Essex Property Trust Inc (ESS) — Q2 2015 Earnings Call Transcript

Thank you. I would like to start by welcoming you to our First Quarter Earnings conference call and we appreciate your spending some time with us today. Mike Dance and Erik Alexander will follow me with comments. 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; and third, an update on the investment market. On to the first topic, yesterday we were pleased to report a quarter driven by robust job growth which is expected, produced demand exceeded overall housing supply, a 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 outperformance 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-stores 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 income, and second, virtually all the supply from apartment development is in A product category, changing the supply-demand dynamic within that segment. We updated our economic forecast on Page S-16 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 more than 2 to 1. 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 estimate that 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 the Axiometrics 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 cost 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 income. 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 rent 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. And then on to the third topic, investment markets. During the second quarter, a combination of great NOI growth and a pullback in stock price caused our accretion hurdles for acquisitions to be difficult to achieve. But that in combination with fewer transactions makes the acquisition environment more challenging. Our acquisition preference is for undermanaged 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 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 call 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 lower throughout our markets. Using the Essex cap rate methodology, our best estimate is that the highest quality properties at locations create around a 4% cap while B quality properties in locations create around a 4.5% cap rate. Lesser quality properties create higher cap rates and periodically and aggressively underwritten or trophy properties will trade in the high 3% cap rate range. We are 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 using the Essex cap rate methodology especially on high-rise apartment properties. Before passing the baton to Erik Alexander, I would 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 will now turn the call over to Erik.

Thank you Mike. I am grateful to the operations team that has remained focused 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 a 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 relief of 8% in July. We believe this is the peak season but expect a 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 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 we’ll continue to support strong revenue results in the coming quarter. Renewal rates for the third quarter will be above 6% due to 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 condition, 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 were weaker than the first quarter but were hindered by some planned renovation activity that is now completed and has been re-leased. 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 1 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 submarket. Our 8th&Hope project has added more than 27 units per month through July and will stabilize next month. We have also leased 35 units since closing Avant in 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 in professional business services sector represented the bulk of the gain by accounting for more than half of the overall growth. Oakland has not enjoyed the same job growth as San Francisco and San Jose but certainly has more than enough when combined with limited new supply and the overall demand from these adjacent MSAs to make this submarket a top performer of the portfolio with 12% year-over-year revenue growth. Office leasing remains strong in the region as over 1 million square feet were absorbed during the quarter. Of note, Apple leased two buildings near San Jose airport totaling 600,000 square feet and signed their first lease in San Francisco. Palo Alto networks just signed and pre-leased for 750,000 square feet in Santa Clara. As expected economic rent levels continue 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’re seeing the same strong demand for our new communities as well, we stabilized Park 20 and Emmy ahead of schedule during the quarter and one south market in downtown San Jose is 50% leased and has an average of 40 leases per month since opening in April. With performances like that, very strong job growth and new unit supply we expect this trend to 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 9th consecutive month that construction has eclipsed 10% growth. With 7 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 preleased 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 at the CBD have weathered the concentration of deliveries reasonably well so far but the suburbs in the south and north end continue to deliver the best results for us and we do not expect that to change in the coming quarters. As expected, economic rent growth continues to accelerate since last quarter and was 13% higher on a year-to-date basis. We expect continued strength in the north and south end 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 in the next year. Currently, the physical occupancy in the Seattle portfolio is 96.7% and an availability at 5%. We’re very pleased with these results through the first half of the year and I think our momentum should lead to 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 ’15 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 ’15 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 ’15 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 ’14 demonstrating the benefits of investing in supplies constrained trade 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 node and represent a value proposition compared to the rents in the urban location. The stabilized co-investment portfolio with comparable year-over-year results now total over 7,300 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 assessment of values pertaining to the legacy BRE portfolio. To-date, the net impact of the supplemental property tax statements received has been slightly favorable to our conservative estimate. The estimated property taxes pertaining to the 15 same properties is expected to be 27.2 million for the third and fourth quarters. The savings on 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 supports property operation. The new cost allocation is still 90 basis points less than the 3% property management fees commonly used by analysts and multifamily peers. The increase in property management fee allocation decreased general and administrative expense and accordingly we have reduced the ’15 forecast for G&A expense by $2 million on S-14 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 on our net income or to our reported core FFO. With the full year, we're 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 the previous year. Our year-over-year results coupled with the lease-up of the development pipeline continue to strengthen our credit metrics contributing to the change in S&Ps 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 Guericke, Mike Schall, and the entire Essex Board for giving me the opportunity to serve as Essex's 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 qualities of homes we provide for our residents, the culture we provide for our associates, and the 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 in finance, accounting, co-investments, research, investor relations, and economic research, I am confident that the transition of my responsibilities on September 30th of this year will be seamless. And finally, before turning the call 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.

