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Executives

Constance Moore - President and CEO

Ed Lange - EVP and COO

John Schissel - EVP and CFO

Steve Dominiak - EVP and CIO

Analysts

Dave Bragg - ISI

Rob Stevenson - Fox-Pitt Kelton

Swaroop Yalla - Morgan Stanley

Jay Habermann - Goldman Sachs

Michael Salinsky - RBC Capital Markets

Michelle Ko - Bank of America/Merrill Lynch

Michael Levy - Macquarie

David Todi of Citi

Jeffrey Donnelly - Wells Fargo

James Wilson - JMP Securities

Jim Cowan - Morgan Stanley

BRE Properties Inc. (BRE) Q3 2009 Earnings Call November 3, 2009 11:00 AM ET

Operator

Good morning. My name is Paula and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will 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. You may being your conference.

Constance Moore

Thank you, Paula. Good morning, everyone. Thank you for joining BRE's third quarter 2009 earnings call. If you're joining us on the Internet today, please feel free to email your questions to ask BRE@breproperties.com at anytime during this morning's call.

Before we being our conversation, I'd like to remind listeners that comments and answers to your questions may include both historical and future references. We do not make statements we do not believe are accurate and fairly represents 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 financial and operating results for the quarter, the investment environment, our financial position and other reporting items. Ed, John Schissel, our new CFO and I will provide the prepared commentary. Steve Dominiak, our Chief Investment Officer, is on the call and will be available during the Q&A session.

Before I begin, I want to say how pleased we are to have John join our executive team. John has joined us at a very busy time for BRE and he has jumped in with both feet. Many of you will be at (inaudible) next week and we look forward to introducing you to John, or for many of you getting reacquainted with John as you knew him from his banking days.

Now, let me turn to the quarter, our financial and operating results for the quarter and year-to-date periods were in line with our expectations. Let me review some of the key takeaways.

Our operating results depict the cumulative regional and economic contraction experienced during the last 12 months, but also the recent deceleration in job losses. Market rents are down 7% year-over-year, effective rents are down 10%. We continue to believe we are in the midst of a two-year declining rent cycle which may have about nine months to go.

Occupancies are strong. We are currently greater than 95% occupied. We've used concessions since March and we will now begin the process of eliminating concessions over the next three to four quarters in advance of the economic recovery.

Our capital and balance sheet work for the year has been terrific. We've raised more than $750 million of capital, essentially eliminating all debt maturities through 2011, and reduced leverage by almost 300 basis points. This has been accomplished with a good mix of secured debt, property sales and common equity.

The net cost of our recapitalization plan has been about $0.03 per share. In my view, this is great execution. With our enhanced liquidity, the reopening of the unsecured debt market and our ATM equity program, we're well positioned defensively and ready for opportunities.

The midpoint of our FFO guidance remains intact. Same-store NOI for the year is expected to coming down at or about 6%, 50 basis points below the range we estimated at the beginning of the year. Interest expense and G&A savings will offset the NOI results.

Job losses continue to be the single largest factor driving results and operating fundamentals in the apartment space. Job losses nationally and in our core markets continued during the third quarter. In our market footprint, non-farming jobs have decreased almost 600,000 or 4.7 year-over-year.

The third quarter reduction totaled 75,000 jobs, roughly half of the second quarter 2009 pace. Not enough deceleration to signal stabilization on inflection point, but it certainly is encouraging. Also encouraging was the third quarter GDP growth of 3.5% announced late last week. While the government stimulus represents almost 90% of the growth, organic GDP reached stabilization, a critical juncture.

Our view and operating plans are based on renewed job growth about 15 months after GDP stabilizes. This would translate into some job growth and pricing power towards the end of 2010 consistent with many economic forecasts.

Let me turn now to our development program in the investment environment. We remain on track to complete the remaining two communities under construction over the next 10 months. Belcarra in Bellevue Washington delivered it's first 95 units late last week and should finish near the first of the year. Villa Granada in Santa Clara will deliver first units next may and will be complete mid-2010. We have $30 million left to fund on these two assets.

Our stamps on the remaining development pipeline remains unchanged. We continue to assess the program on a quarterly basis. We continue to press land sellers with respect to pricing in [terms]. We're also assessing various economic recovery scenarios and reductions to project costs.

