softness on the Bs. Want to get a better sense for what happened, why you think it is surprised, and if this is sort of a reflection of more of the B nature of the portfolio, or just something that you think is more market wide?

Alex, this is Mike. I will answer that. And turn it over to Eric afterwards. Because of these failed condo deals that we bought over the last couple of years, I think we have close to the best assets in many marketplaces, certainly as it relates to Irvine, the Platinum Triangle, some of our properties in west LA, and Warner Center, so we have a lot of experience in terms of what we see on the ground, and we also have experience in obviously the Bs which make up most of our portfolio.

The reason why I mentioned the Sunnyvale comment that I just mentioned a minute ago, where we had 11% year-over-year revenue growth, because we have both A and B assets in that marketplace. B is obviously a brand new property, and so we tracked what happened with rents versus our expectations, and our underwriting, and we have five or six other properties in Sunnyvale which are B oriented. So we can tell you with a lot of confidence that it has a lot more to do with submarket, than it does A versus B. So with that, I will turn it over to Eric. Do you want to add anything to that?

I would just say that we see examples of that in other markets as well, including southern California. Mike Dance mentioned Reveal, that is a new product in Warner Center, and again we have done well there, ahead on the lease-up schedule. Slightly ahead of rents as expected. And we are competing with both new and old product. In Orange County, we have seen some of the older products, B products perform better than say an Via, which is a new, nice A product. And so to Mike's point, I really think it is driven by the individual markets.

And just so I am making sure I am hearing you correctly, it sounds like as the summer progressed into September the existing, your existing residents were fine with the increases. It was really just on the new tenants and post-September, so post 9/30 what is up with the new tenants, are they once again comfortable, or are they still skittish?

It is mixed. We see traffic start to tail off as typical, but it has held up very well. And again, we got good leasing velocity in October as we settled in at the higher occupancy rate at the end of the month. And again, I don't have a ton of data yet over the last couple of weeks, because there is not a lot of transaction volume, but I can tell you that the direction of those new rents has been going up since probably mid-October. So that is what I would have expected to see. I am glad to see it, and we are not having a lot of rejection. And as I commented before, even the last couple of weeks this Reveal project, we continue to get good rates and have strong traffic there. So we are seeing positive signs.

Let me add one additional item. And that is can you outline the exploration profile for November and December, because we turn a lot of units. And part of this is we got big rents on a lot of units turned because in May, June, July we turn a lot of units, and so keep in mind that we got big increases on a lot of turns, and the turn profile or exploration profile changes throughout the year. You just heard what happened in October, and this goes back to our confidence for our Q4 results because there are just not that many expirations for November and December, therefore most of it is baked in at this point.

Yes, good point. So expirations in November are 5.5%. In December they are 5%portfolio-wide. And that includes a low of 3.5% in the Pacific Northwest. And then inch up to 6% come January.

And so to Mike's point it was strong during the, again my view is that it is relatively strong throughout the period when you see those strong renewals. I mean these price offerings both renewal and new are intertwined, right. We have talked about this before where customers have really good information. They can get pricing information on an hourly basis if they so choose, and some people challenge us that way.

But again I think the results speak for themselves, and people are comfortable with those levels. And the thing that I would add is that further confidence for the fourth quarter is I do have a fair amount of information already on November, as executed renewals are tallied, and there are some 900 of them at over 6%, or 6% over expiring rates. So that again, looks really strong and will serve us well.

And then just a second question is either for Mark or Mike Dance. Just with the public unsecured debt markets in flux, curious what is going on in the private unsecured debt markets if they are in the same flux, or maybe they are a little tighter because it is more direct underwriting?

I think it is not quite the same. We do have a number of large investors that are interested in increasing their investment in us, but the spreads have widened, so we were hoping to price an unsecured private placement of about 50 basis points wider than what we would get on a secured. And we weren't quite there yet. But I think we can get something done 50 to 75 basis points over, so a magnitude that would be pretty meaningful.

Okay. Thank you.

Our next question comes from the line of Rob Stevenson with Macquarie. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

When you are sitting here today taking into consideration the health of your market, what you have been seeing in terms of rental rate growth, is the 96.6% occupancy that you ended October, is that where you want to be? Or do you want to drift that up to sort of 97%, or are comfortable pushing rental rate harder now, and seeing that drift back closer to 96%?Talk about where the pricing dynamic is leading you these days on the occupancy side?

