Essex Property Trust, Inc. (ESS) Q4 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Essex Property Trust Fourth Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs as well as information available for the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company’s filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer of Essex Property Trust. Thank you, sir. You may begin. Michael Schall – President and Chief Executive Officer: Thank you, (Robin) and welcome to our fourth quarter earnings conference call. Mike Dance and Erik Alexander will follow me with brief comments. John Eudy, John Burkart and John Lopez are available for Q&A. I will cover the following topics on the call: first, fourth quarter results and rent growth expectations; second, cap rates; and third, update on the state of California. So on to the first topic. Last time, we reported FFO per share of $1.55 per share, an increase of 18% over the prior year and equal to the high end of our guidance range that was presented last quarter. I am very pleased with the focused effort in operations to the credit of Eric and his team. Eric will comment on portfolio results later in the call. I'd like to revisit our longer term expectations for rent growth. Last quarter, I commented that we expect approximately…

Thank you. We will be now conducting the question-and-answer session (Operator Instruction). Our first question comes from the line of Swaroop Yalla with Morgan Stanley. Please proceed with your question. Swaroop Yalla – Morgan Stanley: Yes, hi. I’m looking at S-14, same-store NOI growth shows the change of 7.7% slightly different from 7% to 9% guidance which you gave earlier. Just wondering if that is the yield math or there has been some reassessment of conditions in the last two weeks?

Swaroop, now this is Mike. No, it really wasn’t that, it was just simply rounding off. We do budgets from September to November and we rely on them. We use a ground up budgeting process and then we decided that the range given, where we stood in December was better than to some of the ground up budgets and we decided to keep a range of 7% to 9%. So, we could get the appropriate. Swaroop Yalla – Morgan Stanley: Great. And the acquisitions which you completed, can you talk about the cap rates there and also there seems to be sort of redevelopment component, where do you expect yields to come in after you finish some of those?

I think the average cap rate of the properties that we acquired in 2011 is somewhere around 5%. As you point out, a number of them involved some kind of repositioning, which will increase the yields from there. The newer properties consistent with what I said in my prepared comments are lower than that. They are 4.5% to 4.75% range and the value-added opportunities are in the 5.25% to 5.5% range. So, over time, we are not in any tremendous hurry to complete these redevelopments. In some cases, it will take several years by the time we complete the exterior renovation and then the upgrade of the leasing office and amenities and then finally do the unit terms without drop in occupancies significantly. That process takes several years to play out. Swaroop Yalla – Morgan Stanley: Got it. And just lastly on from California, you mentioned that this greatest potential to surpass guidance there, just wondering what some markets, I mean, if you can just talk a little about some markets and possibly Los Angeles and Orange County?

This is Erik. I think, again, consistent with comments with the low supplies and not just our low availability, but market availability is low. And really all four counties would have a major presence, where we have seen activity, more recently, rents moving up, offered rates being expected, new rents going higher, is that in Los Angeles in particular. Some parts of Orange County and Ventura has been actually strong over the last couple of months and so we are looking for that to go, to continue in the same direction. San Diego has been pretty consistent with the expectations so far. Swaroop Yalla – Morgan Stanley: Okay, thank you.

Our next question comes from the line Jana Galan with Bank of America/Merrill Lynch. Please proceed with your question. Jana Galan – Bank of America/Merrill Lynch: Hi, thank you. I was curious in your guidance for acquisitions in 2012, are you looking at any opportunities outside of your current markets?

We are not, at this point in time, we are – I think I have commented on prior calls that we are adding some East Coast markets to our market research process, but we do not expect to make any changes in our geography in the foreseeable future. So, for now, it's just – it’s just a point of reference or information to us. Jana Galan – Bank of America/Merrill Lynch: Thank you. And then in regards to you mentioned developers or marketing deals that you felt that they were kind of underwritten. Is it more the underwriting difficulty or you just think that the returns aren't high enough for the risk?

