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Executives

Constance B. Moore - President and Chief Executive Officer

Edward F. Lange, Jr. - Executive Vice President, Chief Operating Officer and Chief Financial Officer

Stephen C. Dominiak - Executive Vice President and Chief Investment Officer

Analysts

David Toddi - Citi

Louis W. Taylor - Deutsche Bank Securities Inc.

Michelle Ko - UBS Investment Bank

William Acheson - The Benchmark Company, LLC

Sloan Bohlen — Goldman Sachs

Karin A. Ford - KeyBanc Capital Markets

Rob Stevenson - Fox-Pitt Kelton

Richard C. Anderson - BMO Capital Markets Corp.

Michael Salinsky - RBC Capital Markets

David Bragg - Merrill Lynch & Co.

Andrew McCulloch - Green Street Advisors

BRE Properties, Inc. (BRE) Q4 2008 Earnings Call February 4, 2009 11:00 AM ET

Operator

Good morning, my name is Shade and I will be your conference operator today. At this time, I would like to welcome everyone to the BRE Fourth Quarter 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ms. Constance Moore, President and Chief Executive Officer. Please go ahead.

Constance B. Moore

Thank you, Shade. Good morning everyone. Thank you for joining BRE's year-end conference call for 2008. If you're joining us on the Internet today, please feel free to email your questions to askBRE@breproperties.com at anytime during this morning's call.

Before we begin our conversation, I would like to remind listeners that our comments and answers to your question may include both historical and future references. We do not make statements we do not believe are accurate and fairly represent BRE's performance and prospects given everything that we know today. But when we use words like expectation, projections or outlook, we are using forward-looking statements, which, by their very nature, are subject to risk and uncertainty. We strongly encourage listeners to read BRE's Form 10-K for a full description of potential risk factors and our 10-Qs for interim updates.

This morning, management's commentary will cover our operating results, our investment activities and our financial reporting. Ed and I will provide the commentary, Steve Dominiak, our Chief Investment Officer, is here and we'll all be available during the Q&A session.

The fourth quarter operating results were as expected. Core FFO was reported at $0.68 for the quarter and $2.78 for the year. Core FFO growth for the year was 6.5%, good results given the economic backdrop and the operating conditions.

There really may not be an adequate description to frame what occurred during the fourth quarter with jobs and the nation's economy. On our third quarter earnings call in November, we indicated that the fourth quarter was shaping up to be very difficult. From most reports, it was the worst single quarter since the Great Depression. We have the jobs data and will go through it. But the magnitude of this recession and our expectations, both near and long term shaped our earnings guidance for 2009 and the tactical changes we announced a few weeks ago.

Our enterprise priorities, like that of many real estate companies lead with capital conservation and enhancing liquidity. And our tactical decisions are tied to the four key risks that we believe face our industry.

First, the depth and duration of this recession or depression and the attendant impact on operations and EBITDA. Second, the availability and the cost of public capital, both near and long term. Third, the availability of secured debt from the GSEs. And finally, transaction risk or the availability to sell properties to source capital.

On today's call, we hope to define what we believe to be reality and be clear what our plans are to respond at this time. We believe the decisions we have made and the actions taken are proportionate with the level of crisis will safeguard this enterprise and position BRE to take advantage of opportunities when they begin to present themselves.

During the fourth quarter, close to 1.5 million jobs came out of the national economy. For the year, the figure is closer to 2.6 million. Peak to trough, the nation has lost more than 3 million jobs. And this does not address the total jobless figures that include those that have exhausted unemployment benefits without securing a job and those working part time and have ceased to seek full-time employment.

In our operating markets, California, Washington and Arizona, year-over-year job losses for the fourth quarter were 1.5%, or approximately 235,000 jobs. The monthly snapshots depict deeper deterioration with December to December job losses at 1.9% or 305,000 jobs. Unemployment in California stands at 9.5% the total jobless level is probably 100 to 150 basis points higher.

On the single family home front, the decline in median home prices in most of our major markets range between 30 and 40%. Seattle is the only exception with a 7% decline. Existing home sales have picked up and standing inventories have declined. But in most markets, the level of inventory ranges between five and ten months. Foreclosures declined sequentially, responding to the holiday moratorium sponsored by Fannie Mae and Freddie Mac, but are keeping pace at 1500 to 3000 foreclosures per month.

There does remain a favorable rent-to-own gap in most of our markets, but it is being challenged. Our near-term expectations are aligned with most economic forecasts. With jobs, we expect the first quarter to rival the fourth quarter with respect to job losses. We then expect to see a deceleration in the layoff momentum with job losses continuing early into 2010 before stabilizing.

With respect to housing, we expect to see a continued clearing of inventories and the possibility of a bottom in home prices identified in the second half of the year.

And finally, we believe foreclosures will continue into 2010, but become less of a factor once the market identifies the bottom for prices.

We believe we are looking at a negative rent curve for the next two years. All eyes are on the proposed government stimulus package. If it is successful helping to create jobs and grease the credit skids, it may soften the magnitude and duration of the pricing compression.

Regardless, we believe on a composite basis, market rents in 2009 could fall between 3 and 6% from peak levels in 2008 and the rate cuts in 2010 could be deeper depending on how this next phase of the economy plays out.

Not surprisingly, that is the central driver of our earnings guidance for 2009. We set a wide range of $2.45 to $2.65 for core FFO. The year-end job numbers came in fairly close to our expectations when we set guidance and our operations in January are running close to our expectations. No factors exist that would cause us to rethink the guidance range at this time.

Let me address some of tactical decisions we made earlier this year.

In early January, we announced a deceleration of our development program. We recorded a 5.1 million non-routine charge to abandon three sites we had under control, two in the Inland Empire and one in San Jose. And we reduced our workforce, eliminating 33 positions, mostly in the development group, reducing that team by 36%. While we are mindful that this decision caused disruption in the lives of our associates, it was the appropriate course of action.

There will be no new construction starts during 2009, which was anticipated in our initial earnings guidance. We have altered our predevelopment program, adopting a sequential approach rather than a more typical parallel process. Let me expand on this a bit.

Given the time required to secure entitlements and approvals in California, it is not unusual to assume some level of risk and pursue certain development activities in parallel. The development version of multi-tasking. Starting construction drawings in advance of final approvals or beginning contract negotiations once construction drawings reach a critical point. The parallel approach can save nine to twelve months and get us underway with construction in an expedited manner. With capital preservation as the top priority, risk management takes the lead. As a result, all activities will follow a sequential flow, adding that level of time to the development process in advance of construction.

