Essex Property Trust Inc (ESS) 2015 Q2 法說會逐字稿

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risk and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs as well as information available to the Company at that 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. When we get to the question and answer portion, management asks that you be respectful of everyone's time and limit yourself to one question and one follow up. And it is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust Incorporated. Thank you. Mr. Schall, you may begin.

Thank you. I'd like to start by welcoming you to our first quarter earnings conference call, and we appreciate you spending some time with us today. Mike Dance and Erik Alexander will follow me with comment. John Eudy, John Burkart, and Angela Kleiman are also in attendance.

I'll cover the following topics on the call. First, Q2 results and market conditions. Second, rent control activities within the West Coast market and, third, an update on the investment markets. On to the first topic.

Yesterday, we were pleased to report an exceptional quarter driven by robust job growth which, as expected, produced demand that exceeded overall housing supply. Our reported 7.8% same property revenue growth represents the best quarterly result in the past 14 years. I thank the Essex team for their tremendous effort and for exceeding expectations once again. Northern California continued its out performance with the East Bay generating the best rent growth. Southern California continues its expected steady improvement in revenue growth led by LA and Orange County, which both reported same-store revenue in excess of 6%.

With a few exceptions, rents at the B quality properties and locations are growing faster than A's due primarily to two factors. First, affordability has a greater impact on the rental decision given that rents have grown faster than incomes and, second, virtually all of the supply from apartment development is in the A product category, changing the supply-demand dynamic within that segment. We updated our economic forecast on page S16 of the supplement increasing our 2015 job growth expectations for coastal California and Washington to 2.8%, up 12% from last quarter. As before, our total 2015 housing supply, both rentals and for sale, are estimated at 0.8% of total housing stock, supporting our belief that the West Coast housing demand is outpacing supply by more than two to one. Market occupancy remains high and the largest part of the millennial generation, those between 20 and 24 years of age, are about to enter their prime rental years, supporting our belief that these conditions will not change materially in the next several years.

Looking forward for the nation, Axiometrics estimates approximately 1.4 million households per year will be formed between now and 2018 while construction starts are only about 1.1 million to 1.2 million. This strong outlook supports yet the Axiometric revenue growth estimates for selected West Coast markets ranging from approximately 20% to 30% over the next five years.

We continue to make progress on the Phase III merger integration planning process outlined in our NAREIT presentation and available on our website under the presentation section of the investor tab. Most of the Phase III impact will be realized after 2016. Between now and the end of 2016, we should benefit from the restart of the BRE redevelopment program which should add around 50 basis points of growth to the BRE portfolio in 2016. The resource management initiatives should reduce costs on the BRE portfolio by about $100 per unit per year when fully implemented, and we should eliminate the 60 basis points occupancy differential that was embedded in our Q2 results.

Now on to my second topic which is rent control on the West Coast. I commented last quarter that rent control is an ongoing discussion in several West Coast cities. We continue to see plenty of media coverage concerning the pace of rent growth and its relationship to incomes. The city of Richmond, California, recently decided to pursue a rent control ordinance, although details remain in draft form. The ordinance appears to cover property constructed before 1995, a date mandated by state law, and creates a CPI based formula for capping renewal rents. Recall that California law generally mandates statewide de-control upon move outs allowing rents to go to market when residents move out which is very important to property values and the flow of investment capital into rent controlled areas. Essex owns one property in Richmond and it does not appear to be subject to the ordinance given that it was completed after the 1995 date. We'll continue to monitor rent control discussions throughout our portfolio.

Then on to the third topic, investment markets. During the second quarter, a combination of great NOI growth and a pull back in stock price caused our accretion hurdles for acquisitions to be difficult to achieve. That in combination with fewer transactions makes the acquisition environment more challenging. Our acquisition preference is for under managed properties throughout our markets, transit-oriented properties, and CBD Los Angeles given its relatively attractive price point that has been impacted by significant apartment deliveries.

In CBD LA we believe that the short-term supply issues and relatively affordable rents for an urban market will draw residents from other parts of the metro area and meaningfully contribute to the transition of the CBD LA to a 24-hour city. We thus believe that CBD LA is a great long-term investment. The flip side of a more challenging acquisition market is a better market for property sales. Our plan is to continue to slowly cull the portfolio. Headwinds to more aggressive selling of the portfolio include the impact of prop 13 in California and the often higher rental growth rates in the non-urban parts of our portfolio.