Well, if you think CEO math is in question, developer math I think is much more so. So, developer math and John Eudy is here, he lives with this everyday, but we just don’t buy a lot of the performance. So, John, do you want to comment?

I think that said it Mike. No, just the expectations for – we all believe that rents are going up over the next couple of years quite a bit, but there is a bit spread as on what we think versus what some folks say. Jana Galan – Bank of America/Merrill Lynch: Okay, thank you.

Price going in. Jana Galan – Bank of America/Merrill Lynch: Thanks.

Our next question comes from the line of Eric Wolfe with Citigroup. Please proceed with your question. Eric Wolfe – Citigroup: Hey guys, thanks.

Hello Eric. Eric Wolfe – Citigroup: You’ve always been very good about finding, I guess, what I'd call interesting investment opportunities to supplement your core earnings growth. I guess I was thinking back to 2009 when you were buying multi-family bonds, which obviously turned out to be a great decision. So, I am just curious today from your perspective what’s the most interesting investment opportunities outside of your core business?

It’s a great question Eric. And I don’t think I have a simple answer. I think that finding well located properties that are that we can add value to continues to be the best overall return and I say that because in many cases just take a step back and you look at the apartment markets particularly in urban California, where you’ve got less than 0.5% to 1% of stock being produced in any one year, that means that by definition the average age of the multifamily stock is more than 20 years old. Well, there are repositioning opportunities within that 80% to 90% of the marketplace that I think are really pretty interesting and so I think that is a key focus that we see this year. I think that we have come tremendously long way under John Burkart’s direction in our redevelopment programs in terms. We’ve now done a lot of full scale redevelopments and we’ve been able to do them cost effectively and adding value along the way. And I think that those opportunities are really pretty exciting. I also think that the preferred equity investments of the general statement given how low the underlying first mortgages are on a lot of these properties have Fannie, Freddie, debt in the high 3% range for 10 year financing, creates a lot of cash flow in these transactions, which is perfect for these preferred equity investments. So, I think it will be a processing involving careful selection. I think there is still pretty significantly good opportunities out there to choose from. Eric Wolfe – Citigroup: Great and then you brought up the low, I guess the low cost on GSE data and I guess just thinking about, where interest rates are today versus also how well your stock has done over the last year. I mean does having that low cost of capital change your investment hurdles at all or are you still sort of staying firm and saying 8% to 10% unleverred is where we want to be even though our cost of capital has come down over the last year?

Our formula for determining whether to buy something or build something really starts with what is the value and the cash flow embedded in the share of stock from the existing portfolio and trying to determine, whether we are making the company better i.e., accretive to NAV, accretive to cash flow. And so we won financial models on the company trying to gauge into the key components and what we’re trying to do is accrete to the shareholder interest. So, it changes almost daily. Obviously as the stock price changes then interest rates change and therefore it’s really to be genesis of where the fund and third-party joint ventures come from. If we can find a cheaper cost of capital represented by them and a different risk reward scenario, we’ll go in that direction otherwise we will be acquiring on balance sheet. But that is a iterative process and one that we will be pursuing as we look at each deal this year. Eric Wolfe – Citigroup: Okay. That’s it from me. Thank you.

Okay.

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill. Please proceed with your question. Alex Goldfarb – Sandler O'Neill: Good day. As you guys see this tech boom resurge, I mean we heard Boston talk about in their call yesterday you guys have obviously outlined it. Are you seeing this expand to other market outside of San Francisco and the Peninsula Valley and what I mean is expand in a meaningful way, where you think there are other parts of the West Coast that could really get traction out of this?

This is John Lopez, Alex. Are you meaning outside of what the core markets we currently operate in or just? Alex Goldfarb – Sandler O'Neill: No, no in your core market, there is a lot of buzz about how the tech boom has really exploded, having maybe I just don’t read the Seattle papers enough or the L.A papers enough. But don’t seem to hear as much buzz coming out of those markets I just curious last tech boom we had Seattle was hot that as well. So, I’m just sort of curious if you’re seeing it in some of your market?