We own four land parcels and have four sites under option contracts. None of the parcels will be in a position to be began construction until late 2010 or early 2011. As we indicated last quarter, at this juncture we believe it is unlikely that we will take impairment charges on the land owned. We believe that it's probable that we will develop the sites.

Further abandonment charges for sites under agreement or control remain a possibility. We continue to have ongoing discussions with the current landowners. We currently do not have any assets on the market. We will evaluate further sales and the continued use of the ATM equity program put in place in May to manage balance sheet leverage. We've issued 80 million to date under our ATM program.

The volume of acquisitions in our core markets remains low. Cap rates in Coastal California markets appear to be in the range of 6 to 6.25 on in place rents, which equates to high fives on the forward NOI. The cap rate environment is pretty much as we expected, driven by the 10-year treasury and the cost of secured debt.

The environment holds immediately accretive acquisitions may prove difficult to source and well-located development may become increasingly viable.

Before handing the call over to Ed, let me recap. We had good results for the quarter. We still have a few challenges quarters in front of us, but feel much better today than we did a year ago. The capital markets environment has improved and the pace of job losses has slowed. We're pleased with our operating results year-to-date and our balance sheet work. We are extremely well-positioned.

We will continue to work on the other elements of the plan we outlined at the start of the year. Specifically, we'll lead with capital preservation and liquidity. We'll continue to trim leverage levels to or below 50% as measured by debt-to-growth assets.

We'll continue to assess the development program and take action where necessary and we'll position the company to meet this challenging environment and exploit new opportunities.

So now, let me turn the call over to Ed.

Ed Lange

Thanks, Connie. Good morning, everyone. We'll reach out to our fund friends and shareholders in Philadelphia. Nice win last night, guys, and good to see the series going back to the Bronx.

Let me roll through some operating and economic information. The condition of the rent roll today is excellent relative to the jobs environment. Occupancy is greater than 95%. Our 30-day forward available figure is just under 7%. Concessions are running less than two weeks, and bad debt or late payments are running about 60 basis points. Traffic is up 11% year-over-year, and our renewal activity is running about 53%.

Unscheduled move outs for job loss or relocation remain the recession centric factor that's most concerning. It's running about 100 basis points of inventory each month, up from a normalized level of 30 to 40 basis points.

Occupancy averaged about just below 95% for the quarter. As we begin the fourth quarter, our occupancy averaged just over 95% for October and currently stands at almost 96%. The plan followed by our property operations team has been successful, focus on renewals, use measured concessions, fill the buildings.

As Connie referenced, market rent in our communities is down 7% year-over-year. The majority of the rent declines were realized during the fourth quarter of '08 and the first quarter of this year. Rents have declined 2.5% from the end of March.

We've been able to capture renewals with an average discount of 1% to 1.5% from prior rent with minimal concessions. As I said earlier, renewals are running 53% for the year with new leases. About half of the new leases that we've entered into require a concession and the concessions are costing us 14 days rent or about 4%.

Net of concessions, effective rents are down almost 10% from peak levels a year ago. This is not a shocker, but the economic environment does not support renewed pricing power. However, our strong physical occupancy will allow us to execute the next phase of our operating plan, which will allow us reducing market rents 4% to 5% to set up the move to eliminate concessions, a process that will require more than 10 months to execute, which is our average lease term.

We plan to effectively eliminate the use of new concessions over the next six to nine months to place our operations in a position to exploit the recovery phase or renewed pricing power. Concessions or discounted pricing remained prevalent in our markets and available from private and public operators alike.

We spoke about this last quarter. Different platforms may use a different label, but whether you call it a concession or effective rent, discounts are available. In this environment, the customer is focused on the check writing experience, so the concession is taking the form of a recurring discount off the monthly ask.

For stabilized communities, current general market concessions range anywhere from two to four weeks in stronger coastal markets to two months in some of the weaker markets, and in fact, we're starting to see three months concessions spring up in the Bellevue submarket up in Seattle.

The same-store results for the quarter and year-to-date continued to reflect the headwinds we're experiencing here in California. However, the sequential result began to frame the deceleration of the economic contraction.