Cap rates remain low throughout our markets. Using the Essex cap rate methodology, our best estimate is that the highest quality property and locations trade around a 4 cap while B quality properties and locations trade around a 4.5% cap rate, lesser quality properties trade at higher cap rates and periodically an aggressively underwritten or trophy property will trade in the high 3% cap rate range. We're quite sure that aggressive assumptions on buyer pro formas often indicate that cap rates are 50 basis points or more above the cap rate that we determined used in the Essex cap rate methodology especially on high rise apartment properties.

Before passing the baton to Erik Alexander, I'd like to acknowledge as previously announced that this is Mike Dance's last earnings conference call, so take your best shot in the Q&A. I thank Mike and Angela Kleiman for creating a smooth CFO transition process and again I greatly appreciate Mike's many contributions to the Company's success. This concludes my comments. Thank you for joining the call. I'll now turn the call over to Erik.

Thank you, Mike. I'm grateful for the operations team that has remained focus on executing our plan and delivering the great results that we are reporting today. The second quarter was very strong and we continue to have positive outlook for all our markets. Higher than expected job growth continues to be the primary catalyst for rising rents and strong occupancies throughout our portfolio. The strong demand conditions that we expected pushed economic rents higher and generated a portfolio wide loss to lease of 8% in July. We believe this is the peak for the season, but expect the seasonal decline in rents during the fourth quarter to be of similar profile in 2014, which was less pronounced than prior years.

Once again, the Bay Area led the way for Essex with San Jose and the East Bay posting the largest revenue gain. Seattle continued its healthy growth despite several new projects opening. We are monitoring the CBD supply closely and believe that 2016 will have comparable levels to 2015. We also continue to see good growth in Los Angeles and Orange County and expect San Diego to improve in the third quarter with stronger scheduled rent growth.

Gains from renewal activity increased 6.7% portfolio wide and will continue to support strong revenue results in the coming quarter. Renewal rates for the third quarter will be above 6% for the portfolio. We are also pleased to see that year-to-date turnover has not increased over last year and was 55% during the second quarter compared to 57% a year ago and only 50% on a year-to-date basis for the same-store portfolio. As of yesterday, the physical occupancy for the same-store portfolio was 96.4% with a 30-day availability of just over 5%. So while we are not giving guidance for the next year, we believe the aforementioned conditions, healthy job growth, and static supply forecast for 2016 will help us deliver strong results for several more innings. Now, I will share some highlights for each region beginning with Southern California.

Orange County and Los Angeles continue to be strong performers this quarter with job growth remaining above 2.5% in both counties. The composition of jobs in Los Angeles is improving with nearly half the job growth in June coming from professional and business service and education and health service sectors. San Diego's results were weaker than the first quarter but were hindered by some planned renovation activity that is now completed and has been released. Since we continue to see strong job growth in this market, I believe we will see revenue growth return to levels above 5% during the third quarter.

Office leasing for the region was positive in all counties with the greatest absorption realized in Los Angeles where one million square feet was absorbed during the quarter. We remain excited about the Renaissance of downtown Los Angeles and are seeing strong leasing activity in the sub market. Our 8th and Hope project averaged more than 27 units per month through July and will stabilize next month. We have also leased 35 units since closing (inaudible) the middle of June and are 98% leased. Los Angeles is one of the markets that is expected to have an increase in supply next year, but it remains very low at 0.6% of total housing stock.

Turning to Northern California, the job growth engine continues to fuel great results in the Bay Area. Not only did San Jose post a 5.5% gain in June, the 12-month trailing growth rate is also above 5% and more than twice the national average. The information and professional business service sectors represented the bulk of the gains by accounting for more than half of the overall growth.

Oakland has not enjoyed the same robust job growth as San Francisco and San Jose, but certainly has more than enough when combined with limited new supply and the overflow demand from these adjacent MSAs to make this sub market a top performer in the portfolio with 12% year-over-year revenue growth. Office leasing remains strong in the region as over one million square feet were absorbed during the quarter. Of note, Apple leased two buildings near San Jose airport totaling 600,000 square feet signed their first lease in San Francisco. Palo Alto Networks signed a pre lease for 750,000 square feet in Santa Clara.

As expected, economic rent levels continued to be strong and are up 13% from the beginning of the year and we expect them to remain at similar levels during the third quarter. Strong occupancies make these double digit growth numbers possible. Currently, the same-store portfolio stands at 97% occupied with less than 5% availability. We are seeing the same strong demand for our new communities as well. We stabilized Park 20 and Emme ahead of schedule during the quarter and 1 South Market in downtown San Jose is 50% leased and an average of 40 leases per month since opening in April. With performances like that, very strong job growth, and unit supply, we expect this trend will continue in the Bay Area.