Alex Goldfarb – Sandler O'Neill: I think John you would agree that certain other – parts of the Bay Area, biotech is in certain areas for example and even pushing up outside of Silicon Valley into Alameda County. We have Tesla and Solyndra not only in Fremont for example. So, I think it is as things become more expensive there is a tendency to push out these different – get a different types of technology and or submarket driven depending upon where each of these technologies are biotech versus software versus other types of things, wouldn't you say that’s true?

Yeah after that I would add on to that, that I think what you might want to look at this time, Alex that maybe other than the last tech boom was the emergence of the health in biosciences and that is a very big component obviously in Northern California markets, but it is also has a big presence in San Diego, but that is an area where that will be expanding as it go on – if that’s going to be a larger percentage of the expenditures that we see it in the increase in the amount of money spend towards venture capital in those life science areas. Alex Goldfarb – Sandler O'Neill: Okay, so you would expect to see that in the same sort of rent surge?

Yes. Alex Goldfarb – Sandler O'Neill: Okay and then specifically on Seattle, there is some talk that in South Lake Union especially there is a concern about potential oversupply, is that a concern for you guys?

There is a lot being build Downtown relative to what was being build a couple of years ago which was very little. Roughly right now there is about 6,000 units under construction in Seattle, roughly 5,000 that is Downtown, but it’s a very big chunk, its about 40% of the overall metropolitan area and if you look at the number of jobs versus housing units that are available to live Downtown, it is one of those core areas where there is more workers than housing supply to them and over the last 15, 20 years its been more of a push for the higher income people getting jobs Downtown because it's more of the tech and more of the healthcare is going Downtown. We are seeing people choosing to live Downtown versus commute to the far suburb, which is becoming extremely difficult. So if you look at – I would say that you have to also remember that initial boom was due to a abating of BMRs if you got it in during the year. So what I think you will see is a little less starts this year and so I don’t think that is going to be a reason to think either the Downtown or the total market. In the end, we think it will always gets delivered, it still 1.1% multifamily are less than one on the total residential supply line, so, we are looking at – we are getting job worth of 2%, we expect that to continue for several years. Alex Goldfarb – Sandler O'Neill: Okay. So, the point is you are not expecting like repeat of what happened in Belvieu, what is…

I think what happened there was, it was driven by the incredible belief in the condos, you could sell anything in any price market which drilled, I would think way more than half of the deliveries that we saw and convert to apartment that’s not going to happen this time. Alex Goldfarb – Sandler O'Neill: Okay.

Not to mention that 2.5% to 3% job growth in Seattle became minus 10 in 2008 that had a small impact. Alex Goldfarb – Sandler O'Neill: Right, right, okay. And then just on the JV front just given the prospect of rates staying low through 14, pension funds they were trying to catch up, are you getting more calls from pension funds who want to partner with you to try and solve their long-term return hurdles?

Hey, Alex, this is John Burkart. Absolutely that is the case, we’ve obviously long-term relationships, great relationships in the pension fund, private equity world, but we are getting calls certainly from people, they talked for a long time and many new calls interested investors as going through invest in West Coast multifamily. Alex Goldfarb – Sandler O'Neill: Okay. Thank you.

Thanks Alex.

Our next question comes from the line of Gautam Garg with Credit Suisse. Please proceed with your question. Gautam Garg – Credit Suisse: Hi, guys. Obviously the Facebook IPO is going to pump a lot of capital into the system, I’m just trying to gauge – better gauge the impact that could have on the Bay Area of rental market, is there anything you can talk about with regards to the fact the Google IPO had on the markets around 2004 and 2005 time period?

Well, its very difficult job, again this is John Lopez. It is very difficult to pair out across the entire MSA impact of the Google money that it had on the housing market. I mean, I think what it will probably do, it will solidify the single family market on the peninsula much quicker than you’ll see in the multifamily of good change. But then again that will then triple down to a solid, solid single family prices shooting up is only good for a multifamily side. Gautam Garg – Credit Suisse: Right, okay.

