Essex Property Trust Inc (ESS) 2013 Q1 法說會逐字稿

Greetings and welcome to the Essex Property Trust Inc. first-quarter 2013 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.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs, as well as information available to the Company at this time.

A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, you may begin.

Thank you. I would like to start by welcoming you to our first-quarter earnings call. Mike Dance and Erik Alexander will follow me with comments. John Eudy and John Burkart are available for Q&A.

I will cover the following topics on the call -- first, Q1 results and commentary; second, cap rates and investment markets; and third, an update on the state of California. So onto the first topic. Yesterday, we reported another strong quarter with core FFO per share of $1.87, an increase of 14% over the prior year and equal to the high end of the guidance range that was presented on our last earnings call.

Our operating results should be viewed within the context of our recent activity in the capital markets that was not fully considered in our original guidance. The result of these efforts is an improved balance sheet with longer debt maturities, less variable-rate exposure, increased common equity, greater liquidity and a lower debt to EBITDA ratio, which is now below 7.0.

Our Q1 results and most of the economic data give us confidence in our 2013 guidance. We acknowledge concerns about the level of housing supply, especially apartments, that are scheduled for delivery in 2013 and 2014 in selected submarkets, notably North San Jose and downtown Seattle. At the same time, there are several important factors that support our optimistic outlook and favorably differentiate the West Coast from other parts of the country.

These factors are as follows. First, although March was a disappointing month from the perspective of national job growth, California continued to perform quite well. According to the BLS forecast, California is estimated to produce 30% of the nation's jobs in 2013 and is therefore expected to significantly outpace the national average in job growth.

Second, production of for-sale housing continues at a muted pace although its pace will likely increase later this year. This expectation is driven by the exceptional increase in year-over-year housing prices, up from 15% to 35% in the coastal markets. While the median priced home still lags the highs set in 2007 and 2008, they have recovered sufficiently to allow for-sale housing development. Our experience is that apartments benefit from high-cost for-sale housing alternatives.

Third point, the health of the apartment rental market depends both on job growth and job quality and the quality of jobs continues to be high in the coastal regions of California and Washington. High-income jobs have a greater multiplier effect, more disposable income and greater wealth creation. A good indication of job quality is estimated personal income growth, which, for 2013, is up 5.1% for Seattle, 4.9% for San Jose and from 3% to 3.4% for Southern California as compared to the national average of 3.1%.

And finally, fourth factor. We look to the office market, H-1B visas and venture capital investment activity for confirmation of jobs and economic trends. While the national office recovery has been modest since the Great Recession, we have seen significant improvement in several of the West Coast office markets. For example, since the Great Recession, San Francisco's office rent growth has led the nation, increasing approximately 30%. In the coastal markets, office absorption has outpaced the US and is accelerating. Major expansions of corporate campuses have been announced by Google, Apple, Amazon and several other companies.

Another confirming data point is the demand for H-1B visas, which are used to admit foreign skilled workers into the US. A lottery style approach was used to distribute 85,000 H1B visas allotted in 2013 with all committed in less than a week.

Finally, venture capital is another confirming data point. California received 47%, or $2.8 billion, of the nation's first-quarter 2013 total [VC] investment.

As a result of these factors, we continue to see a favorable ratio of housing demand to supply. Based on our job and supply estimates indicated on page F-16 of the earnings supplement, we estimate that housing demand, including both apartments and for-sale housing, will, on average, exceed supply by a 2.5 to 1 ratio for the Essex portfolio. We conclude that the apartment market will continue to report strong rental growth. While leaseups will soften rents in a few places and create some level of volatility, we expect new apartments to be absorbed without major difficulty.

My second topic, cap rates and investment markets. Cap rates are generally unchanged from last quarter and are currently in the 4% to 4.25% for A property in A locations and in the mid-4% to low 5% range for B quality property in A locations. Cap rates increase from there for lesser locations and property quality.

In the first quarter, deal flow established by our criteria was relatively light; however, we still believe that we will achieve the $400 million in acquisitions contemplated in our 2013 guidance. We will likely start two additional apartment developments in 2013 aggregating approximately 500 units. We have become more selective for new apartment development opportunities and are looking for locations that we expect to improve with rents that have strong growth potential.