We have three land parcels that are owned and five sites under option contracts. The earliest construction start in the group would be in the first half of 2010 for our site in Seattle. The largest site is our La Brea parcel in Los Angeles. The earliest this site could be ready for construction is the second half of 2010.

We have completed a review of our development program. All of the remaining sites are viable based on current scheduling and a visible level of economic recovery after 2010. With the presence of Fannie Mae and Freddie Mac, the apartment industry has access to debt capital that can support an accretive development program. We don't want there to be any confusion. If we had information that suggested or clearly indicated that all future development would be dilutive from a credit and earnings perspective, we would cease all development activity and jettison the program.

What we have learned from prior cycles is that many management teams and companies overreact to economic disruptions and under prepare for the long term. Every one of us in the development field has had experience from past cycles with transactions in sites that were dropped or abandoned at the cost of future growth and later regretted the decision. Every one of the management teams in the apartment space are good stewards of capital and astute business professionals.

I am confident that as time arises to further decelerate our development program, we will. That time is not now.

There are triggering events that lie in our future that will reveal the answer on development. Most of the events center on jobs, housing and capital. The past quarter was an inflection point. The level of economic deterioration was strong enough to render certain sites across the industry infeasible and management teams took action. Over the next 12 to 18 months, there will be another... there will be other inflection points, some positive, some negative that may lead to further decisions or different conclusions.

While we believe cap rate movement remains expansive moving up, there has been little or no transactional volume to accurate gauge cap rates in most of our major markets. There are no shortage of estimates and guesses by market participants, but transactions are not occurring.

As you may have seen in our release, we were successful in closing three transactions during the fourth quarter. For the year, we met our objectives with dispositions, raising $167 million. The composite cap rate across the sales was 6.7%, largely influenced by one larger property, a sea asset in a sea location. Take that out and the average cap rate was closer to 6%, where we expected.

We continue to talk about 2009. I have addressed our economic outlook for the year and the actions taken to decelerate development and reduce overhead. Operationally, we are facing the toughest conditions in decades. As planned, since October, we have cut market rents more than 3% across the portfolio with the deepest cuts in Southern California.

We are seeing decent traffic and focusing on resident renewals and aggressive leasing to solve for occupancy. Our balance sheet remains in good shape and we have sufficient liquidity to meet all obligations for the next two years without external capital. For years, we have maintained very small amounts of secured debt on the balance sheet that we have ample room to add secured financing to meet our debt obligations in 2009 and 2010. This action is in process and we will extend our liquidity reach beyond the next two years.

We will continue to sell communities in Sacramento, which we have set up the next round to present to the market which we addressed in our earnings guidance.

Before handing the call over to Ed, similar to other management teams in our space, we clearly understand the reality of this environment and what lies in front of us. The next couple of years will be difficult. Jobs drive rent up and down. However, the absence of rental supply, the higher propensity to rent levels and the demographics should help shape a very robust recovery. The timeline to the recovery horizon remains uncertain.

The decisions made and the actions taken have helped to safeguard this enterprise. We are not questioning our ability to survive. And quickly, our focus is turning to developing a surplus of liquidity to prepare for opportunities that may emerge in our core markets over the next couple of years. Economic recessions often present terrific acquisition opportunities and we will not be bashful in terms of participating.

Let me turn the call now over to Ed.

Edward F. Lange, Jr.

Thanks Connie. Good morning everyone. I have a fairly wide range of topics to cover, so I'll just dive in.

The FFO results for the quarter were as expected. The year-over-year results for the quarter and the sequential operating results clearly depict the economic inflection point that Connie referenced and we flagged at the end of last quarter. We had non-routine income and expenses... expense items recorded in the fourth quarter and I believe the release covers it well. I have just a couple of points to add. The non-routine expense for the abandonment charge covers three sites we had under control. The bulk of the expense, almost 4.7 billion, was related to a site in Riverside, which we reported in the supplement as part of our pipeline reporting. The other two sites, one in the Inland Empire and one in San Jose had not reached a point of certainty to be included in the public reporting.

The non-routine income items are also well described. Proceeds from a litigation settlement, a non-refundable sales deposit on a community we had under contract to sell and a gain from the retirement of a small amount of our convertible debt we purchased late in the year. We caught the convert market at a time where we could execute a trade price at about 75.

We have not been that active in the open market, and since that point, the market has firmed. The price is moving up to the low to mid 80s. We are not that interested in chasing the prices up and want to focus our liquidity on the nearer term debt maturities that we have.

From the same-store results, it's clear that that all markets are now impacted by the recession including Seattle and San Francisco. Now normally, I wouldn't dwell on the sequential results, but the fourth quarter revenue decline was greater than typical seasonal patterns.

The sequential drop in same-store revenue was 1.8%, and LA, Seattle and Phoenix declines raised 3 to 4%. Market rents were cut 1.5% and occupancy fell 1%. Sequentially lower expected and kept the NOI line flat from the third quarter. While we anticipated the inflection point and it clearly influenced our guidance for '09, the impact is startling. Beyond, the market rents and other reporting metrics are pretty much what we expected.

Physical occupancy averaged close to 94% and is holding pretty steady. Concessions are running at or above nine days rent. While our approach is to set right effective rent, we used concessions on units that are aged. However, concessions are up everywhere and being applied across the lease term. The monthly check-writing experience is priority one for all residents and prospects in all of our regions. Delinquencies across the same-store portfolio continue to run les than 1%, but they have moved above the 0.5 point that we typically have.

Turnover ended the year at 61%, slightly down from '07. Fourth quarter turnover activity ran at an annualized rate of 58%, marginally higher than previous year ends, a result of higher job losses and intended move outs. Traffic levels during the fourth quarter were at the same pace as a year ago, maybe a bit higher. LA and the Bay area are seeing higher traffic while, on the other hand, Orange County has slowed a bit as compared to the end of '07.

As Connie stated at the start of the call, the job numbers for the fourth quarter and year-end go beyond bleak. At the end of the third quarter, the September to September movement in jobs was down half a point. 90 days later, the December to December movement was down more than 1.3% across our portfolio. The data is out and is readily available to the public, so I'm not going to veil it off.