Yeah, I think it’s more an indirect effect we know that it will just be a less alternative for people who are getting job from the future to buy. Gautam Garg – Credit Suisse: Makes sense. And another question if I remember correctly I think on your last call you mentioned something about additional vacancies you do student rentals which a lot of the students moved out of your apartment unit went to an on campus option. What percentage of the portfolio does it represent now and is there any outlook you have on that front for 2012?

Yeah, this is Erik. I commented on that. I mean there is really three properties that are dominated by students, two in Santa Barbara and the small one in the Santa Cruz, one in Santa Cruz fully occupied during the fourth quarter and we made good progress actually in Santa Barbara by doing bed rentals and respectively the occupancy there is about 90%. The – our outlook is better frankly we had two windows of demand one actually starts in February goes for a couple of months and then the other one towards the end of the summer before the semester starts and we’ve already seen in Santa Barbara a big uptick in interest phone calls and visits including from freshmen that are already looking for housing for next year, so through a positive sign for us and in fact if I think we were still able to get rentals during a very good timeline it's difficult to do, so we’re changing the approach a little bit now that we exchange some success with the bad rentals and so we look to be fully occupied before the semester starts in the fall. Gautam Garg – Credit Suisse: Sounds good.

And that similar rent probably a little bit higher, I think we called for 3% increase on the rent based on the fact that we don’t think there is any new supply threat facing us this year. Gautam Garg – Credit Suisse: That sounds okay. Thank you so much.

Our next question comes from the line of Derek Bower with UBS. Please proceed with your question. Ross Nussbaum – UBS: Hey, its Ross Nussbaum here with Derek Bower, I got a question regarding Prop 13, if I look at your same-store pool and if I am looking at the numbers right, in California you guys stayed somewhere around $29 million worth of real estate taxes in 2011, if did you have to take a guesstimate as to if you’re effectively mark-to-market that number, what do you think the tax number might be?

Hi, Ross, this is Mike Dance. Yes, about $20 million probably $22 million to $24 million. Ross Nussbaum – UBS: I am sorry it would be another.

Yes. Ross Nussbaum – UBS: 24

Yes. Ross Nussbaum – UBS: So almost double that you got, but.

Right.

That’s correct. Ross Nussbaum – UBS: And when you guys talked earlier about market cap rate, just want to make sure we’re definitionally correct? Those are basically on if I will mark-to-market tax numbers so that’s what the buyer effectively is paying?

Exactly. We have a definition that we’ve used for many years for cap rate and I realized can be different from what others use, ours is a standardized 95% occupancy, market rents today a normal management fee pre-capital, pre-CapEx. Ross Nussbaum – UBS: Makes sense. Yep. Thanks very much.

Okay.

Our next question comes from the line of David Harris with Imperial Capital. Please proceed with your question. David Harris – Imperial Capital: Well hello guys, thank you for allowing my guest appearance.

Hello, well welcome back David. David Harris – Imperial Capital: I have a couple of old chessnuts to throw at you or at least to kick around as this with either rate of rental increases particularly experiencing in Northern California, are we anywhere close to a political response in terms of the rent cap?

It’s a good question David. And, I can’t – I don’t know with certainty what exactly is going to happen within the political scheme. We have maintained a process by eliminating our to one renewal option to 15% increase largely because of the some of the issues that have cropped up in the past as it relates to that issue. And, so far I don’t know of any organized activity that is pushing on the rent control front, but we continued to monitor it closely, it’s important to us, and so far so good. David Harris – Imperial Capital: When we experienced this last time, was it more of a Northern California phenomenon or Southern or was it just above and down?

It’s one of those subjects and issues that is the pretty well-received by the people. So, it’s everywhere… David Harris – Imperial Capital: Okay.