Sequentially, NOI was down 1.5% from second quarter with a level of revenue decline of less than 1%. Year-to-date NOI has declined 5.3%, revenue has declined just over 3%, and our expense growth was about 1.4%, all inline with expectations outlined earlier in the year.

With the deceleration in job losses, we're accelerating our pivot away from concessions three to six months early. The attendant move of market rents and tougher operating conditions in Seattle may pressure sequential revenues in the fourth quarter. The impact will be an NOI decline for the year of about 6% or so. About 50 base points wide of the previous guidance provided at the end of the first quarter, not material but it's worth noting.

The Inland Empire, Los Angeles and Seattle are the largest contributing markets to a level of NOI decline. The three represent almost 40% of our same-store results. A relative performance of the Inland Empire impacts our results the most. This represents almost 15% of our same-store net operating income.

In terms of general market commentary, I'll start in Seattle, work south a bit. In Seattle, which is 14% of our net operating income, our most challenged market, both demand and supply problems have combined to impact operating conditions. Job losses at Microsoft, Boeing, and the failure of Washington Mutual have softened the demand side of the equation.

Traffic in our community is running 10% less than last year. Failed condo projects have converted to rentals, adding 6,000 units to Bellevue in the downtown Seattle submarkets. Occupancy across the region is running in the low 90s, and our 30-day forward available figure is 11%.

Concessions at some communities have advertised as high as three months of rent in Bellevue. We expect pricing to be reduced and under pressure and be reduced 4% to 5% in the fourth quarter. Year-to-date, net operating income is down 8%.

San Diego continues to perform well relative to our competition. Current occupancy is 97% with less than 4% available. Overall concessions ranged eight days rent to two weeks. Traffic continues to exceed prior year benchmarks and year-to-date, our NOI is down only 2%.

Orange County, which is 14% of our net operating income, is starting to show some signs of life. Large private owners in the region have reported occupancy at or above 90%. However, our portfolio is running about 95%, was 94.8% for the quarter, is currently running above 96%.

Our concessions in this market are heavy, running about 20 days rent. Year-to-date, our NOI is down about 4%. Jobs actually were unchanged for the last 90 days, which is a victory, given that almost 60,000 jobs have been lost in the past 12 months in Orange County.

Los Angeles is 11% of our net operating income. It has struggled for several quarters. Our Los Angeles occupancy improved almost 2.5% from the second quarter, and currently stands greater than 95% with a 5% 30-day forward available figure.

Sequential revenues are up almost 2% from the second quarter reflecting a higher level of occupancy. Year-to-date, NOI is down 13% right on top of the year-over-year reduction in effective rents.

The Inland Empire, which is 15% of our net operating income remains a real grind it out market. For most of the year, unscheduled move outs have run more than 1.5 of occupancy each month. During the third quarter, strong leasing offset the move outs and occupancy improved. Occupancy currently stands at 95% with about 6.5% 30-day forward figure.

With have a good team in this region that's dealing with unforgiving operating conditions, year-to-date, our NOI is down 7%. San Francisco, which is 19% of our NOI, softened up during the third quarter with tech-related job losses and some new supply impacting the South Bay markets.

While market rents are down only 3.5% for the year, we're expecting further pricing pressures across the region. We're looking for rents to come in about 2% to 3% during the fourth quarter. Current occupancy is just over 95% or 8% available. Concessions are running about four weeks on new leases in this market. Year-to-date, our net operating income is down 1.3%.

In terms of economic data, I think the release offered a good data on the jobs front and generally the pace of job losses have slowed, but we're still loosing jobs.

With home prices, year-over-year home prices declines continue to decelerate. Orange County, San Diego, Denver price declined at the low end of the tape at 2%, 7%, and 4%, respectively. San Francisco, L.A. and Seattle are down anywhere at 10% to 20%. Inland Empire and Phoenix are down 30%. Move outs for home purchases stand at about 11% of move outs year-to-date compared with 15% a year ago.

Unsold inventory has declined depending upon market anywhere from 15% to 45%. In all markets, except Seattle, have experienced sequential declines with the inventory. Foreclosure rates are down in all markets, say, Phoenix and Seattle, a clear downward trends emerged with most of our operating markets. Not surprising, permits for new housing stock remained well below historical norms.