Finally in Seattle, the employment growth in this region continues to be strong as well and remains above 3.5%. Trade, transportation, and utilities, along with professional business services account for nearly half of the job formation. And June represents the ninth consecutive month that construction has eclipsed 10% growth. With seven million square feet of office and dozens of residential projects under construction, it is easy to see why this job sector is so strong. Additionally, 40% of that space under construction has been pre-leased, including two more buildings leased by Amazon totaling 810,000 square feet. As expected, office leasing overall improved during the quarter with over 800,000 square feet absorbed.

Demand continues to outpace supply which has led to strong revenue growth. Properties in the CBD have weathered the concentration of deliveries reasonably well so far, but the suburbs in the south and north ends continue to deliver the best results for us and we do not expect that to change in the coming quarter. As expected, economic rent growth continued to accelerate since last quarter and was 13% higher on a year-to-date basis. We expect continued strength in the north and south and as well as B properties on the east side. Given our strong occupancy position and low exposure in the fourth quarter, we continue to expect strong revenue growth into next year. Currently, the physical occupancy in the Seattle portfolio is 96.7% and an availability at 5%. We are very pleased with these results through the first half of the year and I think our momentum should lead to an equally impressive second half. Thank you and I will now turn the call over to the honorable Mike Dance.

Thanks, Erik. Today I will provide comments on the second quarter results and the increase to our 2015 guidance. Operating results are outperforming our expectations. The second quarter results continued to build on the strong first quarter driven by greater than expected demand fueled by the high quality jobs created in our markets. Accordingly, we are confident in raising guidance for the second time this year with a midpoint of our full-year 2015 same property revenue forecast to 7.9%.

The midpoint of our estimated expense growth has been reduced by 50 basis points primarily due to lower than expected utility costs from reduced water use and accordingly we have increased our expectations for 2015 net operating income growth to 10.5%. We are now forecasting same-property revenue growth to be 60 basis points above the strong growth reported in 2014, demonstrating the benefits of investing in supply constrained markets.

Not surprisingly our joint venture portfolio also contributed to our strong second quarter. Most of the stabilized operating apartment communities owned as co-investments are commutable to the urban job [nodes] and represent a value proposition compared to the rents in urban locations. The stabilized co-investment portfolio with comparable year-over-year results now total over 7300 apartment homes and in the second quarter these communities grew revenues by 7.9% and net operating income by 11.4%.

Through the second quarter we have received over two-thirds of the supplemental taxes with new tax assessments of values pertaining to the legacy BRE portfolio. To date, the net impact of the supplemental property tax statements received have been slightly favorable to our conservative estimates. The estimated property taxes pertaining to the 15 same-property portfolio is expected to be $27.2 million for the third and the fourth quarters. The savings and property taxes are offset by an increase to our property management fees. We recently completed an analysis of our corporate G&A cost that concluded we should be allocating just over 2% of gross revenues as the cost of property management activities for the corporate department that support property operations.

The new cost allocation is still 90 basis points less than the 3% property management fees commonly used by analysts and multi-family peers. The increase in property management fee allocation, decreased general and administrative expense, and accordingly we have reduced the 2015 forecast for G&A expense by $2 million on S14 in our supplement. To summarize, this accounting allocation is merely a reclassification of expense that increases property operating expense and decreases general administrative expense by the same amount and has no impact to our net income or to our reported or core FFO.

For the full year we are raising the midpoint of our core FFO per share guidance by $0.16 to $9.64, or a 1.7% increase over our prior projection. The revised midpoint in 2015 guidance is a 13% growth in core FFO compared to 2014. Our year-over-year results coupled with the lease up of the development pipeline continued to strengthen our credit metrics contributing to the change in S&P's credit outlook in Essex from BBB stable to positive. The debt to EBITDA ratio at June 30 was 6.3 times and total debt to our market capitalization was just over 27%.

In closing, my last quarterly conference call I do want to personally thank Keith Gehrke, Mike Schall, and the entire Essex Board for giving me the opportunity to serve as the Essex Chief Financial Officer for the last 10 years. I have been truly blessed to have worked for such a supportive Board and two chief executive officers that I have great respect for. It has been a pleasure to be part of a management team and organization that cares about the quality of the homes we provide for our residents, the culture we provide for our associates, and resulting financial returns that have benefited our shareholders. Our success has truly been a team effort and I am proud to have been a small contributor to the E team. Given the many talents of Angela Kleiman and the strength of her supporting cast and finance accounting, co-investments, research, investor relations, and economic research, I am confident that the transition of my responsibilities on September 30 of this year will be seamless.