And finally, my third topic concerns the state of California. We believe that significant progress has been made in California. While there is an ongoing discussion about future fiscal issues and the need for higher taxes, including modification of Prop 13, the current condition has dramatically improved from just a few years ago. An improving California economy generates more tax revenue, a combination of an improving economy, reduction in cost and tax increases has eliminated the state's fiscal deficit in this fiscal year. According to media sources, general fund spending in the state has declined by approximately $10 billion, or 9.7%, since the 2007/2008 fiscal year.

Prop 30 will raise an estimated $6 billion in new taxes. As a result, the state expects to take in an estimated $2.4 billion more in revenue than it will spend this fiscal year, which ends June 30. That is exceptional progress relative to the $27 billion deficit that the state experienced just a few years ago. I would like to thank you for joining the call today. Now I will turn the call over to Erik. Thank you.

Thanks, Mike. Essex enjoyed another strong quarter in property operations and we are pleased with our results. Demand was strong and improved throughout the period. Turnover was lower than forecasted and we are poised to take advantage of what is expected to be a solid peak leasing season. New lease and renewal activity maintained strength following a good fourth quarter and not since before the recession have we started off the year with economic rents increasing every week for four straight months.

As of April, [off-the-lease] for the portfolio was 4.2%. As projected, average renewal rates increased 5% during the quarter and are expected to continue at that level through July. Furthermore, the average rents achieved on all new lease transactions in April reached their highest point ever and are $70 higher than renewals recorded in the same month.

So with portfolio occupancy at 96.4% at the end of April, and our net availability less than 6%, we felt confident about the strength of our markets and our ability to achieve our plan for 2013. Bolstering that confidence, the preliminary revenue results for April were at the top end of our revenue guidance for the year.

If there was any surprise during the first quarter, it was lower turnover than planned. Despite strong rent growth and higher renewal rates, turnover for the portfolio decreased 2% compared to the first quarter of last year, with the lowest turnover actually in Seattle. Turnover due to home purchase decreased from the fourth quarter and remains in check across the portfolio at less than 12%. We do expect an increase in moveouts due to home purchase in the upcoming quarters, but anticipate it will remain well within manageable levels. Overall, lower turnover, coupled with rising economic rents, high occupancy and increasing demand should help us maintain pricing power across most of the portfolio throughout the summer.

Expo was the only active leaseup during the quarter. As forecasted, we stabilized this community in April. Congratulations to the Expo team for averaging 37 leases per month during the slowest time of the year. I think this is another testament to the strength of the Seattle market. Demand and leasing volume have remained strong in the downtown despite new product deliveries. Next quarter, I will provide initial leasing results for Epic as we begin pre-leasing activities this month.

Now I'll share some highlights for each of our regions beginning with Seattle. Properties in the region have met or exceeded expectations so far this year and enjoy collective rent growth second only to parts of the Bay area. Seattle posted Company-leading rent growth for new leases in April and we remain confident that this market will meet growth expectations for the year, especially on the east side.

Employment growth remains strong in the region with a year-over-year increase of 2.5%. Job growth details for all of our markets can be found on F-16 of the supplement. Given the robust hiring that continues at Amazon, Microsoft, Google, Intel, Cisco and Visa, we believe job creation will match or exceed our forecast for the year. Of equal importance, the Seattle Metropolitan division posted the highest personal income growth of any of our markets with expected gains over 5% for 2012 and 2013.

Office absorption showed continued strength with 1.6 million square feet of space absorbed during the quarter, or nearly 2% of total stock. I think it is safe to conclude that Seattle remains a hot job market and our portfolio should benefit from these commercial activities throughout 2013.

Northern California continued to lead the way for Essex, the highest growth in rental rates and revenue for the portfolio. The primary reasons are that job growth continues to be strong in the Bay area and the current rate of formations is outpacing our forecast on a year-over-year basis. All submarkets are ahead of schedule and are led by growth in professional and business services.

San Francisco and San Jose job exploits are well known, but the East Bay continues to make meaningful strides in employment adding 21,000 jobs in the last 12 months. First-quarter office absorption in the Bay area was positive in all submarkets and it is interesting to note that East Bay led the region with 600,000 square feet of net absorption during the period.

Multifamily deliveries in North San Jose continue as expected. The demand appears to be sufficient to occupy all these new offerings. Pricing in the submarket increased 3% during the first quarter and concession activity remained normal for communities looking to achieve a high rate of absorption.

