Essex Property Trust, Inc. (ESS) Q2 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Essex Property Trust Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Schall, you may begin.

Thank you, operator. Good day, everyone, and welcome to our Second Quarter 2011 Earnings Call. As a reminder, we will be making comments during the call which are not historical fact, such as our expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements, which involve risks and uncertainty which could cause actual results to differ materially. Many of these risks are detailed in the company's filings with the SEC and we encourage you to review them. Erik Alexander and Mike Dance follow me with brief comments on operations and finance, respectively. John Eudy, John Burkart and John Lopez are here for Q&A. Our goal continues to be growing core FFO or cash flow and NAV per share. In pursuit of that goal, we have created a balanced platform of internal and external growth sources. We plan to improve but not significantly expand the Essex portfolio and are comfortable with total capitalization ranging from $7 billion to $10 billion. A key aspect of the plan includes opportunistic property sales and reinvestment of proceeds to improve the portfolio's overall quality, growth rate, and financial results. We have an exceptional external growth platform, the value of which we do not want excessively diluted by portfolio size. It is important that superior real estate deals move the needle with respect to our per share metrics. Thus, the use of institutional joint ventures is integral to the plan because they require less Essex capital, share risk proportionately, compensate us for our real estate expertise, provide the potential for incentive compensation in the form of promoted interest and help us manage our overall size, given that properties will be sold by these ventures at some point in the future. We expect to be selective with development, which will likely average around 20% to 25% of our external growth, and we expect to utilize up to 5% of the balance sheet to fund preferred equity and similar opportunistic West Coast apartment investments. I'll cover the following topics on the call: first, Q2 results and market commentary; second, review of the investment market; and third, California's fiscal situation. So first topic, Q2 results, market commentary. Last eve, we reported core FFO of $1.40 a share, a 14.7% increase relative to Q2 2010. Market conditions strengthened throughout the quarter and continued to gain momentum through July and into August. It is no surprise that Northern California and Seattle are leading the way, which Erik will describe in detail along with recent improvements in Southern California. We are pleased to increase our 2011 guidance as indicated in the press release. Mike Dance will review the guidance chain of components in his comments. We believe that the remainder of 2011 and 2012 will be very good for apartment operators. We see nothing that will meaningfully change the housing supply until at least 2013, including for-sale home-building, and we believe that tepid demand growth will keep pressuring apartment occupancy rates, pushing rents higher. As suggested last quarter, Northern California and Seattle remain a step ahead of Southern California and that performance differential widened this quarter. There are several contributing factors: first, tech employment has been one of the leading components of job growth, and thus the tech centers outperformed; second, Southern California has had slower job growth, reflected in our revisions to our economic forecast on Page S-15 of the supplement; finally, Southern California has lower market occupancy rates and more vacant condos being rented as apartments that need to be absorbed before rents gain traction, which we believe is happening. We acknowledge that U.S. job growth has underperformed the typical economic recovery and that the near-term outlook is muted. However, we note that the U.S. has added 750,000 jobs so far this year or a 1.2% annualized pace. That number includes 945,000 private sector jobs, with the government losing about 205,000 jobs. The better news is that nongovernment wage and salary growth was 5.3% from June 2011 versus 2010, which is much better than expected, while government wage and salary growth was minus 0.4%. While we agree that economic conditions are far from ideal, they are perhaps not as bad as many perceive. There's a pipeline of apartment development that will start being delivered beginning in 2013, and we've started tracking each deal. We continue to believe that high-density apartments can be constructed in 2 to 3 years, and in significant numbers and will tend to be located closer to the urban core. Thus, the regional development impact measured as a percentage of stock may mask a more significant impact on the relatively thin A-quality component within selected urban markets. We view tracking apartment and for-sale development as mission-critical. We announced 3 acquisitions in the press release aggregating $262 million. About $225 million of those acquisitions are part of our newly-formed WESCO I co-investment program. The company acquired Bellerive, another vacant condo deal located west of the 405 near Santa Monica, which appears to be among one of the last vacant condo deals that are available in the market. We continue to see a substantial deal flow, both for acquisitions and development transactions. Thus, we expect to be active investors through the end of the year and expect to exceed the $500 million original acquisition guidance range, the high end of the range. Second topic, the investment markets. As a general statement, cap rates did not change materially during the quarter and remain in the low 4% range for A-quality property in A locations and the high 4% range for B-quality property in A locations. Cap rates increase from there for lesser locations and property quality. Our calculation of cap rate uses effective current market rent and pro forma operating expenses before CapEx. Now that large rent increases have returned to selected markets, there's a widening differential between the cap rate noted above and the properties going in unleveraged yield, sometimes as much as 75 basis points. It remains to be seen how this differential will impact cap rates going forward. We're beginning to see more well-located B quality property being listed now that rent growth is contributing to meaningful increases in property value. We continue to see an active development pipeline and are pursuing several development deals underwritten based on today's rents. Development cap rates range from 5.5% to 6% or 6.75% to 7.5% upon stabilization. Third topic, the California fiscal situation. The quick update on California state budget situations. By way of background, Governor Brown originally proposed to close the state's $26 billion budget shortfall by extending tax increases and reducing spending in roughly the same amounts. Ultimately, the extension of tax increases was not enacted as originally planned, although the governor still expects to submit the proposed increases to voters at the first possible opportunity. The governor signed a balanced budget for fiscal '11 to '12 that did not include substantial tax increases. Instead, the budget reduces expenditures by about $15 billion affecting every level of state government. In addition, $8.3 billion of the shortfall was made up by an improving tax revenue outlook resulting from improving economic conditions. While finding a balanced budget is good for California, the cost reductions are dramatic in scope and their long-term impact is not completely understood. For example, while funding K-12 education remains at a similar level as the prior year, significant tuition increases were needed at the University of California and California State University systems, given the reduction in state support of 25% and 22%, respectively. Accordingly, while positive progress has been made, many issues remain concerning the budget situation, including the solvency of local governments. Governor Brown is also leading a discussion of how to attract jobs to California but there are few details on that point at this point in time. We will continue to follow this activity closely. Again, thank you for joining us. I'd like to now turn the call over to Erik Alexander.