And finally, before I turn the call back to the operator for questions, I want to stop the rumors that yesterday's earlier than expected press release was caused by my rushing to the exit. Thank you.

(Operator Instructions)

We will take our first question today from Nick Joseph with Citi.

Thanks and congratulations, Mike. Appreciate the color on the rent control initiatives. Could you give us an update on any talk on changes to prop 13?

Not a whole lot, Nick, has happened on prop 13, and this is Mike Schall speaking. Although it's always out there and there are a number of organizations, labor unions, et cetera, that have almost continually over the last 40 years mounted an attack to prop 13, so I think it's still early. We will wait until we're closer to the election to see exactly what's going to happen, but there's no update at this point.

Thanks. And then you talked about rents growing faster than income, so how has the rent to income ratio changed over the last few years for the qualified renters?

Well, the fortunate thing is we've been adding some very high income renters to the renter pool, so not only do we have great job growth but we have jobs that work for a lot of these tech companies that are also high-paying jobs and therefore if you look at the personal income growth per capita we're in some areas that have pretty stellar numbers. For example, Seattle is at 5.8% projected for 2015, again this is personal income growth per capita; San Jose is 6.2% et cetera. So I think in any event holding rent at median income constant you still will generate a pretty significant rent growth outcome there, so we are very fortunate from that perspective.

Rent to median incomes are below generally long-term historical averages in Southern California and about 10% above long-term historical average in San Francisco and Oakland, and little bit above in San Jose. So I'd say in summary we are starting to push a little harder in northern California on that metric, but still have lots of room to run in southern California and Seattle.

Thanks.

Thank you.

Next is Jeff Spector with Bank of America.

Good afternoon and on behalf of [Yan] and myself, congratulations, Mike. On to strategy going forward. Just again listening to the call and results not only this quarter but of course over the last year beating even your own expectations, stabilizing properties better, employment stronger, again from a strategy standpoint is there anything else, any other lever you guys can pull at this point, anything new you could bring to the Company or get more aggressive on to do now that it seems like you're moving on to the next phase with BRE?

Jeff it's Mike Schall speaking again. We have a lot of work to do here both with respect to the BRE, the Phase 3 transformational process. John Eudy is here with me and we're looking at a number of development deals. We would love to find more development, especially in southern California. We're looking at every deal that comes to market that meets our criteria and we'll continue to do so.

Having said that, you get back to the reality the stock is done, okay but it's pulled back a bit while earnings are surging, and when you get to that point that leverage on a leverage-adjusted basis, the returns on the stock going forward look better than the returns on the real estate going forward it causes you to pause, and so we are in that period of time. Now, if the stock has some momentum here going forward, maybe that relationship changes, but we're going to continue to be prudent and we feel like we have an enormous amount of work to do as it relates to the transformational activities that we think those will be material past 2016, but it is going to take a lot of work to get there, so by no means are we sitting on our laurels and we have a lot of work to do.

Great, thank you.

Thanks.

We'll now go to Jordan Sadler with KeyBanc Capital Markets.

Hi, good afternoon. You guys mentioned a few times on the call about CBD LA being an attractive long-term investment. I guess what's your appetite to add more to the sub market and do you think that as new supply comes to market next year that there might be more opportunities?

Hi, it's Mike Schall again. I think we do like CBD LA as we all acknowledged, and I think that it's one of the areas that when we look at price points and we look at demographic issues and the preference of the millennials for more urban settings and the transition the broader transitions that are happening in CBD LA it will continue to be one of our key focuses going forward. In our world everything is about the basic strategy which is finding properties that are located near jobs, in places where people want to live, and we find that up and down the West Coast in a variety of places and so we'll stick to our knitting as it relates to that, and CBD LA fits into that but it's not exclusively CBD LA. We're going to react to the deals that we see and the opportunities that we have relative to other great areas and try to make prudent decisions as we've done in the past.

Thanks for the color there, and then just sticking with sort of southern California. How has Orange County performed relative to your guys' expectations this year and what's your outlook for the remainder of the year given some of the deceleration that occurred into second quarter?

Hi, this is Erik. We're looking for Orange County to be strong in the second half of the year, again supported by good job growth and we've had mixed performance there in Orange County with respect to A's and B's, so we're getting contributions from (inaudible) and the skylines of the world and we think that we're going to see some better performance from some of the kind of the middle tier properties in the second half.