I think we will watch the response of the customers. And again, if we are seeing clear response as they continue to accept rate, we will push a little bit because I don't think there is a lot of danger given the low net availability. Again as I commented, traditionally the rents moderate during this period of time, but with such low availability if traffic holds up, it is, so it was up like 20% actually in October compared to last October, and probably about 10% in northern Cal, slightly positive in southern California, with actually greater improvement over last year in San Diego. If we continue to have that and low availability, I think we can move rates, and we will do that.

Let me add to that because Eric and I talked a lot philosophically about what the sweet spot is for occupancy. And we think it is 96% to 96.5%. And my thinning hairline will continue to thin if we have dramatic shifts in occupancy from quarter to quarter, and thus we are going to strongly work on managing occupancy within a tight range.

Okay. Because I mean if I look back, I mean obviously there was a different sort of mode of thought during the financial crisis, but I mean a lot of the fourth quarters historically you guys have sort of run close to 97% occupancy, if you go back, and so I didn't know whether or not you guys were trying to operate back up at that level, or whether or not, given what has been going on, and your ability to push rental rate, lower occupancy is sort of where you want to be.

I think our status is strong now and we can hold that through the end of the year and very content to do that. If we see something different like I said, based on what the customer is telling us we will start to drift higher on the rate, and put ourselves in position to strike early in 2012. But to Mike's point, there will be more discussion about that balance between those two. It is interesting. It is a hard thing to do. We thought we were gaining confidence for example last year going into even October for Seattle, and in retrospect they were probably pushed too hard last year, and dropped our occupancy to 95.5%, or something like if that if I recall. Again the customer was saying hey, your rate is going up too high, and I am not interested in moving right now. So we are going to be careful.

Where did you guys send January renewal notices out at?

We haven't sent all of them out. Some of them are sent out closer to 30 days in advance, and then only the higher ones are sent out at 60 days in advance. So I don't have a summarized report for that yet. But again, I would say that they are similar to what we have been doing in the past couple of months, and again, those are declining a little bit, even as pleased as I am with 6% in November, that is obviously less than the 7.5% in October and September. So I would expect it closer to that.

Okay. And then last question. Can you talk a little bit about where returns on redevelopment are trending, given what is going on in the markets with rent and acquisition pricing, et cetera?

Yes, this is John Burkart. The numbers are kind of a range. Again it depends on the type of product we are delivering obviously we are trying to suit the product to the marketplace, so we have some that are on the low side in say the 8% cash on cash, and then others are quite frankly substantially higher in the 20 to 25s. Overall, we doubled the amount of, roughly doubled the amount of renovations that we did in this quarter over the last quarter, and it worked very well, and as Mike mentioned, we are increasing that number and we will see a much greater supply as we go into 2012 and beyond.

Okay. And I guess just a quick follow-up for Mike Dance. When you are increasing the amount of redevelopment in the portfolio, how much of an impact does that have on the recurring but noncapital enhancing CapEx for you guys?

We are targeting about, with the exteriors and the kitchen and the bath, the dollars that we are going to spend is that what you are asking?

Does the adjustments from FFO to AFFO should be going down as your redevelopment spend increases, because you are spending more money on units, to do a whole cadre of improvements, rather than just doing maintenance on them?

We try to break that out on the statement of cash flow. I am not sure how the analysts, we don't put it it in the AFFO number because it is revenue generating. I don't know what --

I think the question is to the extent you redevelop something, you basically aren't going to have to as much CapEx in the future, because you have redeveloped it. What effect does that have on AFFO going forward is the question.

I don't think we do enough redevelopment to have a significant outcome on rest of the portfolio.

At least not this far. Maybe the more significant number is just that we do have some rehab vacancies as part of our vacancy number, and I don't know what that number was. I think it was around 50,000 for the quarter.

I didn't comment on that earlier, but there were certainly some in the third quarter, and to the extent that the timing is right we will take advantage in the fourth quarter of getting some units started for next year. I would add a comment on this A, B redevelopment stuff, this is where we see something as well that I think it supports this sort of, the market is really the bigger driver. We are renovating an exterior of a 1970 building in Orange County, and we have had favorable surprise on the response, and rents have gone higher than we expected there, which is very positive.