The headline is the retail impact; retail job losses are at the top of most of our core markets. Many retail workers rent, so these layoffs trigger higher move outs and terminations. And we don't get the feeling the retail industry is finished with their job cuts. Many of our markets follow the trends we detail at the end of the third quarter, so there is no reason to repeat all that data.

However, Seattle and San Francisco have now turned negative. Seattle is no longer immune to the economic fallout. During the fourth quarter, Seattle shed 16,000 jobs, or a drop of 1%. In 90 days, this market dropped all the job growth experienced in the first nine months of the year, bringing employment back to December '07 levels.

During the fourth quarter, the Washington Mutual job cuts kicked off and in January, Microsoft laid of 1000 workers. Boeing announced it will cut 10,000 jobs, half of those in Seattle and Starbucks announced another round of layoffs, estimated at 1000 jobs. Certain submarkets have already been impacted. Downtown rents have fallen almost 9% during the fourth quarter and are continuing to drop.

San Francisco is also feeling the heat. December to December job losses were 1.8%. The bulk of the job losses in Oakland San Jose and San Francisco were retail. Job cuts are being announced by tech companies and venture capital investing has dropped considerably in San Jose. We are at the point in the cycle where it's not clear what the catalyst might be to restart VC investing. This is somewhat reminiscent of the '02-'03 period of the previous cycle.

The new communities we introduced at the end of '07 and leased during '08 all achieved physical stabilization at or about 95% and at market rents that were at or above the underwritten levels. However, weak market conditions will prevent a material reduction and concessions and market rents are going the wrong way. The three properties: Avenue 64 in Emeryville, Renaissance in Orange and The Stuart in Pasadena will remain stuck in limbo; physically stable but not able to make the next move up to economic stabilization. The NOI yields are high fives to 6%, enough to cover debt but not yet accretive.

We have two communities that have just entered the lease up phase: 5600 Wilshire in Los Angeles where we opened in October and Park Viridian in Anaheim where we began leasing in January. At 5600 Wilshire, we have delivered 216 units out of 284 total and we are about 60% leased. Traffic is impressive, averaging more than 100 pieces per month and the closing ratios are good, 40% gross, 35% net. However, rents in Los Angeles, specifically in the sub markets have been clobbered. From peak levels in October '07, rents are down 20%. And we have not cut our rents any further from the third quarter levels at the opening of the property. We are getting good traction, but the market conditions are continuing to soften.

The plan is pretty simple: is to get the property leased and deal with the rents once we get to a point of recovery. At current rents without any recovery, the assets are stabilized in the low to mid five range, down more than 100 bps from the estimates a year ago.

Park Viridian opened a few years ago. First deliveries were mid month and the first movements were just this past weekend. This is a podium product in the Platinum Triangle submarket. The initial deliveries included all the common area space in 37 units out of the total of 320. We have leased 31 units and 12 were within this past weekend. It's a good start. This is good product. It should complete well against the monster Archstone property that's down the street, over 850 units, and it's currently in lease up. AvalonBay also has a small property that we'll see open not too far away.

Concessions in the sub market are running at about two months. At current rent levels, the property will stabilize at or about 6.5%, not much movement from the estimates a year ago. The Platinum Triangle is certainly dealing with supply issues, which we've flagged for several quarters. But traffic remains impressive as households have moved to this new submarket to be closer to places of employment.

The balance of our construction pipeline is proceeding as planned. Our two construction sites in Seattle will begin unit deliveries this year. Taylor 28, located downtown, will introduce units later this quarter. In Belcarra, located in Bellevue, will begin unit deliveries in the third quarter. The remaining construction site in Santa Clara, which is in the San Jose market, should begin unit deliveries in the second quarter of 2010.

As our reporting indicates, we have approximately $106 million left to spend to complete the construction of these five communities. The fund will be expended across '09 in the first half of 2010. Our initial guidance estimated advances for development and construction to range 1$75 to $200 million. The range includes estimated outlays in the second half of the year for lands acquisitions for sites currently under contract, Pasadena Phase II and two sites in the San Jose market. At this time, we would expect the level of advances to be at the low end of the guided range.

Moving to the income statement, just one item. Corporate G&A for the year was reported at about $20.5 million, pretty much where we expected, but increased sequentially in the third quarter to fourth quarter. The increase was approximately $1 million and was attributable to legal expense associated with the property litigation that we flagged earlier on the call and for suite write offs for sites that we were considering but elected to pass.

On the balance sheet, as Connie stated, the balance sheet is in good shape. We have modest debt maturities that we need to address and are in the process of doing so. Here are some points to consider when reviewing our credit profile.

Our debt to gross asset leverage is 55%. Our secured debt as a percent of gross assets is less than 5% and interest coverage is running about 2.8 times. Our debt maturities in 2009 totaled $220 million and debt maturities in 2010 totaled $180 millon. We have an unsecured capital structure, like most of the apartment rigs with a BBB flat equivalent rating from S&P, Moody's and Fitch. Rating agencies are comfortable with the use of secured debt with a ceiling that equates to about 25% of gross assets. While we are not planning to test that ceiling, the ceiling would provide room for approximately $800 million of secured debt. Our current debt covenants provide for considerably more secured debt, up to 40% of gross assets. We are in compliance with all debt covenants and have excess debt capacity of approximately $500 million.

Our unsecured revolving credit facility has $470 million of capacity, has a term of September 2012 and is priced 47.5 bps off LIBOR. At the end of the year, we had drawn $245 million against capacity, or 8% of gross assets, roughly matched against our construction assets. Our plan is consistent with the objectives laid out more than a year ago. We'll use property sales in this climate to manage overall leverage and we'll keep that in the low to mid 50s and we'll work to access secured debt to meet our near-term debt maturities.

Last two items. As Connie indicated earlier, other than some one-off property sales like our own, transactional volume evaporated in the second half of the year. Cap rates are difficult to gauge at the moment. As a result, we have discontinued the NAV estimate, disclosure previously provided in the quarterly supplement.

At the end of the first quarter of '09, we will adopt APB 14-1, the new FASB rule that will change how companies treat and report the interest expense associated with convertible debt. It will effectively add a non-cash interest charge to address the implied cost of the option value of convertible debt. Early adoption is prohibited. Upon adoption, retroactive application is required. We will adjust our EPS and FFO guidance with a non-cash charge.