So would you say that it's tracking in line or with your expectations for the year?

Yes, I think at the beginning of the year we had it close to the top performer with expectations to possibly do better and I still think that that's possible in Orange County.

Great, thank you.

Next is Ian Weissman with Credit Suisse.

Hi, guys. This is Chris for Ian. Guidance seems to imply a little over 3% expense growth in the back half of the year. Mike, it sounds like some of that comes from a reallocation of expenses from G&A to property management. Is the rest coming from like a normalization of property taxes and utilities or is there something else going on there?

Third quarter is typically our highest expense month. We have most of our turnover and obviously the southern California, the hotter weather people are using air conditioning more, so I think it's just a high expense month historically or high expense quarter and we expect that to continue this quarter.

Got you. Okay, so we see NOI margins approaching 70% and we'll almost certainly go above there later this year in 2016 given your revenue and expense trajectories, but like on a DCS valuation it seems like you'd almost have to keep it at 70% to get it meaningful upside on the stock. I just wanted to get your thoughts on where you think the long-term NOI margin ends up after things start to normalize?

It's Michael Schall. It's ranged in that mid to high 60s to 70 historically, but I agree with you. The math is math and it could push higher than 70% and we think that as we look at the world we are not a margin-driven Company. We are looking for rent growth, looking for supply demand imbalances and areas that we can operate properties efficiently on the expense side and whatever happens to the margin happens to the margin, so it's not the primary metric that we use. I understand how the math works and what you're referring to, but from our perspective if we do our jobs we're going to find areas where rents grow and expenses grow at smaller rates and it's going to push the margin up.

Got you. And then on the last question, how much, if any, of the sequential slowdown in southern California had to do with the change in the same-store pool?

I don't think much. I think that the part of it was influenced by what we talked about in San Diego, which we expect to normalize, and then we're looking for better performance from a couple of assets in Los Angeles, and I think Orange County will stay on the same strong trajectory and Ventura has been stable.

Great, thanks a lot. Thank you.

Next is Rob Stevenson with Janney.

Good afternoon, guys. Mike Schall, you said before on one of the questions that you guys were hunting around for land in southern California. What's been your ability to acquire across all of your markets these days and back fill the pipeline because it doesn't look like there's like $38 million of land left that's not been started on, is that correct?

I don't know the exact number. We have several land parcels we've been entitling for the last couple years, one in San Diego, one in Hollywood, and one in Santa Clara, but we're always active out in the markets and John Eudy is here and I know John and his team have worked hard to look at the transactions in southern California, which they have not been as attractive up to this point because of the rent growth differential in northern California versus southern California but are becoming more attractive. John, do you want to comment on anything that you see out there in the land market? I know we have trouble getting our targets in general, but any color on that?

Yes. As Mike said, we've got a couple more we have that will be most likely showing up on the reporting next quarter or two but not many. Right now land prices have been bid up, construction costs are up as we know, (inaudible) to do a development deal. We love it when we get in the mid 6 cap range and above, but we have to have that spread between acquisition caps and development to take the risk, and if we see stuff below a 5.5 to 6 on current economics, we're not going to pursue it and we're running into a lot of opportunities that are well below our threshold. That's the bottom line. We're culling a lot and we're not seeing enough transaction worth taking the risk.

Does that mean that in order to get to the numbers that you need to get to that it's highly likely that it's going to need to be done with JV partners in order to access lower cost of capital and also get the promote and to get you up into the range that's acceptable?

This is Michael Schall. I would say no. It doesn't have that much to do with capital per se. It has to do with remaining disciplines, this is Keith Gehrke's favorite thing he taught us along the way. Remaining disciplined, waiting for the opportunities that make sense for us. Again, we are trying to -- since we use a great deal of capital we're trying to make sure that on a risk and leverage-adjusted basis the investments that we make are going to out perform the stock and the stock is going to do pretty well here given our growth trajectory.

So we aren't going to push it just to make is some deals work. We're going to remain disciplined and try to stick to the strategy and we'll just wait for a better day. I think we're going to have great result for the next couple years just based on what we already have locked in, so there's nothing within us that motivates us to do a bunch of stuff that keeps us even busier and perhaps distracts us from all of the other things we need to do.

Okay, and then how much condo conversion and ground-up development are you seeing days in your markets?