Congratulations Mike and appreciate the color on the rent control initiatives, could you give us an update on 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, etc. 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 is no update at this point.

Thanks and then you've talked about rents growing faster than income, so how was the rent-to-income ratio changed over the last few years for the qualified renters?

The fortunate thing is we've been adding some very high-income renters to the market, so not only do we have great job growth, but we have jobs that are with 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 some 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%, etc. So I think in any event holding rent at medium income constant, you still will generate a pretty significant rent growth outcome there. So we are very fortunate from that perspective. Rent median incomes are below generally long-term historical averages in Southern California and about 10% above the long-term historical average in San Francisco and Oakland and a 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.

On behalf of Jana and myself congratulations Mike, on to strategy going forward, just again listening to the call and the 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 III 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 are looking at every deal that comes to market, that meets our criteria and we will continue to do so. Having said that, when 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 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 are going to continue to be prudent and we feel like we have an enormous amount of work to do as it relates to again the transformational activities, that we think that those will be material past 2016, it's 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.

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

Hi, it's Mike Schall again. We are optimistic about CBD LA, as we've recognized its potential. When considering price points and the preferences of millennials for urban living, especially amidst broader changes in CBD LA, it will remain a significant focus for us moving forward. Our primary strategy revolves around identifying properties near job hubs in desirable living areas, and we see opportunities along the West Coast in various locations. We will continue to adhere to this strategy, with CBD LA being part of our focus. However, we are open to exploring other promising areas and will make decisions based on the deals and opportunities that arise, as we've done previously.

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 in the second quarter?

Hi this is Erik. We expect strong performance in Orange County during the second half of the year, supported by good job growth. The performance there has been mixed regarding A's and B's. We are seeing contributions from notable areas, and we believe the middle-tier properties will show improved performance in the latter half of the year.

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

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

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 reallocating expenses from G&A to property management. Is the rest coming from 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 in Southern California’s hotter weather, people are using air conditioning more so I think just a high expense month historically or high expense quarter and we expect that to continue this quarter.

Got you, okay. And so we've seen NOI margins there approaching 70% and most will certainly go above there later this year in 2015 given your revenue and expense trajectories. But like on a DCS evaluation it seems like you'd almost have to keep it at 70% to get a meaningful upside on the stock. I just wanted to get your thoughts on where you think like a long-term NOI margin ends up, after things start to normalize?

It's Mike Schall. It's ranged in that mid to high 60s to 70 historically, but I agree with you the math is math and it can push higher than 70%. 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 margin up.

And then 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 the part of it was influenced by that 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 again Los Angeles. And I think Orange County will stay on the same strong trajectory and Ventura has been stable.

Michael, you mentioned earlier that you are exploring options for land in Southern California. How has your ability to acquire land been across all your markets lately and are you managing to replenish your pipeline? It seems like there’s about $38 million worth of land that hasn’t been developed yet. Is that accurate?

I don’t know the exact number. We have several land parcels that we’ve been entitling for the last couple of 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 you want to comment on anything you see out there in the land market, I know we have trouble hitting our target in general. But any color on that?

As Mike mentioned, we have a few more projects in the pipeline that will likely appear in our reports over the next quarter or two, but not many. Currently, land prices have increased, construction costs are higher, and it's challenging to secure development deals. We're comfortable when cap rates are in the mid-six percent range or higher, but we need a sufficient spread between acquisition and development cap rates to justify the risk. Right now, we're observing rates below 5.5% to 6% based on current economic conditions, so we won't pursue those opportunities. Many available options fall short of our criteria, which means we are filtering out a lot and not encountering enough transactions that warrant taking the risk.