And in turn we were getting an acceptable return about what we thought we would get in Simi Valley, which is in Ventura County, but it hasn't seen the same bigger spike which we enjoyed in Orange County. That may be an easy one because we talked about the softness in Ventura. I would say that we were pleasantly and remain consistently pleased with the results in Orange County, and expect some of that to happen in San Diego where we are doing work, and certainly in the Bay area where we are.

Okay. Thanks, guys.

Thank you.

Our next question comes from the line of Eric Wolfe from Citi. Please proceed with your question.

Thanks. I just wanted to follow up on Alex's question, and try to better understand whether the rise in occupancy in October was really a function of you just changing your pricing, or if there was a sense of mix shift among your tenants as well?Talk about how much you were pushing rents on new tenants in August and September versus what you did in October, and how you think that should trend for the rest of the quarter?

This is Eric. That is hard to decipher. There is clearly a difference in rent levels related to improving occupancy, but I also think as reported by the sites, through the regional managers that there was a more confident set if you will. That part is more difficult to quantify.

But if I isolate out just the new rent achievements in these months that you talked about, September and October, it is in the $1,400 range as far as achievement. So that is about $50 to $60 less than what was achieved, say back in June. But is slightly more than what was achieved in just the month before that in May. So we started pushing getting some gains in June, and then we just carried that into July and August. So it is a little of both but--

Eric, keep in mind that we turn a lot more units in June and July than we do in September and October as well. So the number of transactions actually matters here. So if you recover, or if you give up a little bit you are giving up a little bit on fewer units than you gained on in the June/July period of time. It is still net beneficial trade from my perspective. As Eric said, overall rent levels of what was achieved didn't change all that dramatically from June to October.

Okay. And again keep in mind that gave you those, hey it is $50, $60 less in October compared to June, but historically you have a decline in that measurement as well. You have going all the way back to even more positive years of 2008, pretty lean when you see that, those rents moved down, moved down in 2009, moved down in 2010. Again part of it is seasonality. Part of it is consumer sentiment. And part of it at least earlier, say the beginning of September was occupancy driven.

And again it really as I said, we were really surprised a little bit by just the strong results in renewals, and we have come off these two, three very good months on the new rent gains, I mean double-digit gains in the Pacific Northwest and the Bay area, strong traffic that held up nicely in August, and people were just sort of looking but not doing anything. And again, that is where I said at some point you say well, I don't know how long that part is going to last, let's see if we can entice them to snap up some of these units, and they did.

Got you. And so I guess since you mentioned that the $60 normally declines to some extent just given the seasonality, so on a percentage basis you did see some decline, but it wasn't a huge change in I guess the trajectory of your results. It was just more of a seasonal run and a bit of a pause?

Well, Eric, again, it was strategy, it was a little bit of market. The market changed somewhat in terms of what the consumer did. The consumer was reacting to current events and we all know what they were. They range from the downgrade of the US credit rating, to the stock market fell apart, I think it was actually you guys, maybe it was Michael commenting on our last conference call, that our market cap is going to be a lot lower after the call, because the stock market was in freefall at the time in August.

The market did change and these properties are pretty economically sensitive. We all know that. That is nothing new. That is why this is such a big deal to everyone, and I get that. I guess I have to it step back away from this and remind everyone this is a longer term business. I know it is quarter to quarter, because we are a public company.

But there is a little bit of inconsistency between what our objectives are and what the quarter to quarter objectives might be, and so hopefully you and everyone else can appreciate that they don't sometimes line up perfectly, and we may have to go a somewhat different direction. In the beginning I said hey, we are disappointed in our reaction to change, because I think we could have done it better. But we also, the reason why we wanted to bring the October results here is yes, we have a very strong trajectory through the end of the year, and we don't turn that many leases in November and December and you know what October is. The skepticism maybe in your report last night, I think we have directly addressed here on the call.