And so I wouldn’t limit it to any one market. David Harris – Imperial Capital: And I think it was on a couple of calls ago, you made reference to the social network, obviously for Facebook and others sort of adding another dimension to tenants understanding of what’s happening in the marketplace, how is that playing out in terms of sort of the tenants sort of, I mean, e-mailing one another, Facebooking one another with regard to chatter about rent increases?

There is some of that. And it actually works against us. And for us as we have a lot of the times can monitor all the activity you can see, but what people are talking about or you hear because somebody comes in to the office and we deal with it case-by-case. Thankfully I think we do a good job of providing service and housing and often times we have plenty of defenders which is the best thing. We don’t have to get involved in it at all. We have the other tenants talk to me about how great their experience is at Essex and a lot of people that are in touch with the competitive market. They will tell you hey, you think that’s bad you should go see X, Y, Z and how much their rent is. Nobody likes getting an increase, but you're still way better off here than there. David Harris – Imperial Capital: Okay. On another subject, it was good to see property sale will be only $7.4 million could you give me the total of how many properties you sold last year?

Two. David Harris – Imperial Capital: Two, for how much Mike.

I think one was low 20 millions and the other was…

15.7, yeah.

So, low 20 million. David Harris – Imperial Capital: Okay. And any idea what you might do this year, I don’t think unless I have missed it, you have not included as a specific reference point in your guidance?

I would say $50 million to $100 million. David Harris – Imperial Capital: $50 million to $100 million. And if you will be upper end of that, would that mean that perhaps you did a little less ATM issuance?

That’s correct. David Harris – Imperial Capital: Okay. So, we could see the two being as intangible one off or more?

This is John Burkart. We are pretty opportunistic about our sales. We have actually a very good portfolio overall. So, we are ending up recruiting a few things here and there, but the execution is very opportunistic. So, if the situation is right on the small office buildings with an absolute excellent execution by the team involved, so if you are an owner/operator at what was probably low 2s in actual cap and an economic cap of about 4.25% assuming 20% office vacancy like the market currently has. So, that type of stuff will be all day long and it keeps for those opportunities. David Harris – Imperial Capital: Okay. And could we assume that will be more second half of the year rather than front end of the year?

We actively market properties, so it will be when do the opportunities come up? David Harris – Imperial Capital: But nothing imminent?

Yeah. David Harris – Imperial Capital: Okay, alright great. Thank you, guys.

Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed with your question. Rich Anderson – BMO Capital Markets: Thank you and thank you for friending me.

Always a pleasure. Rich Anderson – BMO Capital Markets: So, to Ross Nussbaum’s question in the NAV or the property tax impact from Prop 13, if I am doing this math correctly would that be $13 a share value roughly to your NAV?

You mean, at the current multiple, if you just do the straight line on the multiple? Rich Anderson – BMO Capital Markets: Well, I mean, if I were to just take out, say add more cost to the NOI line item and then CapEx, I mean, in that range?

Yeah, if you’re just saying, yes. Rich Anderson – BMO Capital Markets: Something like that, I mean, depending on the cap rate I use it would change, but obviously…

I guess, the one comment I’d make Rich is that if you’re using trailing NOI, remember properties trade on a current market, not a trailing basis. And I’d argue that, that number probably offsets pretty much the Prop 13 NAV impact. Rich Anderson – BMO Capital Markets: Okay, okay fair enough. And on the Prop 13 comments that you made at the beginning of the call, what is the risk that they might view multifamily housing as commercial property. Is there any risk of that it could be – they could further bifurcate residential in to single family and then the multifamily business that you guys run?