Does that mean that in order to get to those 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 to promote in order to get you up into the range that’s acceptable?

I would say no, it doesn’t have much to do with capital itself. It relates to staying disciplined, as Keith taught us along the way. We are focused on waiting for opportunities that are right for us. Since we utilize significant capital, we want to ensure that our investments, on a risk and leverage adjusted basis, will outperform the stock. Given our growth trajectory, we believe the stock will perform well. We are not going to rush into deals just to make them work; instead, we will stick to our strategy and remain disciplined, waiting for a better opportunity. I believe we will see great results in the next couple of years based on what we already have secured. There is nothing pushing us to take on more projects that could distract us from our essential tasks.

And then how much condo conversion and ground-up development are you seeing these days in your market?

Well, condo conversion is not seeing much activity, and although John Burkart is present, I can summarize his insights. The link between apartment values and condo values is practically non-existent. Condo developers typically need a premium of around 30% to 40% over apartment values to make it worthwhile, as developing apartments is considerably less risky. Therefore, the trend favors apartments. A recent statistic from the commerce department indicated that only 5.5% of multifamily construction starts are condos, the lowest figure since the 1970s. This suggests that condo values have not recovered sufficiently to make condo conversions appealing. However, I should note that in San Francisco, there is starting to be a significant premium, though it's still not in the 25% to 40% range that is necessary.

The question we had was just again, in new markets just given how quickly rents are rising and also some initial public backlash you're reading in the papers about how quickly the 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 and the apartment side, I think just new supply is very limited and there is so much demand, both side 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 just so good and I'll use as an example that there is a pretty strong couple of 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, I mean you have a number of headwinds and this is why John Eudy's comments are so apropos. 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 your this idea of going from 5.5 cap rate today to 6.5 cap rate is a little bit in peril 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're 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 processes, NIMBYism, etc. 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? Yes, we're 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 while it’s here.

I just wanted to address H1B Visas for a second, it’s becoming an increasingly political topic as we head into this election season and particularly for tech companies there has been a report of a few major players laying off domestic workers in favor of asking for more H1B Visas, I am just curious on the West Coast in particular, what is your exposure as a portion of your renter base and how do you guys view that risk politically?

Hi, this is Erik. I don’t have the specifics in front of me, but you’re right, it’s a segment of the population mainly in Seattle and the Bay Area. I can't speak to the political aspect, as it’s difficult to assess the risk, but we clearly benefit from having those renters there and support keeping them. Mike, do you have anything to add?

Yes, I have a comment. Those positions are aimed at highly skilled workers, particularly in areas where their expertise is hard to find in the United States. Consequently, the tech sector is struggling to fill available roles, especially in Seattle and Northern California. Even if H1B visas are increased, I don't perceive it as a threat to the domestic workforce, as there are many open positions that employers are finding difficult to fill, particularly in those regions. Therefore, I don’t view the H1B issue as a significant problem and believe it could be advantageous. One concern regarding future costs is the wage pressure caused by rising expenses and the challenges of finding employees. This pressure is present throughout our market and is unlikely to diminish soon. Many candidates we are considering are relocating from other states. Overall, the employment market here is quite dynamic, and attracting high-quality individuals, regardless of their origin, shouldn't be an issue.

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 the percentage across your entire portfolio and what is the rent sensitivity on those units relative to traditional direct leases?

This is Erik. We track corporate leases as a subcategory but do not separately track the agencies. Currently, corporate leases account for less than 3% of our portfolio, with the highest concentration in the Bay Area at just over 4% and in Southern California at just under 2%. Our main concern is related to the concentration in individual properties and we prioritize managing the lease expiration profile. We want to avoid clustering expirations in any single month, so we evaluate these situations individually and collaborate with our revenue management team and senior operations personnel to ensure we achieve the right composition. Sometimes, tenants can significantly benefit us, particularly during lease-ups, as they can enhance cash flow. However, there are occasions where we need to carefully consider the timing of their addition.

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

Thanks very much. A quick question here on Nor Cal in terms of the efforts to sort of prevent on the 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 renewals limits at 10%?