Great. That is understood and sometimes with the market up , up and down 200 basis point a day, it makes you want to be more short-term focused. Just one quick last question. I was just wondering if you could have a significant presence in any other market just for maybe the next year, what market that might

My quick answer would be Boston, because it is similar to the markets that we are in on the West Coast. I am not sure we want to diversify out of our tech oriented market and do another tech oriented market. I am not sure that is ultimately what we are trying to accomplish. We are trying to find markets that are to some extent counter-cyclical to what we see he out here, so I would have to say New York City.

Okay. Thank you.

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

Following up on the last question. As you look at your portfolio today in the markets you are in, is there any markets as you go about repositioning or not repositioning, but recycling of assets is there any markets where you would like to lighten up, or markets where you would like to increase exposure?

John Burkart is here, and he is the keeper of the dispo list. John, do you want to comment on that?

As far as lightening up our exposure, clearly where we have underperformance specifically Ventura and a couple of areas, there would be some discussion of sort of lightening up our exposure, but overall we are looking asset by asset, and looking at where the current returns are and projected returns, and then making decisions to try to optimize the overall portfolio returns. Some of that is market related, and some of it is asset related within that marketplace.

Actually, Mike, let me add to that. Because I think yes, Ventura is on the list and that is nothing new. It has been on the list, these lists were prepared, what pretty close to a year ago?

Yes. And we chose to execute on the Sachs assets as I commented, primarily because rents didn't fall that much in San Diego, that is one factor. The expected rent growth is not that light is another factor. Our overall expectation for Ventura County for example just to follow-up on John's comment is actually fairly positive for the next several years, and again, we don't have the gun to our head with respect to any of these transactions. We are trying to find that sweet spot between projected rental growth and cap rates, so that we can find the appropriate exit. I think we in retrospect maybe we wish we would have done fewer of the Sachs assets and more of the Ventura assets, but nonetheless we are where we are, and we are focused on it, and it will be a bigger part of what we do going forward.

That is helpful. Second question in terms of markets where you have purchased aggressively, are you starting to see people double up as you are pushing along, 8% and 10% renewal increases?

Some. It is hard to quantify. Certainly in Santa Barbara where we commented earlier, only because we just have more people on the ground and involved with the student population there, we have actually ended up with more availability than we wanted, but since school started they have actually nabbed five or six people that were already sick of their triple share arrangement. or converted garage living, or what have you, so certainly in some markets like that, where the rents are very price sensitive, or at least initially was. But as far as the Bay area, as the Bay area goes, get a little bit of it, but it doesn't seem to be overwhelming.

I just wanted to follow-up on that one. The studies that I see talk about the where what is the household formation demand of the Echo Boomers. Just in general, just because they are entering their prime renter years, and the numbers that I see have ranged from about $500,000 to $1.5 million nationally. I think there is evidence that yes, there will be some doubling up, but I think there will probably be more undoubling, i.e., most of the double-ups are obviously kids living with their parents, and I think that the trend will be for a net uncoupling, not a net doubling up, even with the rents that we have,except northern California, rents are still where they wereas I said on our portfolio rents are still 2% below what they were in the prior peak. So I don't think there is a lot of evidence that rents are at the point where there is widespread doubling up. I just don't see that at this point in time.

Finally you sold West Dublin into the joint venture, and most of your developments right now are in joint ventures. I understand with the large development in San Jose multiphase trying to reduce some risk there, but just you talked about cap rate spreads being 100, 100-plus between development and acquisitions. Wondering why you are choosing to go more development, more joint ventures on the development as opposed to keeping maybe some of that upside on the balance sheet?

We talked about this a lot and again John Eudy is here. I guess to simply put it, we targeted an exposure of the amount of our unfunded commitment. You are right, development has a cap rate spread over acquisitions, but it doesn't have the same ability to lock in the capital that is going to be consumed over the next couple of years, and that capital mismatch issue is a significant one in development. I mean at this point in time most of the stuff that we are looking at, we are ready to start construction right away. On Fountain La Brea which we just announced, we are under construction now. We try to get into the dirt very quickly. Minimize that cost risk. We have a general contractorready to sign the GC agreement pretty much right when we close, and then get right into the real estate. We are focused on that unfunded commitment level, and what we are planning to do is essentially of that $325 million number, which is the number that we feel comfortable with, we would rather develop twice as much in a joint venture than to do $325 million and own it all.