It’s another good question and if you look at the history of Prop 13. It has been challenged in every conceivable fashion from the course to the initiative process, to the legislature; it’s been attacked hundred different ways with a hundred different approaches. So, it’s difficult to say this approach, the one you’re suggesting is going to be the one that prevails. It’s a political process Rich and as you know they’re pretty hard to predict. I will tell you that largely this is a matter of dollars. It’s a matter of dollars supporting the path of least resistance to get tax increases in California and for the most part, whatever the donors, which are likely the state employee unions that are providing the big dollars to get most of these proposal served, they’re going to pick, whatever they think is going to be the path of least resistance. After this point after what is been 30 years of Prop 13 its been tried a lot of different times and a lot of different ways, actually not been obviously the path of least resistance because taxes have gone up here many times over that period of time. So, it was why it was labeled the third rail of California politics and I don’t believe that anything has changed that. Rich Anderson – BMO Capital Markets: Okay and then the last question, as you mentioned kind of the intelligent gathering in the East Coast to recovery. But I don’t remember exactly, but how long have you been kind of just staying knowledgeable on the East Coast. Is that always been the case or did you just kind of start keeping your eye on the price our way?

Well you will recall that we’re in a bidding process. Rich Anderson – BMO Capital Markets: Town and Country?

Yeah, Town and Country and so we’ve had some level of market research that we have just increased the intensity of that. So that it is similar to what we do on the West Coast in terms of market timing model trying to understand the supply demand relationships and hopefully looking for balances. And we believe that rents have great growth potential on the West Coast, which is why we wouldn’t make that shift at this point in time. We think we have about the best locations that there are in nation and we don’t want to dilute that presence. But the whole purpose of the market research review is to try to identify entry points and get the timing right. So that’s what we are looking for. Rich Anderson – BMO Capital Markets: Okay sounds good. Thank you.

Thank you.

Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your question. Paula Poskon – Robert W. Baird: Thanks very much. To follow-up on David’s earlier question, what is the range of acquisition and disposition volume that is underlying your FFO guidance range for the year?

Acquisitions we’re looking $400 million to $500 million and dispositions between $50 million and $100 million. What we’re targeting is kind of a net accretion of about a $1 million. Paula Poskon – Robert W. Baird: And on the dispositions Mike, is it more market, submarket dynamics or the age of the properties that a CapEx might be needed. What’s driving your selection process?

You had that’s all of them, it’s a variety of decisions, where we evaluate the portfolio and look for situations that we think we can improve the portfolio by selling the assets sometimes it relates to long-term rent growth, sometimes CapEx, a variety of items in here. Paula Poskon – Robert W. Baird: Okay thanks. And then also for Mike Dance, I’m sorry Mike, I just think I just missed some of this in your commentary and your prepared remarks. What drove the cost savings on via relative to budget? I know you still obviously with some of it was attributable to the earlier than expected lease up. Is there any other major contributors?

$5.5 million of that was used interest expense, property tax expense, capitalized overhead, all of the stock cost, all the other cost were hard cost savings. Paula Poskon – Robert W. Baird: And was that on product cost, labor cost and mix of everything?

I will let John answer that.

Combination of things, it was acceleration to the job we got done six months ahead of schedule. So, general conditions were less. It was that the buyout occurred in declining market at the time the buyout was done on the material side as well as the labor side. Paula Poskon – Robert W. Baird: And then finally, just a question on the development process, are you seeing you any delays in getting things permitted or approved given the workload that some municipalities are having overloaded. I just read today that San Jose is trying to take some action to lower fee construction taxes in the city per office development and requesting in the budget to add staff for the planning commissions. Are you seeing any challenges in that way?

There are issues. All of the cities had some form of staff reduction 2, 2.5 years ago. We hadn’t added much to staff. So, there is some friction there, yes. Paula Poskon – Robert W. Baird: Thanks very much. That’s all I have.

Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question. Michael Salinsky – RBC Capital Markets: Good afternoon guys. Mike, I want to go back to the disposition topic. You talked a little bit on prior call about wanting to grow the size of the company too much. And it sounds like you are looking at many of the acquisitions on balance sheet. Yet the disposition plans fairly small. Can you give us an update as to where you stand on that front and whether it's more just a cycle timing or is there a plan to grow the portfolio at this point?