So Connie, with that, I think we go to questions.

Constance B. Moore

Okay. Shade, I think we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Billerman.

David Toddi - Citi

Good morning, this is David Toddi . Just a couple of questions along the lines of your financing. You mentioned that you have about 800 million of capacity potentially for secured debt financing. Do you see an emphasis on that route over the next 12 to 18 months?

Edward Lange, Jr.

Do we see an emphasis on pursuing secured debt financing?

David Toddi - Citi

Yes.

Edward Lange, Jr.

Yes.

David Toddi - Citi

And what is your expectation relative to cost loan to value ratios and so forth?

Edward Lange, Jr.

Well I think the GSEs are pretty transparent. I think... and it's pretty readily reported. I mean I think both Fannie and Freddie are basically providing a 60% loan to value thereabouts. The more important metric is their debt service coverage, which is, depending upon the borrower, can range 120, 125 to 130 for debt service coverage, and that's a P&I coverage number based off a 30 year AM. And their pricing, it moves daily, but we have seen some transactions in the last couple of weeks, 10 year deals have priced in the low sixes.

David Toddi - Citi

Are you far along already in the process of putting a pool together?

Edward Lange, Jr.

We are in discussions and we are advancing those.

David Toddi - Citi

And of that 800, I mean are we talking about $200 million facility --

Edward Lange, Jr.

I think this far, I mean I think we are pretty clear on the call that we are focused on our near-term debt.

David Toddi - Citi

Yes. Thank you.

Operator

Your next question comes from Louis Taylor.

Louis Taylor - Deutsche Bank Securities Inc.

Thanks. Good morning Connie and Ed. Can you just address, I mean with the drop in occupancy and the employment losses et cetera, what's your sense in terms of where are people moving? Are they going to lower quality units? Are they doubling up, going with parents? I mean where are people going?

Edward Lange, Jr.

Right. Louis, I think it's pretty similar to past cycles. We are not seeing... I mean while there is some exodus of households out of California, their numbers aren't that great. So I would indicate that people are doubling up, tripling up, moving back to couches, moving back with mom and dad.

Louis Taylor - Deutsche Bank Securities Inc.

Okay. And then second question just to Ed, in terms of that APB 14 charge, what's your estimate of how much it's going to be?

Edward Lange, Jr.

The estimate is going to be about $0.12.

Louis Taylor - Deutsche Bank Securities Inc.

All right. And the fact that you're buying the convert back, I mean does that lower the charge?

Edward Lange, Jr.

Not based on what we've bought in December.

Edward Lange, Jr.

It was a small amount. But yes, anything that we wouldn't buy back in open market purchases would basically eat into that.

Louis Taylor - Deutsche Bank Securities Inc.

Great. Thank you.

Operator

Your next question comes from Michelle Ko.

Michelle Ko - UBS Investment Bank

Hi. Given the number of REITs trying to conserve capital by issuing part of their dividend in stock and cash, can you talk about what your assumptions are going forward and how your dividend will be paid, approximately what percentage in stock and what in cash?

Constance Moore

Well we just declared our first quarter dividend and 100% of that is in cash. And from BRE's perspective... and it's a good question because obviously dividends are taking front and center stage these days... we have sufficient operating cash flow to cover our dividend. And that's really not much different than past cycles where we've seen a decline in our operating cash flow could kind of challenge our dividend. But we don't need to look for our dividend to satisfy our debt maturities. And while we certainly understand that others in this space, in the REIT space, are more challenged on that at this point, and we'll look at it quarter-to-quarter, but at this point, we are comfortable with the cash dividend.

Michelle Ko - UBS Investment Bank

Okay. And can you just quickly go over maybe your sources and uses next year?

Edward Lange, Jr.

I think we covered most of that in the guidance. I don't think we are going to eat up a lot of time on the call today. I think if you want to go into that, the detail, you can give me a call offline.

Michelle Ko - UBS Investment Bank

Okay. Thank you.

Operator

Your next question comes from William Acheson.

William Acheson - The Benchmark Company, LLC

Thank you and thanks for the comprehensive, if not sobering overview of your markets. Guys, normally when I compare your results in your submarkets to what you can infer from NAREIT's data, BRE usually outperforms the submarkets reported by NAREITs by a fairly handy manner. This time around, the opposite was the case. And I guess this kind of relates back to Louis's question. Are people trading down from the higher quality, higher rent rate properties and going to the lower amenity level properties, but lower service levels in such a manner that you would see that the disparity that we saw in the fourth quarter between you and say the average for your markets?

Edward Lange, Jr.

Well I think that's a good question, Bill. I think this fourth quarter is going to be a difficult one in try to match up. I believe some of the company level performance is that will come out in some of the data that's out there, because I believe that, like in our case, it was very clear. It wasn't just for us. I think for all of us that are in the industry, we saw the inflection point. October was like a brick wall. And so the second half of October, we all experienced higher levels of move outs, and we were talking about it. When we were at the NAREIT conference meeting with investors and analysts, all the apartment companies are talking about the fact that second half of October, first half of November was definitely an inflection point. And I think we all began moving our rents down. I know that we did.

I think that rather than what we've learned from prior cycles, so if we go back to what we learned '02-'03 in the Bay area, and I'm going to answer this kind of the long way and I hope you can basically bear with me a bit, because I think it's worth talking about.

We have seen 300,000 jobs come out of our markets in the last 12 months. If you take the December to December numbers, we have lost 300,000 jobs across the states that we operate in. What we experienced in the Bay area 2002-2003, or basically over a 12 to 18 month period was 300,000 jobs came out of just the Bay area during that period of time. So that was such a shock that I think all of us that operate in the Bay area, while we didn't enjoy it, we all learned a lot. And I think one of things we all learned was you get out in front of this thing. You get out in front of it and you stay out in front of it.

And so what we did in October, November and December, or in November, December specifically is even though the fourth quarter traffic numbers wouldn't typically give you enough of a lead to cut rents, we began cutting our rents in advance of what we saw was a falling market so that we could get out in front of renewals and get out in front of this a bit. And while the occupancy number at 94% is down from the third quarter, it's pretty much what we've experienced in other fourth quarter seasons so that I think we're able to preserve a bit of the occupancy volume by getting out in front of it.