Alright, guys. Thanks.

Also much of the joint ventures have promotes in them, and so to that extent as Mike said if we are doing twice as much and we have promoted interest, we are actually in a great spot.

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

Thank you very much. Give us a characterization between anyis there any difference from the tenant profile between the tenants that are moving out and the tenants that you are backfilling with, either in terms of average household income or credit profile, or any metrics that you follow?

This is Eric. I would say that it is, I would say that it is fairly similar. I don't have perfect information on this relative to the specific items that you mentioned. We have not changed our underwriting criteria for income requirements, and so sort of by definition the in-place rents often are lagging the market rents, and so the people that are moving out moved in previously and the next ones are moving in at a higher rate, so they are obviously qualifying with a greater income. Sorry as a base, so we have seen an uptick in denials this year. Not huge, but again, that is largely related to credit issues. So again we are not sticking out neck out there. We a couple of years ago had we worked our underwriting model for the applicants to accommodate for people that had otherwise good credit, but were just upside down on their mortgage, and I think we made an appropriate and stayed set on those people. So I guess those would be my comments about that.

Thanks. And then could you just give us some color on the disposition incentive program? What are some of the parameters with that?When it was put in place, and why did you feel the need for it?

It was put in place a couple of years ago and the parameters are either percentage of the sales price, or a percentage of the gross profit. And as Mike alluded to, management here has been very engrained in the acquisition and development side, and we are trying to improve management's willingness to let go of some of these assets. The people a lot of times you unfortunately get married to some of the things that you are involved in acquiring or developing, and this is a way to make sure that we have incentives to do the right thing, and dispose of assets that aren't going to keep up with the rest of the portfolio.

Thanks very much. That is all I have.

Our next question comes from the line of Haendel St. Juste from KBW. Please proceed with your question.

Hey, good afternoon guys. Following your comments earlier, Mike unwinding Fund II over the next few years, Given that three-quarters of Fund II is in So Cal and Seattle, and in conjunction with your relatively positive outlook for So Cal, I guess it is fair to assume that your net exposure to So Cal will ratchet up over the next couple of years? And if so, how much exposure to So Cal are you comfortable with on a relative basis as a percentage of NOI?

Yes, I think it will change over time and I think we took So Cal NOI contributions at 60% at several years ago. And then we started buying northern California and taking So Cal from 60% to 50%, and actually would have probably taken it further than that, further down, except that we just can't find that many deals to buy here in northern California and Seattle. We have been pretty aggressive up here, and thus you just can't move the numbers, the portfolio is picking up and you can't move the numbers that much. Having said that, I think John Burkart is probably better to talk to you about the specifics of Fund II, and what impact that might have. John?

A good point here like you said nor Cal and Seattle or So Cal and Seattle , but the NOI is the majority of the assets are really nor Cal and Seattle, with some with southern Cal. As you can imagine the probable plan would be that we would be selling more out of the areas that have had higher growth, i.e. nor Cal and Seattle sooner, with the southern Cal with the assets we expect to get more growth going forward being the latter sales. And we have a good amount of time to execute the plan, and obviously great flexibility with our partners. These are long-term partners ten years plus, and all on the same page, so we have it with all of our authority to change the timelines as we desire, if we think the market deems it appropriate, we keep the assets

Actually, let me take a step back. What we do is rank our 30 submarkets, try to focus in on the ones with the greatest rent growth, and then conversely, actually if you picture it, we try to buy in the top third, and consider selling in the bottom third in terms of growth. Those markets are not necessarily geographically perfect. In other words, there are markets in southern California that we are selling, and there are other markets in southern California that we are buying. It is difficult to categorize or determine a percentage by southern Cal versus northern Cal versus Seattle, because the reality is, we could be buying and selling in southern California. We could be trying to acquire in downtown LA and selling San Diego, for example. It really goes down to more of the submarket and asset-specific factors that are driving our sales decisions, and less sort of macro percentages tied to the three large regions.

Got you. So certainly I appreciate the color and understand the process here, but I guess there is no hard set fast rule on what the max exposure to any specific region is, though?

Yes, 60% is probably of the most we are going to do in southern Cal, subject to everything I just said, yes.