Yeah, it’s a little bit of each of those things. That is cycle timing and when you’re getting big rent growth and amid low cap rates you’re trying to get to the best of both world’s and so we’re trying to time our activity so that we maximize value. We hesitate to try to focus on a specific amount of dispositions in any one year because it can change over time. We have a choice of funding our acquisitions with dispositions proceeds for example or a combination of stock and debt or joint venture equity. So, we look at it holistically and we try to find the best approach to maximize value. So, it can change over time. Michael Salinsky – RBC Capital Markets: And that’s helpful. A question on operations, can you bifurcate within the portfolio kind of the performance of some of the newer Class A properties you’ve bought some of the condos relative to some of your would you call kind of Class B type assets in terms of what you’re seeing on rents in the Southern California markets. And also I’m just curious if there is any markets, where you’re starting as you are pushing pricing aggressively, if you’re seeing any doubling up starting to emerge?

Hi this is Erik. We haven’t seen or heard a lot about any of the double ups, if we go to the second part of your question with respect to As and Bs I think all of the property types that performed well in the stronger markets. So, certainly in the Bay Area and the Pacific Northwest, they performed equally as well. There is probably a little bit of difference in Southern California between the new condos quality stuff and some of the B products we’ve seen they go up and down a little bit. So, I think the greatest potential is, with some of those As and gone down Orange County and so forth we expect greater performance out of those may be this year, but its pretty close. Michael Salinsky – RBC Capital Markets: And the same is true in Seattle?

The same is definitely true in Seattle. We have a couple of properties out there, performing of As, performed very well and the Bs have as well. So I think certainly when you have the strong market conditions like you have in Seattle in the Bay area they all move. We see the malls are moving together, where you have maybe more modest growth in Southern California maybe there is a little bit more movement in the Bs at that time. But again when things tightened up in the submarkets we’ve seen nice jump in the A products. So I think when you start to see more consistent overall market performance, the economy and the job situation improves. I think we’re going to see the As maybe moving a little faster. Michael Salinsky – RBC Capital Markets: Okay, then final question, two- part. I apologize if I missed this. Mike you usually go through cap rates. Could you give us the update on those and IRR targets for acquisitions versus development and then also thinking on the dividend at this point?

Sure. I did go through the cap rates A and A product and A location in the low to mid 4 range, B and A location sort of high 4 to low 5 range. We think those unlevered IRRs and 8.25 to mid 9 range depending on what we’re looking at. I think that does it, right. Michael Salinsky – RBC Capital Markets: Development?

Development, on the development side, yeah the comment that I made was the development cap rates based on today, market rents in place today are in the mid 5s really not all that different from the year ago. The difference obviously is that in some cases rents have moved a big number 20% or something like that. So, obviously, a deal before a 20% rent jump and after is not really the same deal. So, that is where market selection and timing really comes into play and something that John Eudy and I talk about a lot. Mike Salinsky – RBC Capital Markets: And then finally just dividend?

Dividend we are – we propose that to the Board. I don’t want to guess what the Board might say. I’ll give you a little bit of historical precedent however and that is to follow the FFO growth rate of the prior year. However in this case, because we had a couple of years of declining FFO and we increased the dividend a very small amount we will play some catch up. So, I am guessing it will be in the mid – maybe little bit higher single-digit range. Mike Salinsky – RBC Capital Markets: Okay. Thank you much.

Our next question comes from the line of Dave Bragg with Zelman & Associates. Please proceed with your question. Dave Bragg – Zelman & Associates: Hey, good afternoon. Couple of quick ones. Moving out to buy homes during the quarter, I've heard the portfolio and any movements regionally worth noting?