Well, condo conversion, and actually John Burkart is here as well, but I can probably summarize what he would tell you. This is Mike Schall again. Not that much and mostly because the relationship between apartment values and condo values is pretty much non-existent and we need, actually all condo developers need, somewhere around 30%-40% premium to apartment values, otherwise why would you do a condo? It's a lot less risky to complete an apartment and so the preference would be for apartments, and there's a commerce department statistic we recently saw where only 5.5% of the multi-family construction starts are condos, which is the lowest since the 1970s. I think that pretty much tells you what's going on out there that condo values have not recovered to the point that condo conversions make a great deal of sense and actually I would caveat that within the City of San Francisco there is starting to be some significant premium but not 25% to 40% that we really need.

Okay, thanks guys.

We'll now go to Tayo Okusanya with Jefferies.

Yes, good afternoon. The question we had was just again in your markets given how quickly rents are rising and also some initial public backlash you are reading in the papers about just how quickly rents are rising are you starting to see municipalities talking about making it easier or cheaper to build in any of those markets or it's just on the homebuilding side on the apartment side things just supply is just very limited and there's just so much demand both sides of the equation just keep going up?

Well, this is what we love about the West Coast markets because, no, exactly the opposite. They believe that they can get more out of the developer, not less, because things are so good and they use, as an example, that there's a pretty strong group, couple groups in San Francisco that are suggesting that the below market rate unit should go from 20% to 30% because everything is going so well, so you have a number of headwinds and this is why John Eudy's comments are so apropos here. You've got construction costs that are increasing somewhere in that 10% range which that's probably as good as NOI growth is going to get, so this idea of going from a 5.5 cap rate today to a 6.5 cap rate is a little bit imperiled given that scenario.

You've got cities that recognize that they have housing shortages and especially with respect to the more affordable elements of housing and therefore they are trying to essentially get the developers to bear a greater part of that obligation and plus a number of other headwinds which are just long entitlement process nimbyism, et cetera. This is why we love owning property on the West Coast because it's so difficult to build here and so are we okay with not doing a lot of development? Well, yes we are because if we can't, guess what? No one else can either. And if no one can develop significant amounts of property then our existing $20 billion portfolio is going to do pretty well. So that is our dynamic and candidly we're going to enjoy it while it's here.

That's helpful. Mike, congrats on your last dance.

Thank you.

Next is Tom Lesnick with Capital One Securities.

Hi, guys, and Mike congratulations again. I just wanted to address H1B visas for a second. It's become an increasingly political topic as we head into this election season and particularly for tech companies there's been reports of a few major players laying off domestic workers in favor of asking for more H1B visas. I'm just curious, on the West Coast in particular, what is your exposure as a percent of your renter base and how do you guys view that risk politically?

This is Erik. I don't have an account of that in front of me. It is -- you're correct, it is a segment of the population in primarily Seattle and the Bay Area and politically I don't know it's hard to judge the risk. Clearly we benefit from having those renters there and we would be in favor of keeping it but, Mike, do you have something to?

Yes, actually I have a comment. I think that those are targeted toward highly skilled workers, obviously, and skills that you cannot find here in the United States generally speaking and therefore the positions within the tech community it's hard to find qualified workers to take the positions that are available in the tech markets, mainly Seattle and northern California, and I don't see even if they increase the H1B visas it being a threat to the domestic workforce because I think that you have a situation where there's enough demand out there, enough open positions out there that employers are having a hard time filling their positions again especially in northern California and Seattle, and so I don't see the H1B issue being a big problem at all and in fact it's probably beneficial.

I think that one of our concerns as we look at costs going forward is actually because of the cost increases and the difficulty in finding employees, I think there is some wage pressure we see throughout our markets and I don't see that abating in the near future. I know that a lot of people that we are looking at are coming from out of state so again I think the markets are very vibrant here, the employment markets, and therefore having good quality people coming in irrespective of source is not going to be a problem.

Thanks for that color. And then my second question, I understand that there are several corporate housing agencies that work with the big tech companies down in the valley and that a percentage of your units are probably working with these agencies. What is that percentage across your entire portfolio and what is the rent sensitivity on those units relative to traditional direct leases?

This is Erik. So, we don't track the agency separately. We do track the corporate leases as a sub category, so I'll tell you that, which is it is less than 3% across the portfolio and it is highest in the Bay Area where it's just over 4% and in southern California it's just under 2%. Our sensitivity is really related to concentration in individual properties and the thing that we pay most attention to is the lease expiration profile. So the thing we don't want to do is load up in expirations in any one month, and so we will look at these on a case-by-case basis when they're reviewed with the revenue management team and a more senior level person in operations to make sure that we get the composition correct because there are times when the sort of tenants can really benefit us like in a lease up, for example, and they fit in nicely and add to the cash flow, and there are other times where we need to be careful about the timing and when they end.