Got you. And the average tenant income for your portfolio today, do you have a sense of where that is, and if so would you give me a sense of where rent with respect to income is across the key regions, and where that are has tended to top out as you look back over the long run?

This is Eric. Again with all of the different products and so forth out there I would have so say sort of in the mid-70s kind of range. And I don't see with respect to the topping out, that is hard to say. John, I don't know if you have any comment on that.

This is John Lopez. I would probably say that right now if we look at it from the regional in Seattle, we are still a good portion below the long run rent to income levels, particularly when you look at what the rent income levels are during expansion years. I don't think there is any immediate pushback there. In northern California, we are probably right at the long run average and San Francisco maybe a little above the long run. If you look at where they are in terms of expansions, we are not that far away but we are still below an Oakland and Silicon Valley. We are much closer to Silicon Valley than we were before, but we are still probably in the 18.5 range, when the average is about 19.

If we go to southern California, San Diego we are right about at it, because we didn't have the big drop in rent but in our infill LA and Orange, that is where the biggest gap exists right now. Probably Seattle, LA and Orange have the big gaps. We are right there in San Francisco and San Diego.

Appreciate that. And one last one. Just wanted to clarify, when you guys talk occupancy for the quarter, that is average financial occupancy, right? And then that being the case, would you give us the average month ending physical occupancy for the month of July, August, September and October?

The number I gave was 96.2% was financial occupancy. I think Eric had a physical occupancy as of the end of the month. We will circle back with you on each months end. We don't have that right now, I don't --

I have gotten, again, the most recent one I know because we ended 96.5 at physical in October, and it was 96.2 financial for October. And again, expected to be higher both on physical and financial for November.

And part of the problem with the physical occupancy, and why we will follow up with you, but with the caveat it doesn't really mean that much, because between the end of the month and the first of the month you get a big drop-off because you get all of your notices and move-outs a lot of times on the first or the first of the month tends to have more move-outs than the rest of the year.

So generally true what Mike just said, but I don't want you to be worried about the quarter of November. As of yesterday we are 96.4 physical occupancy. Even though it drops down some, we don't have a big drop there, it is looking good.

Alright, guys. Thank you.

Our next question comes from the line of Andrew McCulloch from Green Street Advisors. Please proceed with your question.

Just one question for me. Have you heard anything new on Prop 13 legislation?Seems like there is some increased scuttlebutt about a potential roll?

We track that fairly closely. I mean Mayor Villarigosa of LA came out as you know, and just hit the press and talking about repealing Prop 13. Unfortunately, he is not part of the structure that will ultimately be linked to that. So I think that Jerry Brown has a somewhat different approach to trying to raise some revenue in the state of California just by way of background. We had a $26 billion shortfall of which he implemented cuts of around $15 billion, and then there was about $8 billion in other revenue that he didn't expect, which left, still left a short fall and he was pushing for tax increases and at this point in time has not completed them in the state of California.

There were some temporary tax increases that expired on June 30. And they were a vehicle license fee, a 1% surtax on wealthy or high income earners, and there was a third piece, a sales tax increase. That was the place that the Governor wanted to go.

Obviously the Prop 13 discussion is one that really has never gone away over the last 20 years, but practically speaking it requires a two-thirds vote at some level, which is very difficult to get even in this great state of California, and therefore the people that would typically fund this type of activity, generally are not willing to throw their financial support behind it at this point in time, given the high threshold for approval level, and the perception of success. I think that the environment is that there will be continued discussion on Prop 13, but I suspect that is not the way it goes at the end of the day.

Okay. And just hypothetically, I know you guys track this, what would be the increased operating expenses or decrease in NOI assuming your property taxes in California were marked to market?

The annual increase in expenses would be in the low $20 millions. $20 million to $22 million depending on where the assessed values came in.

Great, thank you.

Our last question comes from the line of Dave Bragg from Zelman and Associates. Please proceed with your question.

Hi, good morning to you. Mike, you have been doing this for a while and you have been through many different periods in which the consumer has experienced a shock in the past. So could you put August and September in historical perspective for us, maybe in terms of the magnitude of which occupancy came in below your target?