Thank you, Mike. It's my pleasure to be here to report our second quarter operating results and give our view of the second half of the year. The rent growth momentum that's started to build in Essex's portfolio during the first quarter of this year accelerated during the second quarter in the Pacific Northwest and Northern California and remains robust today. While Southern California's revenue results were more muted, they were still favorable on a sequential basis, and gains in rent accelerated the most in June and have continued at a healthy clip in July. Occupancy for the portfolio was essentially flat for the quarter, but we saw a dip in June as peak demand season began in earnest and we continued to ask for higher rents across the board. As stated on our first quarter call, we've achieved market rent growth earlier in the year than initially forecasted. Therefore, we have revised our economic forecast up for 2011. You can review these details on S-15 of the supplement, but of note is an increase in our portfolio rent growth assumptions from 5% to 7.5%, with the biggest gains in the Pacific Northwest and Northern California and a reduction in our job growth forecast for Los Angeles. I will comment on these items along with supply expectations later when I summarize each region. The continued acceleration of rent growth throughout the second quarter gives us good reason to believe in a sustainable recovery and better results for 2011 in all of our markets. The actual rent growth results have improved every month since March and are on pace to continue that trend in August. In the nation's leading markets, it is no surprise that the Pacific Northwest and Northern California lead the charge for Essex. What we see that should help our continued growth is a more recent improvement in Bay Area rents outside of the Silicon Valley, where 60% of Essex's Bay Area portfolio is located and healthier rent gains throughout much of Southern California. Overall, the Essex portfolio saw market rents increase 11% since the second quarter of 2010 and 4.7% over the first quarter. As expected, this improvement in market rents has resulted in a growing loss to lease. At the end of the second quarter, this number stood at 6.8% of scheduled rent compared to 4.1% at the end of last quarter. This obviously represents a growing opportunity to increase revenue. Renewals continued to grow during the quarter and were at 4.9% higher than expiring leases. May renewal results eclipsed 5%, but June renewals didn't quite reach the 6% as expected. This is due in part to some residents with larger increases choosing to move. However, July saw a 6.6% gain in renewal rents, and the first 1,200 renewals in August have posted a gain well over 7%. Average rent gains on new lease transactions were 8.1% during the quarter, but June had a 10.2% gain over expiring leases compared to April at 5.9%. July results were comparable with a 10.8% increase over expiring rate. Again, the Pacific Northwest and Northern California are still leading the overall revenue growth for Essex but Southern California results have improved from 3.6% in April to 7% in July. So again, we have confidence that Southern California is gaining steam and should contribute to a better second half. Therefore, with the growing loss to lease, we plan to take advantage of the expected decline in occupancy and push rents throughout the portfolio during the high demand period through September. While the financial occupancy was essentially flat at 96.9% compared to the first quarter, physical occupancy had actually dropped to 95.9% at the end of June with a 6.5% availability and 95.5% occupancy, with a 6.7% net availability at the end of July. For reference, physical occupancy was more than a point higher last year at this time. The strategy will be to maintain this level of availability in an attempt to gain consolidated increases greater than 8% on expiring and new leases for the remainder of the year, with a watchful eye on the relationship between scheduled rent gains and financial occupancy during the fourth quarter. When executed properly, this approach will allow Essex to post sequential gains in revenue for the third and fourth quarters, achieve our revised revenue guidance for 2011 and put the company in a strong position for revenue growth in 2012. So although our revenue results were respectable and look promising for the second half of the year, the spike in expense growth during the second quarter put a damper on sequential NOI growth. I don't believe there's any reason to be alarmed as expense timing can often be lumpy. Onetime repair and maintenance items, especially duct and gutter cleaning, tree trimming, landscape enhancement, along with an 11% increase in turnover and an increase in actual turn cost accounted for most of the second quarter rise in expenses. Distinct from our redevelopment program, we have completed modest upgrades in apartments upon turn in an effort to meet market expectations for these units getting higher rent. This practice will continue as appropriate but is more prevalent among units vacating after a longer-term residency. One element of expenses that will remain is the wage increase that was effective April 1 following a 2-year salary freeze. However, modified office hours, shared responsibilities and centralizing some of our processes will moderate this expense impact. Given a lower-than-expected increase in utilities for the rest of the year, further savings in property taxes and reduced turnover assumption, we actually expect annual expense growth for 2011 to be lower than initial expense guidance. Expense control will continue to be a focus for Essex. We have expanded our internal resource management group recently to intensify focus on reducing utility consumption. We've also increased our attention on aggregated purchasing and vendor consolidation. These efforts will bear fruit in the second half of the year and continue to help us manage operating expenses throughout 2012 and beyond. Finally, we continue to invest in technology to help us improve efficiencies, enhance customer service and ultimately reduce costs. Currently, there are 10 active initiatives in various stages of deployment at Essex, including centralized invoice processing, check scanning, resident portal, customer surveys, online renewal capabilities. Given evolving technologies and a deserving industry experience, we think our patience will lead to improved efficiency and expense reductions at a lower cost to implement. On our new lease-up activities, these all remained on track with Skyline, Muse and Allegro now stabilized. Via, 284 units under development in Sunnyvale, is off to a phenomenal start, with Phase I 96% leased and 67% occupied. Phase II is already 35% leased and move-ins will begin next month. Santee Village, Bellerive and Reveal are all leasing within plan. Now to comment on the region. Starting with Seattle. Seattle leads all markets for Essex. Essex market rents were up 6.6% sequentially and nearly 12% since the first of the year. We are now only 3% from the previous peak in 2008. At the end of June, occupancy was 95.8% among stabilized assets with a 6% availability. The job picture continues to be strong in Seattle. And related to our improved forecast, Boeing added some 4,000 jobs since the end of last year. Additionally, the number of Microsoft employees moving in to our communities since last quarter has increased by 225 residents. Multi-family supply picked up 250 units but remains at a low 0.4% of total stock. In Northern California, Essex market rents in the Bay Area were up 5.7% sequentially and 9.7% since the first of the year. During the quarter, market rents in San Francisco and Santa Fe have actually crossed over their previous peak in 2008 by about 3%. At the end of June, occupancy was 96.3% with a 6% net availability. Our job forecast is up, and for the first time since 2007, all of our Northern California regions are adding jobs. Office and R&D absorption remained strong in the region with San Francisco MSA leasing an additional 800,000 square feet of office space and 1 million square feet of industrial space during the quarter, while San Jose added 500,000 square feet of office space and 2.5 million of R&D space. Collectively, that equates to more than 6 million square feet of absorbed commercial space during the past 4 quarters in San Jose. Finally, in Southern California, as expected, Southern California trails our other markets, but Essex market rents were up 2.9% sequentially and 4.8% since the first of the year. San Diego has actually led the charge this year posting a 5.2% gain in market rents since January. While San Diego rents have virtually returned to their 2008 peak, Los Angeles and Orange County still have about 4% to 5% to go to close the gap before reaching their prior peak. At the end of June, Southern California was occupied at 95.5% and had a 6.5% net availability. As mentioned earlier, we have revised our job forecast down by 16,000 positions for 2011. Although driven by losses in the government sectors, the reductions posted in business services will be a segment for us to watch closely. Multi-family supply was bumped up 300 units related to a delivery in the first quarter versus the fourth quarter of last year. However, we are tracking over 4,000 units under construction in our market with deliveries spread out through 2013. There is no material change in commercial space absorption during the quarter for Southern Cal. So in conclusion, we saw a fair amount of good news on the rental rate front, and we have to continue to execute wisely to convert those results at a meaningful NOI gain for the rest of this year and into 2012. With that, I will turn the call over to Mike Dance.