Turning to Southern California, Los Angeles leads the results followed closely by Orange County. We expect the relative submarket rankings to remain the same throughout 2013, but do look for Los Angeles and Orange County to increase momentum this summer. San Diego has not been very exciting so far this year, but given that unemployment has dropped below 8% and our job forecast is ahead of schedule, we do expect San Diego to have a better second half of the year. Current occupancies in the county are above 96% and rents moved up in April.

Ventura is ahead of San Diego in terms of rent growth and should perform in line with expectations on modest job growth, high occupancy and low new supply. The jobs picture in Southern California continues to improve in all submarkets, again, led by professional and business services. Los Angeles, Orange, San Diego counties have all seen job growth rise from below the national average last spring to well above the national average in March and all boast rates of job growth above 2%.

The west side of Los Angeles continues to be the strongest with creative and tech companies like Amazon and Beats by Dre seeking additional space while PIMCO, Hyundai and Google expand in Orange County. Office absorption in Southern California remains positive and large projects like the expansion of Universal Studios, the approval of USC Village and groundbreaking of runway in Playa Vista signal a continued economic recovery in Los Angeles.

Therefore, we remain confident in all of our markets and our ability to execute our plan in 2013. Thank you for your time and I will now turn the call over to Mike Dance.

Thanks, Erik. Today, I will provide commentary on our recent capital markets activity and provide details on the second quarter's and full year's guidance. In April, Essex issued $300 million of 10-year senior unsecured notes at an effective rate of 3.35%. The net proceeds from the offering were used to pay off the balance on our lines of credit. While there is a temporary mismatch on the timing of the use of the proceeds, we felt it was an opportune time to enter the market and pre-fund some of our future debt needs.

At the end of April, our cash balance was approximately $100 million with no balance on our bank revolving credit line. By reducing our variable rate exposure with 10-year bonds and pre-funding the debt component of the 2013 development expenditures, we estimate that the additional interest cost will reduce FFO in Q2 by $0.04 per share compared to the Q1 2013 result.

Also, in Q1, we received approximately $40 million from the early payment from indirect real estate investments, which were yielding over 9%. These prepayments will reduce interest income by $0.02 per share in Q2 and subsequent quarters. The $0.06 loss of sequential FFO will be offset by a sequential increase in net operating income for a midpoint in Q2 core FFO guidance of $1.83 per share.

For the first quarter, we achieved 5.9% year-over-year rent growth of same property revenues and a 5.3% increase in same property expenses. Both metrics were better than our internal projections. Our same property expense growth in Q1 was higher than our full-year guidance of 3% to 4% as we have tough operating expense comparisons for the first half of the year.

Operating expenses during the quarter were negatively impacted by 25% higher property taxes in Seattle with increases in both the assessed values and levy rates. For 2013, we are affirming the guidance for FFO and same property operating results provided in January. If the new lease and renewal results that Erik just reported for April continues through the next two months of the quarter, we are well-positioned to achieve close to the high end of our revenue growth guidance in the second quarter.

Year-over-year same property operating expenses for the second quarter are forecasted to be similar to the first quarter. Operating expenses for the second half of the year are forecasted to be below the full-year guidance range as the comparative periods in the second half of 2012 are more reflective of the operating expense run rate for the portfolio. Improvements in our gross operating margins are expected in the second half of 2013.

With the strong operations beating our internal expectations, we are maintaining 2013 FFO guidance despite having issued in April $300 million of unsecured bonds, which was not anticipated at our January guidance. To be clear, had we not issued the bonds and received the early payment on high-yielding investments, we would have been able to increase our FFO guidance. That ends my comments and I will now turn the call back over to the operator for questions.

(Operator Instructions). Nick Joseph, Citi.

Great, thanks. You mentioned that first quarter's same-store revenue growth of 5.9% was maybe a little ahead of your expectations. So just looking at the full-year guidance of 5% to 6.5%, are you expecting revenue growth to kind of trend towards that 5.9%? You are not expecting really a deceleration going forward?

We haven't seen it in April and based on where renewals are going out and what we are seeing, nothing shows a deceleration for the portfolio.

Okay, and then in terms of the development, are you seeing any construction cost pressures?

This is John Eudy. Of course, we are. Fortunately, our portfolio under construction is 95% bought out, but, in the future, for the next 6 to 12 months, there is going to be high single digit increases is our thought.

All right. And then, finally, can you talk about your thoughts on the ATM program, how you balance the desire to match fund and continue to improve the balance sheet with where your current stock price is today relative to NAV?