So that's why it might be a little bit worse than some of the REITs data that are you seeing. I think a lot of us are going to be more aggressive about getting out in front of this, getting out in front of renewals, trying to push a higher renewal ratio; essentially solving for the occupancy line.

Constance Moore

Yes, I think as we've talked over the last couple of years, the important thing for us is to make sure that when we identify that inflection point both up and down and take action quickly. And so Ed and his team took actions very quickly in the fourth quarter and we'll assess how that goes through the first quarter.

William Acheson - The Benchmark Company, LLC

Okay, that's excellent. Follow-up question. Looking at the weighted average rate of interest on your line of credit in the fourth quarter, you have it listed as a 4.45%, and that's LIBOR+ 45 bps. If I look at the weighted average LIBOR just using, say for instance, the one year, I come up with a rate of close to 3.8%. Is there some reason that the recorded figure in the supplement is that much higher than what would otherwise be the case?

Edward Lange, Jr.

Yes, Bill, the figure that's in the supplement is for the entire year and is inclusive of also the amortization of fees associated with putting the line in place.

William Acheson - The Benchmark Company, LLC

Okay. Now we have seen LIBOR come down quite a bit just in the last month or so. Was that previously in your guidance given in mid December?

Edward Lange, Jr.

No.

William Acheson - The Benchmark Company, LLC

Okay. Thank you. Thank you very much.

Operator

Your next question comes from Sloane Bowen .

Sloan Bohlen — Goldman Sachs

Hi guys, I'm on with Jay as well. Just a question for Connie on the comment you made last quarter about you expected that cap rates in California would be tough to move above six with the Treasury where it is and with the GSE still involved. Can you talk about how buyer return requirements have changed and whether... are they underwriting same-store declines greater than what you are expecting, or give us a little color there?

Constance Moore

Well, I think we just haven't seen a lot of transactions, and I may have Steve add some color to this as well. I mean I think if you look at what we sold in the fourth quarter, and again I said if you take out that very sort of sea asset in a sea location... our average cap rate was 6%. And again, that's our cap rate; that's not the buyers cap rate, reflecting the Prop 13 change. Anybody who has to sell today in a big way is probably in more of a distressed situation. But we just haven't seen a lot of transaction. I don't know, Steve, if you want to add anything to that?

Stephen Dominiak

I have nothing to add.

Constance Moore

Yes, I mean I think we talked about last time that cap rates in California may settle around six. But I think we have also talked about and it may have been even at NAREIT where we talked about they might go to 6.5, 6.75 before they come back and settle down. I think the relationship between the 10 year ultimately will hold. I just don't think we are in that space right now.

Edward Lange, Jr.

Yes, I think one of the things... one of the comments I think Connie quoted this thing perfectly is that there is going to be a period of time that in a period of distress, we can't control what a distressed seller might do so that we are not confused. We think over the next couple of years, certainly in '09 and '10 while we're seeing a decline in rent curve, if somebody has to sell a property and they may be insensitive to what the cap rate is, they just need the cash so that cap rates are going to be very volatile we believe over the next 18 to 24 months for sure. But at the end of this thing, depending upon how much inflation comes back into the system as a result of the stimulus package, what we said at the third quarter was that if we end up at the end of the with a 10 year treasury at or above 5%, at some point, the historical trends will come back into play. We should see a national number about 250 basis points off that, and California typically has done 100 basis points to the national average. We think it will all come back into play, it's just a question of when.

Constance Moore

And I think from an underwriting perspective here, obviously, during the peak in the hay day when everything was quite frothy, people were underwriting on forward rent growth, forward NOI. In 2008, that discipline went back to looking at back at 12 month actuals. But I think now you are looking at people who are sort of looking at 12 months forward because, as we mentioned, we are into a declining rent period and so you are going to see people looking at that declining rent period which is... it's difficult. I think acquisitions are going to be challenging for people as you are facing into a declining rent perspective for the next 12 to 18 months.

Edward Lange, Jr.

I think the last point of that is that even though the GSE financing is available, if you are a buyer and if you are an institutional buyer, I don't think anybody feels a real sense of urgency to jump in and buy at the beginning of a two year declining rent curve. I think we'll probably see transactions begin to move up in the first half of '10 as you get closer to the end of that declining rent curve.

Sloan Bohlen — Goldman Sachs

Okay, thank you for that. And then just add along that point, how does that make you think about how you manage your balance sheet in the near term, kind of referring back to Michael's question about what pool of assets do you look to put secured mortgages on versus your ability to sell in markets? And then kind of as an add-on to that, you talked about selling assets in Sacramento. Would you look to exit that market completely right now or what's your thought process there?

Edward Lange, Jr.

Piled on about three questions there. On the question of Sacramento, the answer is yes. We announced that probably 18 months ago that our plan is to, at some point, essentially exit that market. If we end up with one property up there, that's okay. But essentially, I think once we finish the work that we on the books for 2009, we'll be effectively exiting that market, and that is the plan.

As it relates to the secured debt, our goal is to deal with our near-term maturities. And as I said, we have got about $400 million worth of debt coming up over the next two years that would exhaust of our half of dry powder on the secured debt front, which we believe will give sufficient time for the unsecured markets to recover so that REIT spread are more in line with general corporate spreads. And I think there is positive news down there. I think corporate spreads have come in, the REIT spreads are obviously tied to the CMBS market. But the corporate spreads are already starting to tighten back up. So I think there is a little bit of promise there and I think if we can allow two or three years for that recovery to occur, we'll be back into the public markets.

Constance Moore

Shade?

Operator

Your next question comes from Karin Ford.

Karin Ford - KeyBanc Capital Markets

Good morning.

Constance Moore

Hi Karin.

Karin Ford - KeyBanc Capital Markets

Two questions on development, if I could. First, did you give us an update on how many leases you have signed at 5600 Wilshire post the end of the fourth quarter?

Edward Lange, Jr.

I gave you the number as of the end of January. So I think if you go back and look at number, that's a current number.

Karin Ford - KeyBanc Capital Markets

I'm sorry, what number was that?

Edward Lange, Jr.

60%.

Karin Ford - KeyBanc Capital Markets

60%. Okay. Second question is just on the 7% projected average composite yield you have got in the supplement. I think it's stayed there now for several quarters. Just given the color that you gave us today on the Q that are currently in lease up, looking like they are going to stabilize somewhere lower than that and concerns about Seattle, which are really the '09 lease up, do you still feel good about that 7% number or do you think that some quarter in the future we'll see a downward adjustment there?