Thanks, Erik. Today, I will highlight the capital markets activity and review the changes to our guidance using information shown on S-14 included in the quarterly supplemental materials released yesterday. At the end of June, we raised $115 million of debt from a private placement of unsecured bonds. And year-to-date, we have raised a total of $265 million from top tier fixed-income investors, and we plan to continue to access the private placement market in the foreseeable future to fund the refinancing of existing secured debt obligations. We expect that by the end of 2012 that over 50% of our Net Operating Income will be from unencumbered assets and be well positioned to access the public debt market to refinance the $200 million in secured debt that will be maturing in 2013. For the first 7 months of 2011, we have raised over $200 million in common stock from the At-the-Market equity program. With the formation of WESCO and the Canada Pension joint venture, the 2011 guidance for the second half of the year assumes no additional common equity issued for the remaining of the year. We continue to maintain one of the strongest apartment REIT balance sheets, with a debt to total market capitalization of 32%, interest coverage of over 3x and a total debt to EBITDA of approximately 8x. I am pleased that we have been able to improve our financial strength while still forecasting growth in 2011, core FFO diluted share of 12%. This success has been achieved in large part by a disciplined match funding of the external growth investment activity with approximately 55% common equity and 45% long-term debt. We have approximately $325 million of undrawn capacity on our credit facilities and $200 million of availability on the current aftermarket equity program. Now I'll finish my remarks with some comments to our 2011 FFO guidance. I am embarrassed at the FFO impact from the retirement of the Series B and Series F preferred equities in the 2011 guidance, given that the end of the first quarter was not properly communicated on last quarter's conference call. The updated 2011 guidance now has the full impact from the issuance of Series H preferred shares and the write-off of the cost of the issuance from the retired series. As Erik pointed out in his comments, we expect the third quarter to have higher vacancy and an increase in repairs and maintenance cost as we increase renewal rates and cause certain revenues to move out. During the fourth quarter, we will likely be less aggressive on renewal rent increases to rebuild occupancy during the slower leasing season. The guidance of a 6% increase in year-over-year same property Net Operating Income is expected to be achieved by an increase in gross revenues ranging between 4.3% to 4.5%, and increases in property operating expenses ranging between 1% and 2%. The other changes in guidance are primarily the result of the investment activities and the 2 joint ventures formed during the second quarter, which have all been highlighted in yesterday's press release. The forecasted results in the third quarter will have some dilution from the lease-up of Via, Muse, and Santee Village communities included in last quarter's guidance, plus the third quarter -- plus the second quarter acquisitions of the West LA condos acquired on balance sheet, and the Warner Center Reveal apartments recently purchased by our WESCO joint venture. Given this lease-up activity in the non-same-store portfolio and the expected increase in the same-store vacancy, the midpoint of our guidance for the second half of the year has FFO per diluted share of $1.40 in the third quarter and $1.50 in the fourth quarter. That concludes my remarks, and I will return the call back to the operator for questions.

[Operator Instructions] Our first question is from the line of Swaroop Yalla with Morgan Stanley.

Mike, this is a big picture question. Part of media articles on institutional investors entering the single-family rental market, picking up distressed properties and in turn renting them out. Does this give you any concern, especially in your suburban market, if you see this as taking demand away from you?

That's a good question. I saw at least one of these articles in The Wall Street Journal. I think the premise of those articles were buying homes somewhere around $100,000 each, so that you could get the 8% cap rate that was commented upon. And so as I've commented before, we view California as the tale of 2 states. You have the inland part of the state and you have the coastal part of the state. I can pretty much assure you that all the homes that they're referring to in that -- in those articles are in the inland part of the state. I think in the case of The Wall Street Journal article, they were talking about Vallejo. But with respect to the Sacramento Valley, with respect to the Inland Empire and other areas, I think that's where you're going to find those homes. That's where you're going to find massive foreclosures. Those are areas where the price of a home went from $300,000 to $450,000 and then back to $150,000 in the course of 5 years. And it's so different from the coastal market. But I want to also note that way back when in the RTC days, in the early ‘90s, we actually bought a portfolio of houses, single-family homes and went through the process of selling them off. And John Eudy is sitting across from me, he remembers it well. It was a challenging prospect, so even though we've looked at some opportunities to make those types of investments, at this point in time, and for the foreseeable future, we will pass. Good question, though.

Great. And just can you comment on the cap rate for the acquisitions you did this quarter? I know some of those are vacant right now, but I just wanted to know the stabilized sort of yield and also on the disposition.

Yes, we can comment on that. The Oxnard purchase, The Arbors was in the 5% to 5.5% range. The Reveal is in the 4.5% to 4.75% range, and Bellerive was in the 5% range. Again, I think the difference is in how we look at the acquisitions area is we can get paid to provide services, so those are higher cap rates than what I think we -- than what I cited. And generally, higher cap rates as compared to core properties that are fully leased up, basically operating properties. So where we can get 25 basis points to 50 basis points in the case of Reveal, for example, to complete a lease-up because it didn't lease-up then therefore, some component of the buyers cannot do -- cannot finance lease-up transactions, we'll take that all day long. We think that's a competitive advantage. So if we can add value, and a lot of the acquisitions that we're looking at is trying to add value in search of a better-than-market cap rate, and I think each of those examples are good examples of what we've been able to do.

Great. And on the disposition?

The disposition was in the 6% to 6.5% range on our numbers. Remember we have Prop 13, which gives us a little property tax number. The buyers, obviously, are looking at property taxes based on the current value. So I'd say the buyer was buying at about 5.5% cap and our sale was in the 6% -- it's about 6.25%, I believe.

Our next question is from the line of Rob Stevenson with Macquarie.

Can you guys talk a little bit about where you are in your markets relative to market rents and whether or not that's capped out over the last 3 or 4 quarters to any sort of material measure?

Yes, this is Erik. No, we don't think so. As we commented earlier, we started to approach some of the peaks, prior peaks but continue to get good momentum in Northern California and the Pacific Northwest. And as we commented, see growing trends on both the renewals side and the new rents side in Southern California which is most encouraging.

So you've seen that the private guys have sort of kept up with you guys in terms of rental rate increases to sort of keep market from -- you guys from getting too far ahead of the overall market and you're pushing rents?

Yes, Rob, this is John Lopez. Also to note is if you look at our Seattle market, where we had the biggest swing, if you look at what our vendors are indicating where we are from their previous peak, it's right in line where we're at. So we feel that we went a little bit farther down on the downside, and so we don't feel we've outstretched the mark at this point.

And I would add to that too regarding the loss to lease. We've commented that it increased over the quarter in all markets. And so there's still a fair amount of rent to capture there, and the people seem to be responding favorably for us in that area month-after-month, and again in August as well. We expect similar results on the renewal side in September.

And then I guess, sort of a related question. Are your move-outs to rent increases lower than expected, as expected, higher than expected? I mean, where are you sort of falling out on that? And is that sort of driving your rental rate growth decisions?

It's difficult to dissect for this time of the year because there's a seasonal increase in turnover. And we've definitely seen a few more people moving out as I commented citing that it's too expensive, although again the averages that I spoke of, some of them are obviously much higher. And therefore, they're moving out and we're turning around and capturing the new leases at the market rent and achieving a greater gain. So I would say that we are careful in some of the submarkets where we look. And we see that a greater percentage of people are not responding to our offers and then adjust the following renewals appropriately or even negotiate with those that we've already sent out.