Alright. Thanks. Appreciate that color. Congrats again, Mike.

Thank you.

We'll now go to Dan Oppenheim with Zelman & Associates.

Thanks very much. Quick question here on Nor Cal in terms of the efforts to sort of prevent rent control by limiting the renewals to 10%. Are you seeing that keeping turnover down so far in Nor Cal or how are you seeing that in terms of what's happening in turnover with those renewal implements at 10%?

Yes, this is Erik again. So it does absolutely help keep the turnover down, so we talked about 55% turnover overall in the portfolio for the quarter. It was 51% in northern California, for example, where we have the most renewing leases exposed to this 10% cap and so last year it was over 54% so again the turnover is coming down in that area and I commented before that Mike nor I are getting thank you notes from anybody on this stuff, but what happens is they go out into the market and look at some of the competitors and then come back and tell the staff, wow, pay attention to this, and this is several hundred dollars, $200 higher, so it absolutely has an impact on turnover.

Great, thank you.

Rich Anderson with Mizuho Securities is next.

Thanks. Good morning to everybody. Mike, last time -- Mike Schall, last time you said you thought you'd get to $600 million of acquisitions by September. Not that it is a long way to go from there, but is that kind of the line of thinking off the table now?

No, I don't think so, Rich. I think we're at 571.

No, I know that. 471.

471 with a pipeline of about $100 million to take us to $571 million. That includes the three joint venture buyouts that we did, so I think we're on pace but, again, we're looking at a few things and it's pretty tough out there. It's interesting that we have had about what about a 50 basis point move in interest rates from when we did our last bond deal at around 3.5%. We are probably would be somewhere around 4% now and certainly cap rates have not changed over that period of time.

Right, I was thinking the line of thinking not so much the absolute numbers like on a going-forward basis maybe not thinking so much about guiding to a number after this is done.

Rich, again in our case it's such a function of the stock that we're going to issue and how we complete the match funding process and again whether the investments, whether we can find investments that are going to generate a total return that's better than the stock, so that equation changes literally daily and if the stock does well we'll be more active and if the stock does poorly we're going to be less active and/or we'll be more interested in selling.

Okay. I heard from some folks that people are actually now living in rented tents in backyards in northern California with access to bathrooms from private individuals that own homes. Have you heard this, and before you answer that, putting the rent control issue aside, do you guys have any concern about Karma and alienating people at this point that cannot own a home or rent an apartment are actually taking very substantial steps just to put a roof or a piece of canvas over their head? Just wondering if you can talk about the long-term ramifications of milking every last penny out of the market.

Wow. Somehow implied in that comment is that we are milking every last penny out of the market which I would tend to disagree with. I mean as Erik just said, we have a cap on our renewal rents. We are trying to act as a responsible party and I'm not sure I can comment on my karma, but having said all of that --

It's Friday. I'm trying to keep it going here.

I hear you. I hear that people are actually living in freight containers, for example. That was the most recent one. San Francisco is trying to entitle -- unentitle units and second rooms. There's a variety of things that are happening. People are doubling up and I think probably more telling is that people are essentially moving a little bit farther away from the core areas in search of more affordable housing and I think that is the way that the rental market works, that the people in San Francisco when rents go up significantly, and the same is true in Manhattan and a variety of other places, when rents go up significantly some people are priced out and they go to Oakland, and then Oakland rents go up and then the people that are in Oakland get pushed out to San Ramone or Livermore, and this radiates through the entire rental market until everything within say the Bay Area in this case is completely full in which case it's -- I think at that point it's a real problem.

I think at this point there is still pretty significant variations in price as you go further out from the primary rental markets and the main job [nodes] and therefore I think there's still opportunity within the marketplace and again I think that's why we see the B's outperforming the A's, for example.

Okay, thanks for humoring my question. And then last question is now that you've finally upgraded the CFO position, do you think we'll see an upgrade in G&A?

Good one. Well, I guess I need to negotiate with Angela before I answer that question.

I'm sorry I had to do it. Good luck, Mike, thanks.

Thank you.

We'll now go to Greg Van Winkle with Morgan Stanley.

Hey, guys. Wanted to get your thoughts on your Seattle and Bellevue exposures. You've given the Bellevue supply risk. Would you guys look at trimming some assets in that sub market maybe?