Yes, I think that was one of the reasons we looked at the bond market. Obviously, we are very pleased with the pricing of our 10-year bonds and relative to our stock price right now, we basically intentionally deferred some of our equity raise and pre-funded some of our debt raise. And we hope with continued strong results that we are expecting, the cost of the common equity will go down, but we will need to continue to deliver the results we are seeing.

All right, great. Thanks, guys.

Dave Bragg, Green Street Advisors.

Thank you. Good morning. Can you just give us a little bit in detail about your underwriting Fox Plaza, your going-in yield and your expected IRR?

Sure. Fox Plaza is our acquisition on Market Street in San Francisco. It is across the street from the brand new Twitter headquarters and it is a very vibrant, changing, improving area. So that is the first very important point in that acquisition. It is a rent-controlled building and as a result, you could expect our going-in yield to be lower than comparable transactions given rent control and that was certainly the case. There was a low 4% type going-in yield, but a much higher cap rate on market rents. In other words, there was a very large loss to lease there. The cap rate on market rents was approaching 6%.

And so, in the short term, as you are turning unit, you don't benefit as much obviously because the going-in yield is lower, but, over time, we hope to capture that large loss to lease and get closer to the economic cap rate given rent control. Does that help, Dave?

Yes, that is helpful. And my next question is just about Southern California. Last quarter, you spoke about the region having underperformed your expectations so far on this recovery. In the first quarter, your revenue growth was at the low end of full-year guidance. So after four months of this year, are you disappointed again with the region or are you optimistic that it will accelerate, putting you at the top half of your guidance range for that region for the year?

Yes, Dave, this is Mike and Erik may want to follow up as well. Keep in mind that we just came out of our seasonal period. Our peak leasing season begins effectively March 1 and we see most of our growth during that period of time. So as it relates to guidance revision, other types of things, keep in mind that we just came out of a seasonal period and so the first quarter may or may not be as relevant as some of the other quarters. In fact, I would say Q2 is the most relevant quarter. We go effectively from having near zero loss to lease at December 31 given seasonality primarily and we see how strong the markets bounce back as we enter into the peak leasing season.

Or, as Erik said, we are favorably impressed by what we see out there and I think that we are on track for a strong peak leasing season. Having said that, relatively new and a couple months does not make a year. And so we are erring maybe a little bit on the cautious side.

So just specifically, Mike or Erik, you said you expect 5% renewal gains April through July for the portfolio. Where would you put those for Southern California?

There is going to be a range in SoCal on the lower end, maybe the 3%s in San Diego or Ventura. Again, that could be higher depending on the specific asset too, 5%s and 6%s in parts of Los Angeles. Certainly the west side of downtown, we see strength and we have good demand and high occupancy. So we are hopeful and optimistic about the upcoming summer. But as Mike said, we will learn a lot more in the next two months.

Thank you.

Rob Stevenson, Macquarie.

Good afternoon, guys. Can you talk a little bit about San Jose, Seattle, when the biggest percentage of the development comes online and sort of how you sort of -- when you see that despite robust job growth, what do you do to sort of prepare for that for your existing assets in those markets to avoid the sort of cycle where one month, two month starts becoming three and people start moving out?

Sure. In San Jose, it is a really unique situation in that, a couple years ago, the city was trying to incentivize new development of apartments before we saw any of the rent increase activity and they granted waivers of the BMR requirements and some other things to help developers start construction. That was granted on five transactions aggregating somewhere around 3000 units. All those units are going to hit at some point in time in the '13 to '14 period and therefore, that is where the slug of supply is coming in in San Jose and again, it is right there before us. Irvine was the first to deliver and a couple others, Laurent Station and there is a series of transactions that are coming in for the rest of 2013 and into 2014.

In Seattle, we see just a continued amount of supply. Our estimates, if you look at multifamily deliveries in '13, we have 6900 units. In 2014, we think it is probably 8000. So we will see continued supply of multifamily units in Seattle, maybe even a few more than we see in 2013.

In Northern California -- well in San Jose specifically, we think it will, given what I just said, it will be reduced. It will go from 4100 deliveries of apartments in 2013 to 3500 in 2014. Again, those numbers can change, especially the 2014 numbers. We track this pretty carefully and so it's pretty sensitive, obviously, to our overall results.

Having said all those things, given job growth, we think that we can absorb these levels of supply and still have very strong rent growth and so we don't expect, based on what we see in front of us today, for a significant amount of deceleration in rent through 2014.