Okay. And then last question, with the new fund, is that -- is there any sort of outs for you guys in terms of being able to offer the fund acquisitions and if the fund says, no, then you guys can do it on your own balance sheet if you really wanted to?

That is exactly how it's structured. So it's a true joint venture as opposed to a fund where we have more discretion. Both partners need to agree. There's essentially criteria, that outside the criteria we can invest on balance sheet. And so to the extent that our partner doesn't want to do something, we have conviction. We can definitely do it ourselves.

Our next question is from the line of Eric Wolfe with Citi.

Mike, you mentioned in your remarks that you expected more development near the urban core. So do you have any desire to start investing in areas more outside the core? And how should we think about that relative to your goal of improving the quality of your portfolio?

I still think the urban core is the place to be. I think that if you add -- supply is supply. If you add supply in the best places, it's still going to soften the secondary location. So I do not mean to say that in the supply going to the urban core that, that somehow makes the periphery better but rather it just provides more -- again, supply is supply whether it's for sale or for rent. Housing supply is the critical matter relative to housing demand, and so it just gives us one more variable, I guess, to manage is what I'm saying. And we're going to, as I said before, we're going to be very mindful and careful about monitoring supply because I expect that it will get out of whack from time to time. And if you could just picture this with me, I suspect that cap rates will remain low even though rents are growing at well above the average compounded growth rate over time that one would expect. And therefore, the quality of the deal is going to be lesser in the future relative to what it is now. And that more development deals will become financeable towards the top of the cycle because what typically happens at the top of the cycle is you get -- you have higher rents that you're looking at today and for whatever reason the rent growth expectations moderate a little bit, but not completely, and therefore, lots of deals get launched at the top of the cycle. So again, it's something that we're going to monitor very carefully and manage the portfolio accordingly. I can't exactly tell you what that's going to mean because the scenario has yet to play out. Again for the next year and a half or so, I think we have phenomenal conditions in this industry.

Okay. And then, when you talk about improving the quality of your portfolio, you're really talking about just, I guess, the growth profile more so than, say, just increasing average rent or buying at a low cap rate?

Yes, it's hard to generalize. If you said increased average rent, well, that would mean you probably wouldn't do Seattle because average rents are a little over $1,000 relative to Northern California which has average rents in the $1,500 range. That I think is misleading. I think that Seattle is a -- represents a very good opportunity to grow the portfolio, and it's a market that we're pursuing aggressively. So looking at -- average rent levels would not be the criteria because it's too simplistic. We are trying to improve the locations, number one. We've always been a location company. We try to get the timing right, which means understanding where each market is relative to the cycle and deploying capital to the right place, and those will be the primary considerations going forward.

Okay, that's helpful. And then just a quick one on your guidance. Could you tell us what you're forecasting in terms of sequential revenue growth in the third and fourth quarter? It would seem to imply a pretty large ramp from the second quarter.

More in the fourth quarter than the third quarter. The third quarter will be a little bit muted by the expected increase in vacancy. But yes, it's very significant in the fourth quarter as we're increasing the rent roll.

And just to add, to throw numbers at that, I think last quarter we said Q3, Q4 somewhere in the -- around 2% on average. So it'll probably be a little bit more than 2% in Q4, Mike, and less than 2% in Q3.

Yes.

Okay. And I guess for you to get that, I mean, is it a reasonable assumption for us that you need like 7% to 8% rent growth over in place leases in the back half of the year?

Yes, this is Erik. It is, again, as commented, we got well over 7% on the renewals in August. That's what we see for September. The new lease side is north of 10%, overall, even going into August. And then the base rents in the fourth quarter and the number of transactions allow us to, if we're in that 8% range, a little over that on average for all of those transactions we had there.

Our next question is from the line of David Toti with FBR Capital Markets. David Toti - FBR Capital Markets & Co.: I have a couple of questions about first, on land costs. And then, I want to follow up with capital markets. Can you give us some specifics on what you're seeing in the market relative to the cost of entitled land, both for garden and for high-density locations, whether you want to use a square foot or per door cost?

This is John Eudy. First off, garden, we don't play in that space too much. That's usually out in the Sacramento and the outlying areas. On urban, it really depends on fees. There's a whole number of factors that play into that but just to give you a range, for a higher density 4-story podium deal, in our markets, it ranges anywhere from 45 to 100 a door and anywhere in between you can land depending upon the specifics. David Toti - FBR Capital Markets & Co.: Okay. Have you seen any acceleration in pricing on your title lands in your markets in the last couple of quarters?

By acceleration, there are a lot of opportunities that have been floated out there by a lot of different people [indiscernible] from 2 years ago, 3 years ago. And the traction that's happening, we've seen a few outliers that have price pointed up a lot, that we have not been able to touch. But in general, there is an upward pressure, but it's probably not as much as some of the opportunities look like from the seller side. David Toti - FBR Capital Markets & Co.: Okay, that's helpful. And then, Mike, just a question for you. Given recent volatility in capital markets and the sort of expansion of credit spreads, 2 questions. Number one, are you seeing that in your available credit in recent quotes? And number two, does it in any way change your view towards your external growth strategy?

On the first, I think it's too early to tell. I mean there's been a significant change in the treasuries, and we have a deal in the pipeline that we're going to get for the joint venture. We're going to be getting some quotes from the GSEs. So we haven't gotten to that point yet, so I can't answer what impact the decline in the treasuries has on our credit spreads. So I'd just be guessing, so I won't. And then, impact to our aggressiveness on acquiring will depend on where these quotes come in and where we see actual pricing.

Your next question is from the line of Jana Galan with Bank of America.

Going back to your same-store revenue guidance, I think you bumped it 20 basis points. I was wondering if that was from stronger Northern California and Seattle expectations or is it kind of the little bit of strength you're seeing in the Southern California rents?

Yes, it's actually strength in all markets. We don't see any slowdown in the Pacific Northwest or Northern California so far. And as commented before, we've seen nice acceleration in Southern California.

And then, with your job forecast down a bit, are you just expecting that you have favorable wage growth and the occupancy is up? Or how do you offset kind of the lower job forecast?

Yes. I think -- this is Mike. I think that even though the job growth is not what we hoped it would be, there still is job growth. And amid virtually 0 supply, I think we have 0.2% of single-family and 0.2% multi-family supply this year. So with that supply, i.e., next to nothing, the combination is still a positive combination. So that's the job/supply relationship. And then, demographics continue to be a positive thing for us. Obviously, the Gen X and Gen Ys are in the prime rental ages. And as a result of that, I think that they are providing some strong support for the multi-family space. So I think it's a combination of those factors.

Our next question is from Alex Goldfarb with Sandler O'Neill. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Just with regards to the tech growth in Northern California, it seems that it just continues to build and build. And just curious if you think that will sort of -- if you're seeing any signs at the froth that you saw in the dot-com era or perhaps maybe fewer Visas, or maybe it's a different dynamic this time where you don't think that we'll get back to that froth that we saw then?