No, region is really, this is Erik, worth noting. It’s in the portfolio wise it’s in that 9% to 12% range, which is consistent with sort of the long-term activity. It has been as high in the 15%, 16% I think for a couple of quarters during the boom. And I think it hit a low in the 8 – just over 8% range. Dave Bragg – Zelman & Associates: Okay. And other question is I know that the topic of single family rentals has come up in the past as it relates to the expected impact on your portfolio or others from a competitive standpoint, but just given the continued headlines related to institutional capital entering the space, could you just talk about this from a multifamily operators' perspective in terms of the approach that one could take, should they decide to do this and what the opportunities could be on the revenue and expense side?

Yeah, Dave we – you and I have talked about this separately. And there are opportunities to buy portfolios in concert with local operators that are specializing in this type of activity. Several of which were actually at your conference sometime ago. The issue for us is the most of that is not in the markets that we are in. The typical market where that’s going to make sense is going to be a market where the homes are deeply, deeply discounted. And we are seeing in most of our markets the value of for-sale property increasing or being relatively flat and you need a big reduction in price in order to make that work in our opinion. You find those opportunities in the Inland Empire of California, in the Sacramento Valley, and in certain other areas and we have certainly looked at some of those opportunities. We struggle with how to make that a business. There may be a trade there or an opportunity to do a dealer to, but we just don’t see it as a long-term annual business and that’s why we have at this time in point its data on the sideline. There is just – there is no way that I see that in carriers where single-family homes and median price homes it's in $400,000 to $500,000 range to make that work from a single family rental standpoint. So, that is the question we continue to look at it and but at this point in time we are not seeing the fantastic opportunity. Dave Bragg – Zelman & Associates: But, Mike, just putting the investment part of it aside and understandably still given your answer there, but just purely from an operational perspective in terms of revenue and expense synergies between the two businesses in appropriate market assuming that there is a concentrated portfolio with both multifamily units and single family, how have you thought about that?

Yeah. I mean, again I think well even within our footprint. So, if you say okay, the three County Bay Area, the counties surrounding the bay, the areas that we are going to be able to buy homes that are discounted enough in order to make that work out on an investment basis are going to be areas that we all renters will not want to rent in and not want to live in. So, I am sure there are some areas where that will work and just not areas that we own property and I’ll give you some examples. Maybe Hayward have some areas where within the – within Alameda County that where you could find housing in expenses enough to generate a positive cash flow a significant positive cash flow on the rental transaction. The problem is we don’t really want to be in Hayward. It’s not one of our desired locations. We have one property there, it’s up in the hills near Cal State East Bay has very specific reason why it’s there and why it’s a good investment. That aside, we just don’t see, we don’t see it as major competition. I know that it actually you went to Skyline and you were – you noted that you caught them on a very short-term period where they had a lot of move-outs, but I think that’s an anomaly. I think that there are typically in the 20% to 25% move-out range right now to home ownership and that’s the highest end product anywhere. So, again we are sensitive to it, I assure you, we just don’t see it as being a major detraction from our operation. Dave Bragg – Zelman & Associates: Sure. I will take it offline. I understand the answer from an economic perspective, but more so was thinking about just purely operational revenue synergies and expense synergies given your platform, but I'll follow up with you. Thank you.

Very good.

(Operator Instructions) Our next question comes from the line of Tayo Okusanya from Jefferies. Please proceed with your question. Tayo Okusanya – Jefferies: Yes. I am just curious across your market, if you have seen any real change in demand for all your products, whether it’s the one bedroom, two bedroom, or the three bedroom and if you are what you think is causing that or driving that?

This is Erik. We haven’t seen any unique changes in product demands. Some of the, if you might imagine, smaller ones that are in studios and the value propositions for peoples, almost don't matter what's submarket driven end and larger floor plans and three bedrooms are popular with families and tend to not always could tend to follow a pattern of school enrollment. So, I can’t say that anything unique is popping up. Tayo Okusanya – Jefferies: Okay, thank you.

Thank you.

There are no further questions in the queue at this time. I would like to turn the floor back over to management for closing comments. Michael Schall – President and Chief Executive Officer: Yeah, in closing, I would just like to thank you all for joining us today and we look forward to continuing the conversation next quarter. Have a good day. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.