Okay. Given what you guys had said earlier in the call about a high single digit increase in construction costs, I mean I would imagine that, at this point, rental rates are still keeping up with that to an extent where yields haven't, on developments, haven't just fallen off a cliff. But how much higher do construction costs really have to go in your markets before it starts really choking off yields to the point where you are seeing a real decrease in supply?

That is already happening, Rob. To pencil deals today compared to when we were underwriting and doing the front end of our deals that we have in our pipeline now two years ago, it is very, very minimal on what hits the radar from our perspective as far as potential deals. I think the market is recognizing that as well. There is a lot of deals out there being chatted about and talked about amongst various folks from merchant builders on up. But on a go-forward basis, I see the supply starts starting to taper off considerably just for that reason.

Okay. And then just lastly, what is the -- you have got a few redevelopment projects on the books these days. What is the -- outside of those projects, what is the incremental opportunity from a redevelopment standpoint that makes sense from a return perspective today?

This is John Burkart. There is actually a variety of opportunities in the portfolio. One of them that we are starting to embark upon is the (inaudible) of the asset, basically updating the amenities to modern standards. Another one, of course, we are continuing with the unit turn. We have substantially increased our unit turn this year from last year and we will continue to do so. Obviously, the major renovations are still a part of the opportunities, as well as some limited infill opportunity and then, of course, the condo optionality on many of the assets that we have. So we are pretty excited about the value of the portfolio right now.

Can you help us quantify what that, in terms of units, in terms of dollars, that you could put out over the next couple of years in that type of project?

Yes, the units, we are probably going to get about 1200 renovated units this year. There is a range of say 1000 to 1500 and Erik's team and my team work very closely together to make a lot of good decisions based on market conditions, etc. in these areas, but the target is around $1200. We are typically investing around $20,000 per property or per unit and our returns are averaging 10% to 15% on that. Additional renovation opportunity funds, we are in the $10 million to $20 million range on the assets overall. That is in addition to the unit turns. Does that help?

Yes, I was just trying to quantify as to how big of a growth driver. It sounds like there is opportunity, but it is still -- in terms of (technical difficulty) at this point over the next couple of years. It is not going to be a material sort of tailwind from a growth perspective.

Rob, I think part of that is philosophical in nature in that rather than throwing a chunk of money at a renovation program, we try to be purposeful, we try to look for low-hanging fruit, we try to not have a one size fits all type of approach and I think that we end up with a better overall result doing that. The reality is we have most of the housing stock on the West Coast and certainly within our portfolio is 20 to 30 to 40 years old and there is a lot of redevelopment potential within it.

In terms of how to actually execute a redevelopment program. That is where -- there is I think very significant strategic differences among the apartment companies and we tend to take the maybe a little bit more conservative approach, which is try to be very purposeful with respect to how we invest that money.

Okay, guys. Thank you very much.

David Toti, Cantor Fitzgerald.

Hey, guys, just one quick one. Mike, this one is kind of for you. You guys have obviously taken the opportunity to sort of latterly invest opportunistically over the past couple of years, but it has been somewhat quiet the last few quarters. Is that partially because of the deal flow or do you think that pricing, even in the lateral investment opportunities, is a bit beyond your hurdle rates?

Yes, it is really the deal flow. There are two things I think that are happening. Number one, there are more deals that are not within what we define as our core markets, so there is a lot of sales around the periphery and a property that we really don't want to own. So there actually have been transactions, but really not transactions that fit our criteria. So I think that is number one.

And number two, I think there has just been a slowdown in overall deal activity. And I guess the third piece is it is harder for us to make the numbers work given that, last year, we grew core FFO 21%. We are starting the year with a very solid growth rate, which makes our equity more expensive and therefore more difficult to invest at a positive spread in terms of what we are looking at. So it is really all of those factors.

Having said that, we have more modest expectations this year. Last year, we did about $800 million in acquisitions. This year, we expect to do about $400 million. So I think we are still on track to hit that number.

Okay. Then my second question just has to do with the asset you are planning to sell from the fund. I might have missed this earlier. If you guys are hesitant on the acquisition side, what is the buyer profile on the other side of those potential deals? What kind of buyers are looking at those assets and finding it meets their hurdle?