Candidly, Alex, I am hoping that we don't get back to the froth that we had then. It was a very unique time. Rents went up about 40% between 1998 and '99. Rent to median income approached 30% or actually hit 30% in a couple of markets. And not -- the things that are not good and not healthy happen when you get to those levels. Of course, that was -- the backdrop behind that was all these companies that raised billions of dollars without having any revenue or really any company. And obviously, that whole program didn't end well. We view this as being completely different. The numbers in terms of actual amounts of job growth are not nearly as much as they were back then. And we view them as sustainable, real companies with real products. Their valuations arguably may be stratospheric but nonetheless, in terms of people, in terms of employment, in terms of having real companies with good growth prospects and really the latest in the international market when it comes to the tech world. So a real deep market. We view that as long-term sustainable and long-term very healthy for both the company and both the Northwest and California.

And Alex, this is John Lopez. Just a reminder, the [indiscernible] industry cycle, that was 5.5%, 5.25% job growth. That's the end of a 4-year run of good growth in the area. We're now at just 2% growth after losing 6% or 7%. We still got ample vacant space in this marketplace, so I don't think we're anywhere near that. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Okay. And then on the JV front, you now have 2 new JV relationships. Just sort of curious where the institutions are falling. Are they willing to go back into sort of the communal funds? Or do they want or they still prefer to have the individual relationship where each venture is with its own institutional partner?

Actually, John Burkart is here, and he runs or oversees that part of our business. John, do you have a comment on that?

Yes, absolutely. Alex, after the last few years, the institutions clearly want a lot more control, and so they are -- they desire to have more control, which typically means a JV type structure. That they also wanted to get their money invested, and so they're willing to give some things up. And I think it's -- at this point in time that transition is incurring a little bit. They're starting to realize they want to get more money out. But overall, in the last year, their focus has been less partners, more control. Clearly, they have identified us as being a top-quality partner, and so we're constantly spoken to by the institutions looking to co-invest with us. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Okay. So you see that changing and maybe, over the next year or so, seeing more communal funds, or you see the institutions still wanting that control and have the individual relationship?

Alex, say it one more time, please? Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: It sounded -- I wasn't sure if you were suggesting that the -- they may be increasingly open to the communal fund going forward or if they still very much want that control of the one-on-one fund.

Yes. No, I am suggesting that's the case. And then, yes, the -- my expectation is over the next year or 2, you will start to see some more funds -- discretionary funds. It just isn't slow to go there. But the pressure to get money out the door and as they look at their opportunities, they will move into that field. Going back a year ago, that wasn't really an option when you spoke with those individuals. Now they're entertaining that option for sure.

Our next question is from the line of David Harris with Gleacher. David Harris - Gleacher & Company, Inc.: If we think back to the last cycle, you ran into some political resistance over rising rents. I'm just wondered if -- was it -- would you say that was more of a characteristic in North or Southern California?

It's Mike. I think it was in places where rents were -- the largest increases were given out. And they're, especially today in -- amid the social networking that is possible, that the ability to communicate what people consider to be excessive increases is a growing issue. And internally, I have encouraged Erik and operations to have some limitations on renewal rents as a result of that, and it varies from location to location, depending upon the circumstance. But nonetheless, I'm a firm believer that we need some self-management within our industry to avoid broader and more painful regulation out there. And I am going to be more publicly discussing this topic because I think it's a really important one for the apartment space. David Harris - Gleacher & Company, Inc.: And you think that the advance of social media, call it what you will, it actually raises this type of topic now when compared to, say, 4 or 5 years ago?

I absolutely believe that. David Harris - Gleacher & Company, Inc.: Okay. And we're nowhere near that point now, would that be fair to say?

David, it's easier -- and let me just add one more thing. It's so easy now to connect several different people, different properties with the political structure. And that whole process is much different than it used to be. So again, I think this is an important issue going forward. And I'm sorry, I missed your last question. David Harris - Gleacher & Company, Inc.: And, well, I was saying your sense is that -- I mean, obviously, you can always have outliers, but we're nowhere near that sort of pressure starting to build in Northern California today?

We do have -- I would guess that one of the top comments to the CEO website is on this issue. So I'm not going to say it's not out there. It is out there. Again, we're trying to come up with rational approaches to this, and I do fear -- I remember well in the late ‘90s a local operator giving out 35% increases got tremendous scrutiny by the political processes. So I am concerned about it. I think it's a key issue, and I think a little bit of self-regulation is important here. David Harris - Gleacher & Company, Inc.: Okay. Well, high fives on the sale of Chula Vista. I'm curious as to know, did you use a 1031 at all around that transaction?

We did not. We used the proceeds to pay off the Series S that we retired. David Harris - Gleacher & Company, Inc.: Okay. And what about the pipeline of the sales that -- as we look forward for the balance of the year and into '12?

Well, you'll start seeing some Chula Vista like assets. There's not many of them, but maybe 4 or 5 more that we will list and hope to get those done before the end of the year. And then '12 will really depend on I think what locations we think we can -- have achieved the right growth that we are expecting and sell them at the right time. David Harris - Gleacher & Company, Inc.: So we can expect to see sales, not every quarter, on a fairly regular basis over a number of quarters?

This is John Burkart. I think from Essex's perspective, we've always tried to be somewhat opportunistic. So we're watching, as Michael is saying, we're watching where rents are going, what's going on with cap rates. And clearly, over the last many months, we've had rents move up and a level of downward pressure on cap rates, certainly in the secondary areas. So as Mike alluded to, at this point, you may see a few more transactions from us. You should expect over time to see transactions -- disposition transactions from us, but I would say, a certain amount per quarter. It's not a methodical execution. It's much more of an opportunistic play to improve the portfolio overall. David Harris - Gleacher & Company, Inc.: Right. Okay. And the question -- final question on the ATM, you've kind of got to $217 million, I think, year-to-date in the press release. You did $251 million last year. I think Mike Dance, you referenced, there's another $200 million left on the program. I mean, is there any sort of limit that you would sort of envisage in terms of sort of capping this thing out? I mean, relative to the base, this is pretty high volume of equity issuance. I know it's all for good to finance good acquisitions and maintain low leverage, but it's still pretty eye-popping in terms of equity issues relative to the base.

The limit is the amount of good investment opportunities that are available to us. David Harris - Gleacher & Company, Inc.: You could always sell. You can always step up the selling.

Well, that's true and... David Harris - Gleacher & Company, Inc.: And not use a 1031, too.

Yes, that's true to the extent that we have good opportunities to sell. But my comment earlier was I -- because of what we expect to sell in the second half, we're not -- and the fact that we now have joint venture partners as a source of capital, we do not expect much usage on the ATM if any from here on out. David Harris - Gleacher & Company, Inc.: Right. Well, the stock price is kind of back to your average as we speak anyway, but...