Yes, Dave. I think it had to do with more, well, first of all, every situation is different. I'm not sure that when you get to historical precedence, everything is a little different, remember this is all within a quarter. We are talking in the broader scheme of things, this is a blip on the radar screen ultimately. The reality is the analysts have become so focused on all of the moving parts within the quarter, and they ascribe great value to individual movements in new lease rates, renewal rates, occupancy rates, that it is really beyond the scope of what you can manage.

All within a timeframe because again, as I said earlier, what you might do as an owner of a portfolio over the long haul can be significantly different than what you might do in the quarter, and that topic of conversation is one that Eric and I have revisited many times over the last 30 days, because we are focused on cash flow and revenue, but practically speaking given the quarterly result thing, you may have limitations on what you can do in terms of how far you can move occupancy down in search of higher rents, for example .

So I guess from my perspective there was a pretty sudden change in consumer sentiment as we said before. Our division managers would describe it or do describe it as effectively seasonality started a month earlier. I think it is just related to the results, the things that happened in early August, and I think everything is, every situation is a little bit different, and so I am not sure that history is going to help us with this. What I also can say is our reaction to changing conditions, and again we are not talking about oh, gee, the market went from being great to being horrible. We are talking about a shift of sentiment, a shift of preference, and that type of thing.

It doesn't change the broader picture here, and I think that we could have reacted faster and better to build occupancy quickly. One of the issues we were a little bit more, we had a smaller portfolio, a flatter organization than we do now and it was easier to implement change than it is now. So that is something that we are working on, and we and will be the focus of a meeting that begins immediately after this conference

Well, I understand the preference for focusing on the long-term. I actually think that is the point of my question, is that given such a robust outlook 28% rent growth over the next five years, people are looking for evidence of that sustainability, or evidence that there may be weaker demand than expected. So on that note just thinking about your five year model, what level of household income growth is embedded in that, and how important is that component to the model?

David, this is John Lopez. In our top market we have probably on average over the five year period probably in the range of about 3.5% annual average, obviously in chunks up front higher in the first two or three years. That would probably be the basis for it. Another thing it is critical for us, because that is, we have gotten some, the rent went down and then came back. Probably sold more than they should have given the drop in occupancy, and so there was a bounce back.

Going forward we are going to need those jobs, and that income growth to get that rent growth. And we are seeing that. If we look at, if we get into the job growth and we are seeing the income growth in not just overall personal income but in wages and salaries. So we are seeing the ramp up. We have seen it before and we believe it is there.

Multifamily supply in the single family market those influences are pretty well understood for the next couple years so really to be on track to hit that target over the longer term we need to start seeing household income growth of 3.5% or better over the next couple of years.

I think that the 28% is comprised of if you take 3.5% times five years that is 17.5. You are talking about outgrowing income levels by 10.5% over five years, which we think is sustainable given the other measurements, rent to median income, affordability issues, and that type of thing. So that is what the assumption is based on.

You are right because obviously it is getting that consistent growth given what we have had today, it is based on now we are starting in our market the next five years out, we are essentially above 95 in Seattle. 96.5 in northern California. 95 in southern California. So we have got two years of very, very limited supply with moderate increases starting at 96% occupancy, and we already have year-over-year 1.25% job growth. So we are very confident in those numbers.

And remember, it is just as we look at the national numbers, and you say it is an anemic job, but we have got 3% year-over-year growth in Silicon Valley, and even in southern California where we are a little disappointed, if you look at the office absorption in southern California, that would almost put it on the top of the charts in the entire country. Boston has done well but they aren't beating southern California. Texas has done well but the absorption rates in the third quarter, and this year in Dallas, Houston, Austin would not make southern California look bad.

So we believe that LA obviously has lagged a bit, but if you look at the recent numbers it has been very positive, and the coupling of increasing in the professional business services, and jobs in the third quarter in LA, and absorption of office space. That wasn't a coincidental accident. We are seeing 2-plus growth in Seattle. 3-plus in Silicon Valley. San Francisco is ramping up. We are above 1% in southern California, without the participation yet of LA. So we think we are in a really good position.

That is helpful. Thank you.

Thank you.

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

Thank you. I would like to thank everyone for joining us on the call today. As you can tell, we remain solidly optimistic about the future, we appreciate your interest in the Company, and look forward to next quarter's call. Thank you.

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