There is a lot of activity in those transactions and most of those properties are very well-located and they will fall within the cap rates that I talked about in my prepared remarks. And so for well-located properties, there is still plenty of buyers out there that are very interested in those properties. So I don't see that changing. I mean I think that you would start seeing cap rates change if you started seeing investor activity pull back. Cap rates are probably more a function of how many dollars, investor dollars are chasing how many deals than they are expected growth rates and IRRs and that type of thing. So we still see plenty of money out there.

Interesting. Thanks for the detail.

Michael Salinsky, RBC Capital Markets.

Thank you. And good morning, guys. Erik, first question, what was the sequential rent growth in the first quarter and also, if you look at the blended rents for the quarter signed, how does that compare versus the first quarter of 2012?

The sequential rents are 28% and over last year, let me look that one up for you, but I think it is -- I don't want to guess at it. I'll get back to you on that.

Okay, I appreciate that. And then second question, Mike, just to go back to David's question about the acquisition pricing in the market, how far off are you missing on the deals? How much is pricing outside and on your numbers and your growth expectations? Where is the market pricing on coastal multifamily assets today on an IRR basis?

I don't really think that is the issue because we are just not underwriting the same quantity of deals that we underwrote over the last couple years, which surprises me a bit because even last year I think was -- the transaction volume was somewhere around 70% of what it was in 2007, 2008. So even last year, we had less transaction volume. We are seeing even less this year. I think a lot of that has to do with what has happened with rent over the past several years. If you go back 20 to 30 years, there was not this peak leasing season concept nearly to the extent that it exists today. Rents increased more ratably throughout the year. Now you have a four-month period that your entire year is essentially predicated on from March to July or August let's say.

And so all things being equal, I think sellers and owners would rather wait a little bit longer and see how good the peak leasing season is before listing their building because, obviously, if the NOI goes up, they can justify a higher, they are going to get a higher price. So I think it is probably more that, but we will tell you next quarter.

Okay. And then I had a question --. (multiple speakers)

Sorry, Mike. I don't have the quarterly information that you asked about. But the most recent information, which would be the complete month of April compared to last year is 7% higher on the new lease -- on all new lease transactions.

Okay, that is encouraging. And just a final question, I think previously you had mentioned 2014 is kind of the year you expected Southern California to outperform Northern California. Is that still a reasonable expectation?

Well, we have been expecting Southern California to improve faster than it has. So I think that is the one area that we have been a little bit off. The magnitude in Northern California and Seattle of rent growth and the pace were much better than we thought, but the pace in Southern California offset the benefit that we saw here.

So we are going to make a similar guess. I am not sure that, and Erik may have a different opinion, but I am not sure that they are going to cross over in 2014. Part of that is due to, if you look at the personal income growth that is so strong in the North, when you are at 4% to 5% personal income growth and 2 to 2.5 times ratio of demand to supply, which were the numbers that we were quoting actually and even more strong in the North, we are starting to think that Northern California and Seattle can remain stronger longer than we thought.

And so we feel good about that and at the same time, I think our expectation for Southern California is the continued slow methodical improvement that we have had thus far recognizing, however, that pricing power is a function of availability in the marketplace and there is a big difference. If you had one (inaudible) go from 95% to 96% market occupancy, you get quite a bit more pricing power over that 1%. So it is more like an exponential impact. If you go from 96% to 97%, you start picking up more pricing power.

So we could be wrong. We think that things are going in the right direction. It has just been painfully slow in Southern California. So I am not so sure that they -- I see them as more equitable than probably one outpacing the other at this point.

Thanks. I appreciate the color.

Paula Poskon, Robert W. Baird.

Thank you. Are there any other industries in your markets that you think will have accelerating significant job growth outside of technology?

I mean life sciences is the other obvious one. In Southern California, we are seeing -- these are not as good a quality jobs, but certainly leisure hospitality seems to be doing really well in Southern California. So I would say anything having to do with tech, energy and life sciences are really at the top of the radar screen in terms of the types of jobs that we are looking for and then, of course, professional services are always good as well. So I would say all three -- special services, life sciences, tech and energy, which we don't have so much of.

Thanks, Mike.

Ross Nussbaum, UBS.

Hi, thanks. I just want to clarify, when you said that, in April, the new leases were up 7%, is that over the expiring leases?

No, that is all new leases executed in April versus all new leases executed last April.

Okay, so effectively sort of market-asking or taking rents are up 7% year-over-year?