David, it's Mike. But just more fundamentally to get the point, in my comments, I made the point that property values are going up, and they're going up because the cap rates are still about where they were, but now you have a significant bump in rent. So now you have a higher NOI stream to risk the lower cap rate being applied. So had we sold more assets previously, we, I think pretty clearly, we would have left something on the table. We are very sensitive to -- and Mike is the king of this, managing the source of capital and understanding the value of the portfolio relative to the stock price and other metrics. And we're focused on it. We agree with you. We think there'll be better opportunities to sell in the future. But actually I want to differentiate us a bit from some of our peers that are out there selling massive parts of their portfolio. That is not at all what we're talking about. We don't have that many locations that we need to sell or want to sell. And so to use John Burkart's word, opportunistic, I think is the key. We've -- I think the older stack methods that Mike was referring to, represent sort of a unique part of our portfolio because for the most part our portfolio is not -- that is not representative of our portfolio. So selling those off is maybe a little bit more defensive. Going forward, we're going to look to be opportunistic.

Our next question is from the line of Mark Biffert with Bloomberg Research.

Maybe I missed this, but what are -- what is the rent as a percentage of income in your portfolio for your tenants?

Our range for our in-place tenants or for the marketplace?

Well, for your in-place tenants.

We don't...

Yes, we don't track it.

We don't do that. This is a market -- if you look at the market averages, it's probably around 24%, 25% in San Francisco; 18% to 19% in Silicon Valley, about 18% in the East Bay, 17% in Seattle. And it runs about 18% in Ventura, 19% to 20% in San Diego and Orange, and about 18.5% in L.A.

Okay. And what -- how far below the norm is that currently?

It is not below the norm in either -- significantly in either -- reported for California. The real 2 areas that are below the norm are Orange and Los Angeles. And they're probably anywhere from 5% to 8.5%, 9% below the norm as far as if you've got immediate rent growth to bring it back to that norm. In Northern California, in San Francisco, we're about at the norm. And in the East Bay, in Silicon Valley, we may be about 5% from the norm.

John, just one point of clarification though. The norm that you're using is the average of the last 20 years. And the average of the last 20 years had 3 recessions in it. So it tends to skew the "norm" down from what was the norm in 1995 to 2000.

And that is an important point. There have been plenty of -- there have been plenty of times in the past at different points in the cycle that we've operated much higher than that average because it hasn't pulled down. And if you look in Seattle, we're probably getting it up into the high 16s when the norm is about 18.5%, so we probably have a good 7.5% or 8% left to go in Seattle.

Okay. Well, that leads to my next question then. Mike Dance, I think you said that you guys were going to be less aggressive in the fourth quarter on your renewal rent increases to maintain occupancies through the slow period. And I'm just wondering if you have the backfill in demand, why would you be less aggressive? Why wouldn't you continue to push rents until you saw that pushback or the demand drop off?

Yes, this is Erik. I think we would. I think what Mike is talking about is that we're going to keep a watchful eye on that balance. And so if we don't get something, right, if we don't get the demand, we need to be careful what we're doing on the renewal side. From an income standpoint, we haven't had any trouble qualifying new residents all of this year with these increasing rents at our communities. That's not been a big issue for us to deal with it. And we've been covering that well. Depending on the community, it ranges from 2.5x to 3x the rents on their income qualifications. And again, they're covering it very well.

Okay. And then, Mike, another question. Just when you look at your opportunities that you're -- for acquisition or development, what are you seeing around the transit hubs? Is that an interest for you outside of, say, your core urban markets that you talked about in the future?

Sure. We love the transit hubs. One of the deals that we bought, development deals that we're going to put into production is in Dublin, which is, what,100 feet from the brand new West Dublin BART station. So I -- we believe in the urbanization of California. And the general rule there is certainly political acceptance to that concept and the integration of -- actually, our deal, our Via deal that we're delivering now has a -- the local light rail valley transit nearby and some retail that I think that's very interesting. So we believe in it. We think it's been well accepted by the tenants. It's a -- yes, I'd say it's a major consideration to what we look for in a development deal.

Yes, and even Reveal which we just bought is an interesting conversion of a rail line to a dedicated bus line that's being expanded all the way through the Valley and then connects with the Metrolink, which is the subway that goes into Central Station in Los Angeles. And the ridership on these double-train luxury buses, air-conditioned, is gaining in popularity. So it is part of the attraction of going there. And we hope that, that continues.

And just lastly, in some of the markets that are weaker, in Orange County and in some of your other weaker markets, are you seeing a significant shift in population outside of those markets and that you think it might take a while for them to come back? Or do you think that it's the opposite, that you're seeing people come in now, that they're seeing cheaper homes or cheaper rent and that, that's turning around?

Yes, it's hard to say. We don't see people moving out. And I think we see activity similar to before as people can move closer to their job and get good housing. They're doing that. We see that in all of our communities. So again, they're looking for a lesser commute and they want certain amenities that those people are coming in. The ones that are leaving, then the reasons, again, seem to be about the same with the exception of slight increase in the -- moving for maybe less expensive rent that people are locating about the same outside of the area as they were last year whether it be relocation for family or jobs or so forth. But again, they're coming in for the same reasons as well.

Right. And again, this is John Lopez. Just to point out, if you look at the trends and the increase of occupancies that we've seen, in each one of our regions and each one of our markets, it's being led by the top areas. But the clear trend is people are taking advantage of with lower prices, the top end and even availability that usually isn't there in an average market.

Yes, I think that's probably a good point. I mean, we saw that first hand at Skyline and Axis which are higher-end properties. And so you had people moving from within Orange County to both of those high-quality products, but you had a number of people moving from outside of the area that hadn't previously considered Orange County because of the product -- the specific product offerings so.

Our next question is from the line of Michael Salinsky with RBC Capital Markets.

Just want to go back to Rob's question real fast. You talked a little bit about loss lease. Can you break that out by Northern California versus Southern California and Seattle?

Sure. Northern California is just under 10%, Southern Cal is just over 4.5%, and Pacific Northwest is just below 8%.

Okay, that's helpful. Second, Mike, in terms of the investment outlook, are there plans for any additional preferred equity investments?

They are, as you know, opportunistic in nature. And so if we see those opportunities, we'll react to them. They will tend to be lumpy. It isn't like we can produce a ongoing stream of those transactions, really, the opportunity framed by underlying debt rates that are very low and you have the opportunity to take that piece above the existing debt level. So I -- we're working on some, but I would be -- it's impossible for me to give you any meaningful guidance on what we might do.

Okay. And third, just a bigger-picture question. When we talked a year ago, you guys were underwriting pretty decent growth over the next 5 years. Curious if that has changed at all given the macro outlook here? What kind of growth you're underwriting over the next 3 to 5 years in terms of when you're looking at IRRs? And also, as we get back to kind of peak-ish rents here, and we're not seeing significant wage or job growth, how much can we continue to push rents longer-term there?

Well, I've got 2 comments. One comment is, we actually are seeing wage growth, so I think that's an important piece that would -- as a statistic. And John Lopez can elaborate if he wants, but the non-government wage and salary piece, i.e., not bonuses of employed people, was at 5-plus-percent June over June, June ‘11 to June ‘10. So we are seeing that. And again, I think in the high-tech world, wage growth is probably among the best, I'm supposing. So I think that part of it is good. In terms of the 5-year growth rate, it's up a little bit. We’ve talked on previous calls that we thought the blended average of our portfolio growth there was in the 30% to 35% range over 5 years. It might be a little bit higher than that, but to the extent we're front-ending a lot of this rent growth. Obviously, Northern California and Seattle is much greater than what we originally expected this year. We're not expecting that to meaningfully increase the 5-year growth rate. I think John Lopez has bumped it from 30% to 35% to 35% to 40% over 5 years, so he has some increase in the 5-year projected growth rate. But to the extent that we get outside growth upfront, I wouldn't expect that to just essentially add on to what the 5-year growth rate is.