Edward Lange, Jr.

Well, I think mathematically for the quarter, it basically comes out pretty close to seven. I think our feeling is that at some point during the year, you're going to see that number come in. Probably at some point in the year it's probably going to be stated as a range. We wouldn't be surprised to see that as a pretty wide range, it will run between 6% and 7%.

Karin Ford - KeyBanc Capital Markets

Thank you very much.

Operator

Your next question comes from Rob Stevenson.

Rob Stevenson - Fox-Pitt Kelton

Good morning guys. Ed, what are you expecting to spend in 2009 on a per unit basis for CapEx? And is there some of that spend that you could defer to a future year when a positive rent growth number better cover that expense?

Edward Lange, Jr.

I think our CapEx number is going to run about 700 to 715 a unit, not too much different than last year. And while we are not... I'll answer it, really give you two answers on this, both consistent, not two to choose from. But there will be some level of cash or expense that we can defer. But to be honest with you, that's not really how we run the business. One of the things that we've seen in prior down cycles is that if you begin deferring maintenance, that comes back and bites you once you get to the recovery. So while we are not interested in overspending and we are obviously not doing a lot of revenue enhancing rehab at this moment, the recurring CapEx is important to keep the current appeal up. And we've been pretty good about doing that in the past and we'll keep doing it.

Constance Moore

Yes, I think the important thing is, as Ed said, we are not doing a lot of revenue enhancing because clearly we're not getting paid for that today. But allowing your asset to deteriorate is just not something that makes a lot of sense.

Rob Stevenson - Fox-Pitt Kelton

Okay. And then as a follow up, what are you guys seeing, as the markets start to turn down, what are you seeing as the difference between maybe a couple of years ago at the property level versus today with all of the additional computerized systems and the revenue management stuff and all this other stuff being brought to bear? I mean is there a noticeable difference in how fast you are able to sort of spin on a dime or is that somewhat overstated?

Edward Lange, Jr.

I think what we're saying in the market is that whether or not it's the direction from the folks that have produced the pricing models or the direction of the companies that are using them, the fact is that the pricing models can be set up to set pricing each and every day. And and they are fairly geared, they are very sensitive to traffic. So you get to a moment in time where traffic might slow up at a property or any given properties or in a submarket, you'll see a wide range of volatility in pricing on a daily basis. And it's not a product that really fits itself well for daily pricing. Yet, we'll see that type of activity.

And I'll just give you a quick example. About a year and a half ago in San Diego in the Chula Vista submarket, which is mostly military-driven, there was a lot of volatility because of the troop movements. And we were seeing pricing, wide ranges in pricing on a daily basis from all the competitors in the marketplace that were using the pricing models. And the one thing that there wasn't, was any traffic so that you could set your rent no matter where you wanted to set it, the high end of the range, the low end of the range. There wasn't anybody to rent. So our decision at the time was just to hold still, just hold still. There was a troop rotation due back into San Diego. And our feeling was once that troop rotation hit, the traffic basically would spike and the pricing models would all move up, but our pricing would already be their.

And I think that's one of the factors that helped us outperform in San Diego over the last 12 to 18 months. We have had some very strong numbers out there. Look, we don't have anything against the pricing models that are out there, but I do think that there are some disruptions that we have seen in the last 12 to 18 months by the use of them that we didn't see five or six years ago before they came into play.

Rob Stevenson - Fox-Pitt Kelton

Okay. Thanks guys.

Operator

Your next question comes from Rich Anderson.

Richard Anderson - BMO Capital Markets Corp.

Hey good morning everybody.

Constance Moore

Good morning Rich

Richard Anderson - BMO Capital Markets Corp.

Just two questions. What impact did the lower LIBOR have on your ability to maintain your '09 guidance in light of some of the more recent dislocation you are seeing in Seattle in the Bay area?

Edward Lange, Jr.

I think the guidance range had a pretty wide range for LIBOR. So I don't think it was the lower LIBOR rates that allowed us to keep our guidance.

Richard Anderson - BMO Capital Markets Corp.

Could you quantify what the movement in LIBOR since you issued your guidance may impact your annual number? Is that something you can provide?

Edward Lange, Jr.

Could, but I think it's too early in the year to basically get into that. I mean we were following a forward curve when we set LIBOR so that the number we have got in our guidance range is a little bit less than 2%. So that's at the low end and then the high end and it's something around 1%. So it's in the guidance. We haven't seen anything from an operational standpoint or anything with LIBOR that would suggest we've got to go in and tinker with guidance at this time. I think when get to mid year, we'll be in a different spot where we can basically speak more specifically to it.

Richard Anderson - BMO Capital Markets Corp.

Okay. And then the follow up is, is there any issue with the quality or commitment of any of the banks in your line?

Edward Lange, Jr.

No.

Richard Anderson - BMO Capital Markets Corp.

Okay, thank you.

Operator

Your next question comes from Michael Salinsky.

Michael Salinsky - RBC Capital Markets

Good morning. Ed or Connie, can you talk about during the past downturn rather, you saw a significant mass exodus to buy homes. Obviously, we've had a benefit here, but inventory levels continue to rise. If you had referred some anecdotal evidence of clearing in markets like the Inland Empire and Sacramento. Do you think that that weakens this current upcycle as people start moving out as that inventory has to clear, making 2011-2012 look like weaker years?

Constance Moore

Well, I think there is a couple of things. I mean I think to the extent that we have the discipline of a down payment, even if it is small, the discipline of a down payment will change that. And I think there is no question that we had this wave of people buying houses in the past cycle that we probably aren't going to see that. But we are going to have to clear the inventory, so there is going to be some of that. But the good thing is I think that either I mentioned or Ed mentioned on the call and maybe we both did, that there is just supply, new supply of multi-family housing is just sort of ground to a halt. And so we are not seeing a lot of new additionsto that supply and certainly not to the single family as well. And yet, the demographics are still ahead of us and we have a very large Gen-Y population that is continuing to come; we can't stop them. But I do think that we're going to seeclearly, you will see until that inventory is cleared out, you're going to see sort of a muting of our rental, our ability to push rents.