There is quite a bit of noise in this overexpiring because our expiring includes -- if someone goes into a month-to-month premium, it is picked up in the denominator of that calculation. So there has been, over the last couple years, more and more of a disconnect between the expiring lease rate. In fact, I have encouraged our people to either create a new metric or deemphasize that one because it is not relevant. I mean we were talking about in Q1 somewhere around 5% renewals and 5% new lease rates, yet we were better than that. And so I think that some part of this is a disconnect in how that metric is calculated. And I think it is becoming a little bit less relevant than it was a couple years ago.

Yes, that is sort of where I was trying to go because I was looking at the back of your supplement in terms of the -- I think it was 6.1% market rent growth forecast you had for this year and I was just sort of trying to tie that back to the 5% renewals, 7% new leases. I mean they are all in the same ballpark I guess. I mean it gives us a sense that that is roughly what you are achieving.

Yes.

I thought it was notable that you didn't change your estimated market rent growth forecast from last quarter. You didn't just simply paste the page in to the supplemental. You continue to believe that the market is as strong today as it was the last time you put out your supplemental.

Yes, that is absolutely the case. This is John. We continue to get great job data, which is actually better than what we had in our supplemental. And we are seeing a great experience out of operations (inaudible).

I think there is one more factor, which is I am sort of philosophically opposed to raising guidance two months after we give it originally. So I was a -- I weighed in against a guidance change candidly because we just gave it to you in February and it is only April and I want to see a little bit more about what happens. So perhaps I am part of the problem there.

The last question, you guys have been opportunistic in the past and I am curious, when you look at the stock prices of virtually all of your peers in the multifamily REIT sector and you look at them and say, hmmm, most of them might be trading at discounts to the cap rates that you are seeing in the market, do you have any inclination to go out and buy a few shares of public companies rather than direct assets?

You are so smooth, Ross.

And I am not saying -- I am not bringing up BRE. I mean this is a whole -- I am not going down that -- I'm not saying you want to buy the company; I am just sitting here saying you have done -- you have done these kinds of things in the past and I am curious if that is still something that you spend time thinking about.

I mean we do try to understand the environment that we are in, but, at this point in time, it is really not where we are spending our time. There are a lot of other things that I think are maybe more interesting to us. We are working on some transactions that are similar, but maybe a little bit unique. So no, that is not how we are spending our time right now.

I appreciate it. Thank you.

Rich Anderson, BMO Capital Markets.

Good morning. Do you have any property in Camarillo?

We do.

There is a big fire there right now, just FYI. So that is that. (multiple speakers)

We own several properties in Camarillo.

Okay, so take a look. I guess I just want to ask a bigger-picture question. I mean we talk a lot about granular detail, cap rates and renewal increases and all that sort of stuff and yet the sector has still underperformed NAV discount average of 7%. Nothing is really working when we get on these calls. And I'm curious if you can think, Mike or anybody, big picture, what do you think has to happen for the sector to start performing better as a group or even you, yourself? I mean do you think that there is a catalyst out there in a positive way? Do you think 2014 might do better than people are expecting? Do you have a big-picture comment about how we can get the sector moving and acknowledging what is a good value and also good growth?

That is a great question and I wish I had the answer. I will make the comment that I made to Mike D., which is this was the first year in his eight years here that he wasn't accused of sandbagging with respect to our guidance this year. So I thought that good strong quarterly results, which we consider these results to be pretty strong, especially coming out of the first quarter, which has an element of seasonality and that comment that we still saw the West Coast as being a great place to own property and then confirming that with actual results would be a positive thing. But as I looked at the stock over the last day, that doesn't seem to be the case.

So I think it is more of the same. I think it has proven it out and I think the expectations of investors or the concerns of investors are maybe too large relative to the reality. So, again, I don't know if I could say it any differently. I tried to bring up the points in the script that support the reasons why you should own apartments on the West Coast. I hope that resonated.

Do you think -- not to give guidance, of course, but do you think 2014 could be a bit better than what people are kind of dialing into their numbers right now?

I think implied in my comments, which, again, when you see personal income growth in the 3% to 5% range and you see a ratio of housing demand to housing supply at 2% plus, those would be bullish indicators and they would mean that you would not expect to see any meaningful deceleration going forward. So yes, I expect a very good 2014 and candidly, we could be maybe surprised by Southern California a bit as they continue its slow, but steady recovery. So I think 2014 will be another good year.

Okay, great. Thanks.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back to management for any closing comments.

Thank you, operator and thank you, everyone, for joining the call today. We look forward to seeing many of you at NAREIT and we will look forward to the next quarter's call. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.