Yes. And just to add to that, Mike -- this is John Lopez, is that we have those expectations with a very moderate job growth expectations as the underlying driver and the lack of single-family supply and the long gap in multi-family. And our view of growth going forward, really hasn't changed that much that we expect to see improvements year-to-year, but not in 1.5 years turning around to phenomenal 5%, 6% GDP growth.

Okay. And your unlevered IRR targets, your comments on cap rate's not changing, I'm just wondering if you're -- but now you're doing it through joint ventures, saving the added fee income. Have those actually gone up this quarter?

No. I mean, I think our IRR targets are similar. They are in the 9% to 10% range, levered in the mid-teens. So I think that those expectations are still pretty much unchanged. I will give you that market selection becomes more important because there are markets that are scaled towards the bottom of the rent cycle, really have not seen any meaningful recovery in rents. And then there are markets where we've seen very dramatic rate of recovery well in excess of what we expected. So it makes a more interesting acquisition dynamic right now.

And our next question is from Paula Poskon with Robert W. Baird. Paula Poskon - Robert W. Baird & Co. Incorporated: Any update on the mezz loan program?

Yes. We just gave it. We have some in the pipeline but, as Mike mentioned, nothing we can give guidance on at this point. They're kind of letters of intent. They're not to a stage where we have commitments for breakup fees. Paula Poskon - Robert W. Baird & Co. Incorporated: Mike, I'm sorry, I missed that.

Yes, Paula, in my opening remarks, we talked about capping that activity at effectively about 5% of total capital. So we're looking for opportunities. And again, they tend to be lumpy. But they could be -- not necessarily -- they're generally not mezz loans. They're generally, preferred equity-type investments that -- and other opportunistic things that are of the similar type of investment. Paula Poskon - Robert W. Baird & Co. Incorporated: Okay. And then at the -- our NAREIT meeting, you had talked about labor costs still being low but providing you an ability to essentially cherry-pick talent, and that was accelerating productivity at the construction sites. Are you still seeing that? And is that perhaps one of the drivers of the reduced costs on the Via project?

Yes. This is John Eudy. On Via, remember, we bought that out in the winter and early spring of 2010, which I would say is probably the very bottom of the market. And that's what I consider the baseline going forward compared to the 3 buyouts that we have recently done on the starts for this year. From then to now, there is about a 4% to 5% increase that we've seen on a comparable -- net rentable square foot comparison. I do think that, that will start to move up as we see more of this activity starting to occur. Through this year, it's not going to go up much, maybe another 2 or 3 points, but going into the spring of 2012 and later, we're -- it's a projection, we don't know for sure. It's probably another anywhere between 5% to 8% beyond the number that we're buying that at today.

And just to add to that, Paula, I do think that John and -- John and I talked about this, he will agree that the quality of the labor force was a material factor in terms of getting Via delivered faster and at lower cost than what we...

We obviously hit on all cylinders. We got the lowest pricing point. We got the best-quality subs at the time, and the translation was we're, what, 10.5% below the original project cost...

That was cost of capital, too, because we are 4.5 months ahead of plan. Paula Poskon - Robert W. Baird & Co. Incorporated: Okay. And then finally, just looking out long term, can you talk about your view of the role of preferreds in your capital stack?

It's, again, very consistent with the investment strategy. To extent that we have these, what you call mezz or preferred equities, we like our preferred stock as a way to match-fund those because they typically have similar terms. And to extent that we can get 300 basis points or more of arbitrage between what we're going to get on the yield and what our cost of funds are, we think that is an appropriate use of preferred stock. Outside of that, we don't see as many opportunities to use that as a source of capital.

Our next question is from the line of Eric Wolfe with Citi.

I just wanted to come back to the turnover comments you had in your opening remarks, and I think you discussed having a little bit higher turnover in some of your more seasoned residents in terms of pushing those rental increases on them and them leaving and then that resulting in higher turn cost. I was wondering if you can just sort of elaborate a little bit more on that? When you look at $7 billion your turnover year-over-year at least, is down 300 bps on an annualized basis, and for the 6 months, it's down the same, 300 basis points. So I just wanted to tease out, is that sort of higher turn relative to what you expected? And then also talk a little bit about the resident base.

This is Erik. Yes, no, overall, I think the turnover is still below what our initial expectations were for 2011. But we did see a seasonal increase in the second quarter over first quarter. As it relates to who is moving out, I think a little of what we saw in June were more -- a few more move-outs among people that got higher increases. And so all turns aren't created equal. And so what we're trying to do is be wise about what we're getting back as far as the product. And so these enhancements, as I said, are not distinct redevelopment programs there. Better paint and more liberal replacement of fixtures maybe for longer-term residents that have been there for a while, so that you have sharp apartments. That's a relief that these -- at these higher rates and get those while the demand is there. So again, that translated to some higher costs on some of those turns. And we expect to see some more of that going forward. But I wouldn't apply that to all of the units. As we go into next year, we're going to be looking to take more advantage of expanding the turn strategically to get better rents and select marketability.

When you look at your resident space -- resident base today, what's sort of the average tenure within your portfolio of that resident?

I don't have that prepared. I can get back to you. It has -- when we last looked at it as you -- intuitively, you might appreciate that it's been longer over the last couple of years because rents were flat or down and that they are going up. Some people are moving. It's in that 2-year range, a little bit more. It tends to, again, be between, I think it was 22 months and 27 months, again, depending what part of the cycle that you're in.

And are you tracking, I mean, are you able to say what is the rationale for that move-out, home purchase, rent, job and...

Yes. I mean, we do track that. Some of it is subject to interpretations. When somebody says that they're moving out of the area, we try to get the best explanation that we can so that we can stick it in the appropriate category. But oftentimes, that's all you get. You don't know whether that was for family or job loss or too expensive. But again, we collect information the same way and the move out related increase again is -- or too expensive is up a little bit over the first quarter and over the same period last year, so in that 6% to 7% range versus last year, as you might expect. Nobody was moving out because it was too expensive, maybe 1% or 2%. And then on home purchases is something that we've always paid attention to. But again, it’s bouncing around in the 8% to 10% range over the last couple of years. For the second quarter, it was at 10%.

Right. And so when we think about the spread between the new and the renewal, at least some of that is being -- in a new lease, you're losing some of that based on the higher expenses that you're flowing through?

Yes, I suppose that's right. Again, there's a timing issue related to renewals. So our practice has not been to send renewals out above current offered rates. So in California, if you're sending out increases 60 days in advance, you have economic rent growth in between the time somebody gets their renewal and maybe even decides to leave. We've seen people accept month-to-month premiums and delay their decision to move a couple of months after getting their increase. And so again, you're actually picking something up on the new side given that those economic rents are growing in all markets.