This is Mike. No, I don't think so. Bellevue I think is another area that has undergone an incredible transformation over the last several years and only continues to get better. I think you have high-paying jobs and a very vibrant economy in Seattle, and so I think we like our Bellevue exposure. I don't view our exposure as being excessive in any part of the Seattle metro area where somewhere in the 20% range downtown, the CBD. Maybe that could get a little bit bigger, although in the short term there's some headwinds there from new supply.

And we're in the better sub markets on the east side and actually the north and south ends of Seattle are the ones that are generating the best growth which would probably be the areas that we ultimately would want to sell. So, I think we're happy in Bellevue and Redmond and Issaquah and some of those core east side markets, and we're enjoying some of the incredible rent growth we're getting in Renton and Everett, so we're happy with where we are.

Alright. That's good color. And then you guys issued about $90 million of equity during the quarter. Didn't do any dispositions. Should we read into that, that you view equity as most compelling source of capital over dispositions today?

As Mike pointed out earlier, we were match funding some compelling transactions in southern California. That doesn't work right now so we would look to, as he mentioned in his comments, culling some of the portfolio to fund the development needs for the rest of the year to the extent that there's an acquisition that works then we would look to issue an equity again.

Alright. Thanks, guys. That's all for me and congrats, Mike.

Thank you.

Thank you.

We'll now go to Drew Babin with Robert W. Baird.

Hi. Thanks for taking my question. Given your current outlook for property taxes and just visibility on the progress made with the BRE portfolio so far, would it be outside the realm of reason to assume that same property expense might actually be lower in 2016 versus 2015?

No, we pretty much have -- this is Mike Dance. We have 2% expectation for the property tax increases. We are seeing some wage pressure right now with the strong economy and so I think kind of 3% is our expectation for 2016 in terms of operating expense growth.

But not guidance? And lastly, just did you look at acquisition opportunities? What's the likelihood that the next acquisition could come from your co-investment portfolio and what are sort of the advantages of doing it that way with regard to pricing?

This is Michael Schall. I think that was a opportunity that was presented in the marketplace really framed earlier this year by the 10-year treasury being at 1.8% and the stock trading somewhere around $235 to $240 which we thought was a great time to match fund off a couple of the buyouts of our JV partners. Those dynamics have changed very considerably in a quarter and a half and therefore I don't see that happening any time in the foreseeable future.

Great, thank you. That's helpful.

And we'll take our last question today from Conor Wagner with Green Street Advisors.

Good morning. Congratulations, Mike.

Thank you.

First question on development in some of your markets. We've seen a tax proposed on development in Seattle in addition to a requirement for affordable housing as well as a potential tax on residential development in San Francisco. I'd like to get your thoughts on that and how it impacts you looking at those markets and your future development?

By tax on development are you talking about for in lieu for affordable?

Well, yes. In Seattle I guess they're discussing an affordable requirement on future buildings as well as linkage fee and then I've also seen in San Francisco a discussion of a fee on residential development that's currently on other commercial types of development.

That is correct and there's also a few of those issues happening in California as well. It's another [action] that makes it tougher to make the numbers work. That was what we were referring to earlier that dilutes the spread that we're looking for between acquisition cap rates and development, so it's out there with the pressure that's on, on the affordability side relative to Mike's earlier comments. That's what is the gate keeper to keep things from being overbuilt because it puts more impediment to developing.

Great, and then a followup. I'd like to know what's the historical relationship been between rent spreads with Oakland and San Francisco? Where are they now and then do you anticipate that relationship changing in the coming years?

Obviously different by product type. Given the growth in Oakland it has been going up faster this year. It's tightening and so it's been several hundred dollars difference or more and I think that's closing and I think you'll continue to see that, as Mike talked about people moving from the peninsula and San Jose and San Francisco into the East Bay, including Oakland. So, we like those markets going forward and we also like it because over the years it's just gotten better to commute back to jobs. East Bay has added some jobs as we talked about but certainly not as much as Silicon Valley and San Francisco, but the BART line has been extended further. We see people with the properties that we have along that line commuting back, so it just becomes a better alternative for people every year.

Great, thank you.

Thank you.

And I'd now like to turn the call back to Mr. Schall for any additional or closing remarks.

Okay, thank you. In closing, I'd like to thank everyone once again for joining the call. We hope you and your families are enjoying a safe and enjoyable summer season. Good day. Thank you.

And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation and have a great afternoon.