Yes, this is Erik again. So it does absolutely help to 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 we commented before that neither I nor my staff 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 they come back and tell our staff, well I had to pay attention to this and this, several hundred dollars, few hundred dollars higher. So it's absolutely having an impact on turnover.

Thanks. Good morning to everybody. Mike last time Mike Schall last time you said you get to 600 million of acquisition by September not that it is a long way to go from there but is that kind of line of thinking off the table now?

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

No I know that, I know that.

471.

471.

471 with a pipeline of about 100 million.

Okay.

It should take us to 571, which includes the three joint venture buyouts that we did. I believe we are on pace, but we are considering a few factors, and it’s quite challenging out there. It's noteworthy that we experienced about a 50 basis point increase in interest rates since our last bond deal, which was around 3.5, and we would likely be around 4% now. Cap rates have not changed during that time.

Right. I was thinking line of thinking not so much for your absolute numbers like going forward basis maybe not thinking so much about guiding to a number after this is done?

In our case, it's largely dependent on the stock we plan to issue and how we will complete the match funding process. It's also about whether we can find investments that will yield a total return better than the stock. This situation can change daily; if the stock performs well, we will be more active, whereas if it performs poorly, we might be less active or consider selling.

Okay. I have heard from some folks that people are actually now living in rented tents in backyard in Northern California with access bathrooms from private individuals that own homes. Have you heard this? And before you answer that, putting the rent control issues aside, I mean 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 could 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 the responsible party and I am not sure I can comment on my karma. But having said all that.

Its Friday I am trying to keep it going here.

I understand. I've seen reports of individuals actually living in freight containers. Recently, San Francisco has been working on approving the use of garages, unentitled units, and second rooms for housing. There are a range of developments underway. People are also combining households. More significantly, many are moving further away from central areas to find more affordable housing. This reflects how the rental market operates; when rents in San Francisco rise sharply, as they do in Manhattan and other locations, some residents become priced out and may move to Oakland. As Oakland's rents increase, those residents may then move to places like San Ramon or Livermore. This ripple effect impacts the entire rental market until all areas, such as the Bay Area, become congested, which poses a significant issue. Currently, there are still considerable price variations as you move away from the primary rental markets and key employment centers. Thus, there remains opportunity in the market, which explains why we've observed that B properties are outperforming A properties, for instance.

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 upgrade in G&A?

Well, I guess I need to negotiate with Angela before answering the question.

I am sorry, had to do it. Good luck Mike. Thanks.

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 submarket maybe?

No, I don’t think so. I mean Bellevue I think is another area that is undergone incredible transformation over the last several years and only continues to get better. I think you have high-paying jobs and a 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. We’re just somewhere in the 20% range downtown, CBD maybe that could get a little bit bigger. Although in the short term we have some headwinds there from new supply. And we’re in the better submarkets 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.

That’s some good color. And then you guys issued above $90 million of equity during the quarter, did you do any dispositions. Should we read into that that you view equity as the most important 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, calling some of the portfolio to fund the development needs for the rest of the year to the extent that there is an acquisition that works then we would look to issue equity again.

First question on development in some of your markets, seen a tax purpose on development in Seattle in addition to requirement for affordable housing as well as a potential tax on residential development in San Francisco, can I get your thoughts on that and how it impacts your look at those markets in your future development?

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

Yes, in Seattle, I guess they're discussing having affordable procurement on future buildings as well as a linkage fee and then I've also seen in San Francisco discussion of that for residential development that's currently on other commercial types of development?

Yes, that is correct and there is also a few of those issues happening in California as well. It's another exaction that makes it tougher to make a number's 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 relevant to Mike’s earlier comment. That's what, is the gatekeeper to keep things from being overbuilt because that puts more impediments to developing.

Then follow-up, I'd like to know what the historical relationship band between rent spreads with Oakland and San Francisco, where they now? And do you anticipate that relationship changing in the coming years?

They obviously differ by product type, given the growth in Oakland has been filling 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 because over the years it just gotten better to commute back to job. East Bay has added some jobs as we've 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 into it, just becomes a better alternative to people every year.

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