Okay. And then just a last question, Mike Schall. Mike, you mentioned at the beginning of the call something, being a $7 billion to $10 billion -- you mentioned $7 billion to $10 billion. What are you trying to reference in that from a perspective of your gross asset base, enterprise value and...

The total capitalization. Again, the comment I'm trying to make is, I would focus less on the specific numbers and more on the concept of not trying to become the largest company, but rather focus on the per share metrics that we're trying to accomplish, which is cash flow per share and NAV per share. So again, we view the company as an investment company, and we have some advantages of size. Obviously, you have more portfolio to spread, technology initiatives and other stuff. That's an advantage of size. But then there are some disadvantages of size. And as I look at our company, one of the things we've been able to do is add a lot of value via external growth. So trying to keep our external growth machine as an important part of the overall results is important to us and so obviously, maintaining company size is a key consideration. Obviously, the bigger your portfolio, the less impact your external activities have. That's the point.

Right. But at some point also from let's say an M&A perspective, if you can consolidate within a market and drive efficiencies, that could drive significant value even off of a bigger base?

Yes, I agree with that. But I think that there is a limit to how far you could drive those efficiencies. And so I totally agree with you, if you could find the right opportunity to grow the base and, obviously, one possible way to have more markets to grow in, which is a whole different discussion and not something that we are looking at imminently. But it depends on how you view those -- the depth of those efficiencies and how that again relates to the value of the external growth platform. That is the key right there.

And so being at the lower end of that $7 billion to $10 billion sort of enterprise value today, should we expect that you can still grow meaningfully up to that $10 billion before you have to ratchet up disposition pace and things like that?

Yes. And again, we're not in a hurry to get to the $10 billion either. We're trying to accomplish things. If we can grow externally and add meaningful value going from $7 billion to $10 billion, then that is important to us, and that's what we're going to do. If we can find better opportunities, and I think it was the point made earlier about if you find a better cost of funds in your disposition program than you do in issuing your stock, then that becomes the key objective. And again, we're trying to manage the per share metrics that are -- those are the focus, much more so than company size, much more so than trying to create the operating efficiencies. The operating efficiencies are important, but the depth of the operating efficiencies -- you hit a point where it's just hard to drive those numbers meaningfully.

Right. But at least on a per share and I think NAV cash flow, growth is still ultimately important. But some of these things, some of the preferred and mezz and some of the stuff that you do there, you get on a treadmill, it's hard to replace, right? So from a per share perspective, you may take a step back as you recycle that capital into more hard assets?

Yes. Well, and I agree with that as well. And I think that, that's why we're going to limit that to a 5%, limit it to 5% of total cap because we don't want that to get completely out of control. Having said that, I think it's a great opportunity to add value right now. And I think those transactions, you've got one example where we -- our Santee Court building where we bought the first loan and then we ended up buying the building. So there are opportunities that those transactions can lead to in the future to add value. So I wouldn't necessarily suggest that there's going to be -- they're going to create a cliff to worry about. I think that we will be able to identify transactions over time that are -- that add value, and I think that becomes an important part of our overall program.

Okay. Well, the way the market is going, you may get down to $6 billion before you get up to $10 billion. So you have a lot of room to move to add to it.

[indiscernible]. We're trying to keep this an upbeat call. This is a good call.

Our next question is from the line of Andrew McCulloch with Green Street Advisors.

With the comment you made on the self-imposed rent control, does that put you at risk, if your competitor is kind of blowing right past you, maybe causing you to leave money on the table? I ask -- you're very far from having a monopoly in any of your markets, meaning you don't set market rents. The collective market sets market rents. And I understand maybe the motivation to cap rent increases in theory, but could that be problematic if you do?

It's a factor. We've looked at the potential impact of it. And we think it's relatively minor, but there is some impact. And Erik and Mike and I have had several conversations about that. And I agree with you, the market sets the rent. But at the same time, I think that if I look back in history, the late ‘90s, for example, it was important to have an industry view of not being too abusive with rent increases. So personally, I believe that some restraint is appropriate. I don't think it costs us very much because the caps that we're talking about in general are somewhere in the 15% range. The caps that we had in the late '90s were somewhere in the 10% range. And again, this is just for existing tenants. This is just on renewals. This has no effect obviously on new lease rents. And I think there are other tangible benefits as well, like, for example, it should reduce your vacancy because if you have a rent increase, your existing residents, they go -- you tell them to go look at other buildings in the area and they're more likely to stay there, which is going to ultimately reduce vacancy and reduce turnover. So I think it's a balanced approach. And again, we're not trying to put ourselves at a competitive disadvantage, but we're trying to come up with a rational program, and I think we've done that.

Great. Just one quick question. Can you just walk through your new lease and renewal rates for the different SoCal markets? I think you gave it for SoCal in general, but the different markets?

The new lease and renewal rates?

Yes, growth rates?

Okay, in Northern California...

Just individual SoCal markets. If you could break it out, L.A., Orange County, San Diego.

We have that information, but it's not by county. It's by our regional portfolio managers, so we'll have to take another slice and dice at the data and get back to you.

Our next question is from the line of Alex Goldfarb with Sandler O'Neill. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Just quickly on San Jose, just speaking to some folks, it sounds like there's a bunch of development activity going on out there. Just wanted to get your perspective if this is just a few deals in the works or if there's a meaningful amount? And if there is a meaningful amount, when do you think it's going to start coming online?

Alex, this is John Lopez, there is about 7 or 8 deals that are in the construction phase right now. There is one of those components, it's probably about, IAC had 1,500 units that starting, obviously, not all at once. So we're probably looking at 6 or 7 deals in the 300 to 400-unit range that will probably be coming online in late in mid-2013 to 2014. So we've got 1.5 year before that delivers, but there have been an improvement. Those starts were all within the last 6 months.

There are several behind it, right?

And there are more behind that. I mean, that's what's under construction right now. You're probably going to see that rate pick up with the recent rent increases. We've had that strategy and we expected that to go up. Alexander Goldfarb - Sandler O'Neill + Partners, L.P.: Okay. So I guess I'm just a little surprised because you always think that it takes such a long time to get permits and the zoning that development would be a lot slower. Has San Jose become much more development-friendly or these deals have been in the works for some time?

Yes, this is John Eudy. Most -- every one of those deals have been on the shelf the last 2 years. And then there was a little bit of an impetus that got people started, those in north San Jose like ourselves. If you got in the ground by September 30, you were able to get the affordable requirements waived. If you miss that date, you don't. So that will shut the door on a number of deals after September, because the economic differential is about 50, 60 basis points in cap rate. I think that's part of it. That's the total amount that's going to come on over the next 1.5 years to 3 years. It's a small loss in the budget compared to what happened 3 or 4 years ago when you take this multi-family for sale out of the picture.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you, operator. Well, in closing, we're pleased with the progress made during the quarter, and we're also pleased that the outlook remains very strong. We think that the long-term growth rate for the West Coast will be among the best in the country. Just want to thank you once again for joining the call, and we appreciate your interest in the company. And we look forward to hearing from you on next quarter's call. Thanks again.

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