Michael Salinsky - RBC Capital Markets

Even as job growth comes back, it may take a couple of quarters for the inventory to clear before you have the ability to push rents again?

Constance Moore

I mean I think --

Edward Lange, Jr.

In certain markets.

Constance Moore

Yes, I think in certain markets, yes. I mean we are probably most exposed obviously in Sacramento, which is becoming a smaller and smaller part of our portfolio and then the Inland Empire.

Edward Lange, Jr.

I think it's certainly going to be market specific. And I think that.but from a general sense what we know is that the cohort that's the primary renter group, which is Gen-Y, have migrated and are migrating and prefer to live in urban infill location. So I don't think that the single family clearing of homes in the Inland Empire is going to have much of a driver on Gen-Y as it relates to making their rental selections in San Diego, Orange County, Los Angeles. I think that what we feel is that the Inland Empire has an opportunity to go back to an environment that existed prior to '05, beginning of '05 when the ownership rules were relaxed for underwriting. And that was a situation where if you look for a long time, there was a very, very small rent to owned gap in the Inland Empire.

In fact, for a lot of years, they sat right on top of each other in those two groups, single family housing and rental housing could co-exist in that market, in that people rented until they got a down payment together and then they bought a house and they bought a condo. So the occupancies in the Inland Empire were nothing to really scream about. You would scratch, get 93 to 94% occupancy. You had a fair amount of turnover; it wasn't unusual for the Inland Empire to have 70% turnover each year. So I think we have chance I think as I think the things you are talking about are all the right topics in that people will have to put down a down payment, they are going to have to accept a fixed rate mortgages. So the Inland Empire has an opportunity to go back to its prior environment where the two groups could co-exist. But that's going to take some time and it will basically play itself out.

Constance Moore

And the other thing that we may experience that we certainly did starting in mid 2005 when we started to get job growth is what you saw, in addition to the job growth and the normal household formation, you saw the unbundling of households that had doubled up or gone back to the couch, as we have been talking about earlier today. So that's why you saw a very quick spike in the Bay area as that market started to produce some jobs. It didn't take that much job growth for us to get a significant moment in rent because there had been no supply. And in addition to just the normal household formation, you saw the unbundling of the households that had bundled up, if you will, during that downturn.

So as we begin to see households contract and either move down from two bedrooms to one bedroom or move in and get the roommate, or move back to their parents, they will eventually unbundle those households. And so that has another kick as it relates to when job growth in the economy starts to turn. But I think as Ed points out, a lot of where the housing woes are in this country are not where our renter cohort want to live.

Michael Salinsky - RBC Capital Markets

Okay, that's very helpful. And then as a follow up, there has been a lot in the news about early renewals, people going and getting significant pricing decreases. Are you guys discounting renewals significantly? Are you seeing that in any market?

Edward Lange, Jr.

We are being aggressive with renewals. I think as we pointed out, part of the tactics that we put in place in the fourth quarter as we brought down our market rents, we are out in front of renewals 60 or 90 days in advance and we're offering., at this point in time the rent rule hasn't flipped. I would say that renewals are being put in place either at or above their current contract, but not materially. So we haven't flipped the rent roll yet. That's what occurred in the Bay area in '02 and '03 and we may see that in some of our markets before we are done here, before the end of '10. But it's not the case now. But we are I think like all of us, I think all the companies in this space are being very aggressive with the renewals. Right now, we are achieving 56% renewals. That's the typical target, 40 or 45%, so that I think people that have a job are hunkering down, accepting their renewals and staying in place.

Michael Salinsky - RBC Capital Markets

Great. Thanks for the color.

Operator

Your next question comes from David Bragg.

David Bragg - Merrill Lynch & Co.

Good morning. Ed, your comment on downtown Seattle was interesting with market rents down 9%. Can you talk about how that compares to the broader market including Bellevue?

Edward Lange, Jr.

Well downtown has been hit the hardest, and that's where Washington Mutual had 7500 employees in Seattle. And while they weren't among the top ten employers in that market, they had close to 4000 of those employees right downtown. And I don't know how many are left, but there is certainly.a big impact. So I think we have seen right now I would say the submarket sticks out. We haven't seen that material type of level of drop in the general Seattle market. We are down maybe on our fourth quarter rent number about 13.50 a unit; we are down maybe 20 bucks. We're not down a ton across the whole region. So most of the pain was felt downtown. And what I'm getting to is that in the third quarter, we were talking about the psychological impact that was hitting Seattle because the numbers weren't there yet. Now we are starting to see the impact of the real job losses and downtown was the first market to get it.

David Bragg - Merrill Lynch & Co.

Okay. And what was your occupancy level in that market at the end of January?

Edward Lange, Jr.

I am sorry, Dave, we don't usually give out the monthly data, but it's very, very consistent and tied to the fourth quarter number.

David Bragg - Merrill Lynch & Co.

Okay. That helps. And just lastly on that market, as you prepare to deliver the two developments that you mentioned earlier, Taylor 28 and Belcarra, how are you adjusting your pricing strategy in terms of market rates versus concessions as you move towards those openings?

Edward Lange, Jr.

Well I think with all lease ups, there is a range of concessions that is put in place and kept during the delivery cycle. One, because of the people that are moving into a property or moving into a property that's not yet completed. So in some cases, when you open a new podium property, you are doing hardhat tours. People are moving in and not all of the amenities could be in place. So it's difficult to provide a level of concession and it's standard in the industry to provide a one month concession during the leasing cycle. What we have seen I think different in this cycle than in prior cycles is that we are seeing a lot of operators go right to a two month concession. So the idea is you fly out of the blocks, you offer a two months concession, get the property about 35%, 45% leased and occupied and then bring that concession back to one month.

So we have got all those options available to us. Right now, we are getting ready to open the doors at Taylor 28. We are going to be setting the market rents, so we are pretty current. We are right downtown. We essentially in the last quarter wiped out one year's worth of rent growth in that market. And so we are right on top of the market list. We'll set the right level of market rent and we will use the right concession to compete and get the property sold.

David Bragg - Merrill Lynch & Co.

So with that asset, it specifically sounds as though a one month concession is what you are targeting at this time?

Edward Lange, Jr.

I am probably not going to go into the details on the marketing of one single property. But I would say, yes, we would typically use a one month concession and we may push it out to six weeks if we have to.

David Bragg - Merrill Lynch & Co.

Okay, that's helpful. Thank you.

Operator

Your next question comes from Matt Demteck .

Unidentified Analyst

Hi, I would like to get a little more color on your asset dispositions. You mentioned a sea asset and a sea location. Was that the Northern California asset or the Sacramento asset?

Edward Lange, Jr.

That was the asset that was in the Bay area in the town of Vallejo. Vallejo sits halfway between San Francisco and Sacramento. It's just south of Napa, but it's not as pretty. So I didn't want to basically mislead you. So Vallejo made the news last year, national news, it filed for bankruptcy in the middle of the year. And this is an asset that's a older asset that we inherited when we merged with Trammell Crow West in 1997. Tougher asset, kind of a basic sea asset, nothing too spectacular. And we would call that submarket a C-location so that while we are not a distressed seller, we weren't going to basically wait until the end of this two year rent curve decline to sell that property so that the cap rate was higher than we would have wanted by about half a point but we were able to clear the trade.

Unidentified Analyst

All right. And if you kind of back out the Federal Way property at 57, it looks like the remaining two properties are close to a 78 by my math. Could you break down where the individual assets traded?

Edward Lange, Jr.

I'm not going to... I prefer not to go into all the level of property detail.

Constance Moore

I think we said if we took out the Vallejo asset, it was 6.

Edward Lange, Jr.

If we took out the Vallejo asset, the rest of the properties average a 6... it's a 613. And if you want additional color, you can give me a call offline.

Unidentified Analyst

Sure. Okay. And then for your remaining Sacramento properties, what kind of cap rate are you kind of thinking about for your guidance and planning?

Constance Moore

Well we are in the middle of marketing those, so we're not really going to talk about cap rates on assets that we are marketing.

Edward Lange, Jr.

We'll give you a report card after we complete the sales.

Unidentified Analyst

All right, thanks.

Operator

Your next question comes from Andrew McCulloch.

Andrew McCulloch - Green Street Advisors

Hey, good morning. I've got a two-part question on development. How much have you seen construction costs come in over the past 12 months and how much further would they have to come in to make development potential again? And for arguments sake, assume flattish rent and cap rates in your markets of around seven.

Stephen Dominiak

I can address the first part of the question. We have seen most of the construction prices come down during the third and fourth quarter. And the estimates that we've seen, that range would be 5 to 7% decline.

Edward Lange, Jr.

I think as Connie's comments indicated earlier in the call is that we are... sites are viable. We intend to go forward. They are on a delayed schedule now as we adopt this sequential workflow. Requires recovery after 2010 and includes some assumptions in terms of getting the benefits of these cost reductions. But I don't think we are going to go into detail at this time.

Andrew McCulloch - Green Street Advisors

Got it. Thanks.

Operator

(Operator Instructions) You have a follow-up question from Michael Billerman.

Unidentified Analyst

Yes, Ed, I just wanted to go back on the land under contract. You had mentioned two of the three sites weren't in sort of the public disclosure. What's sort of the total dollars of other land that may be under contract that you didn't write off? And I assume that's another asset on the balance sheet. I just wanted to confirm that as well.

Edward Lange, Jr.

Yes, they are in the other assets, but we're not going to provide a lot of color. It's not unusual for us or other companies to have a handful of sites. I guess some people call it a shadow pipeline, stuff that we are pursuing, stuff that we are looking at that we don't have a lot of dollars out on that we'll make decisions on over the next 12 to 18 months. But I don't think we are going to provide some color on that.

Unidentified Analyst

The 10-Q says you had 27 million sort of land under contract for sites. I assume the 27 would be gross relative to the 21 million you had last quarter, so it's really not a big number.

Edward Lange, Jr.

No, it's not.

Unidentified Analyst

Okay. And then just wanted just to clarify a little bit, you talked about market rents being down 1.5% in the fourth quarter. You also talked about I think rents being down 3% since December. And then you talked about a down 3% to 6% from the peak for 2009. I'm just trying to reconcile and put everything together, really trying to get a picture of what's really happening.

Edward Lange, Jr.

I think it's a good question. What we have said is that in the fourth quarter, our market rents came down 1.5%. Then what we added is that if you go peak to trough through the end of the January so that where we are sitting today, we are down 3% since October. So October would be the peak in 2008. So we are down 3%. So essentially, we took market rents down 1.5% in the fourth quarter and then we took market rents down another 1.5% during the month of January, pretty much as planned.

Unidentified Analyst

And then you expect... the 3 to 6% down for '09 is relative to that October peak?

Edward Lange, Jr.

Yes.

Unidentified Analyst

Okay. Perfect, thank you.

Edward Lange, Jr.

Before you ask the next question, we got a question over the Internet. We were asked what is the average discount on near-term debt maturity that you are able to buy debt back at. I'm reading it as we got it. So I think the question is if we were to buy our near-term debt maturities, the 9s and the 10s, what type of discounts might be available?

I think the answer can be found looking at some of the recent tender activity by some of our peers that have gone after there 9s and 10s and everybody has got a different situation. There were a couple of tenders that were out there on some high coupon debt coming due in 9 and 10. They looked like there were no discounts available or very little discount for the 9 and maybe a 2% to 3% discount to go out to the 10s. In our case, our debt coming due 9 and 10 has very low coupons, high 4s, low 5s so that we don't believe there is much of a discount available right now on either of those maturities, meaning maybe the 9s we I wouldn't see any, but maybe in the 10s, you could it get 97 or a 98, but not really much.

Constance Moore

Shade, do we have any more questions? We'll take one more.

Operator

Yes, ma'am. You have the follow-up question from Karin Ford.

Karin Ford - KeyBanc Capital Markets

Hi, I just wanted to ask about the $1 million escrow that you had returned to. Can you just talk about what asset sale didn't occur and what the reasons were for the transaction not occurring?

Constance Moore

I think we said it was a property in the Inland Empire and then buyer just couldn't secure acceptable financing. So he had $1 million hard up and he walked away from the contract and we kept the money.

Karin Ford - KeyBanc Capital Markets

And what type of a buyer was that?

Edward Lange, Jr.

It was a private buyer.

Constance Moore

It was a private buyer.

Karin Ford - KeyBanc Capital Markets

Okay, thank you.

Operator

There are no further questions at this time.

Constance Moore

Great. Thanks everyone. We'll look forward to our first quarter earnings call. Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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