On the single-family housing side depending upon the markets, the permits decline range anywhere from 10% to 35% year-over-year and remain anywhere from 65% to 85% below normalized levels. Multi-family permits depending upon market have declined anywhere from 55% to a 100%.

There still remains a fairly healthy rent to owned gap in most of our core markets. The Orange County, the rent to owned gap is still 70%. In the Bay area, it's 77%. Seattle is 45%, San Diego was 30%, and Los Angeles has a 23% rent to own gap. The inland Empire has a negative rent to own gap of 13%. In terms of the progress on our lease-up communities, our Park Viridian site in Anaheim, it's in the Platinum Triangle submarket. We're competing against other supply as I think most of you are aware, Archstone AvalonBay and others. Our leasing velocity has averaged 30 units per month since we opened in February. We're nearly complete with the physical stabilization. We're 91% leased.

Concessions in the submarket range anywhere from four weeks to 14 weeks, currently we're running about eight weeks concession. Taylor 28 is in the South Lake Union neighborhood in downtown Seattle. The property is two blocks away from the space (inaudible) in the Paul Allen's Experience Music Project. Leasing velocity is averaging about 22 units a month. Traffic has fallen off to about 10 to 15 pieces a week from 20 earlier this summer. We're currently 75% leased, and concessions are running anywhere between eight to 12 weeks in this submarket and that is also our range. General occupancy in the submarket is 95%. We have one other property commencing lease up in the fourth quarter, which is our Belcarra property with 296 units in Bellevue Washington, where we had our first move in this past weekend. That's all I have. I'll now pass the call on to John.

John Schissel

Thanks, Ed. I want to reiterate I'm excited to be part of the BRE team here. Regarding the financials for the quarter, there were no significant changes to our reporting our pronouncements to the [doc]. Our reported earnings do include a non routine gain in the amount of 382,000 relating to the retirement of debt and the repurchase of 5 million in bonds. With respect to our financial position, as Connie noted, the balance sheet is in great shape.

After giving effect to the tender activity during the year, we have no material debt maturities until the February 2012 put date on our outstanding convertible debt. These financial metrics reflects leverage of 52.6% at quarter end, interest coverage of 2.9 times for the quarter and a debt to recurring EBITDA ratio for the quarter of 8.321. In addition, our floating rate debt exposure stood at 13%, total debt at quarter end are only 7% of gross assets.

During the quarter, we did issue an additional 1.5 million shares under the at-the-market equity program generating net proceeds of 41.2 million, and we do expect to continue to issue common stock under this program. We found it to be very efficient. The existing program has 45 million of remaining capacity.

Our capital needs for construction advances reflect the deceleration of the development program, '09 advances are now expected to range between $110 million and $120 million, and advances for '10 currently are not expected to exceed $50 million. Our increased retained earnings combined with continued equity issuance under our ATM program should move our leverage towards the target of 50%.

Our unsecured revolving credit facility has an aggregate commitment of $750 million and a term through September 2012. It is attractively priced at a spread of 47.5 basis points off LIBOR. The balance at the end of the quarter was $248 million, leaving ample undrawn capacity.

Excess debt capacity under our debt covenants exceeds $615 million. We did adjust guidance for the year tightening to a $0.06 range around the same core mid-point. The mid-point for Core FFO guidance is at 255 and on a reported base mid-point is 247 per share. Elements influencing the sequential decline in quarterly FFO include the impact of financing events from the third quarter.

Specifically the closing of the second tranche of the Fannie Mae facility in the amount of $310 million, and a higher share count from the additional shares issued mid-quarter, as well as a slight weakening in NOI which Ed referenced and slightly higher G&A. Connie, I believe we can open up the call for questions.

Constance Moore

Great. Paula, we're ready for question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Dave Bragg of ISI.

Dave Bragg - ISI

We were doing a little more looking into CapEx and just have a couple of questions on that matter. I'm looking at page 12 of the supplement and two questions specifically. First, could you talk about the increase in CapEx of about 25% over the last year to 958 per door on a trailing four quarter basis? Then also could you talk about the activities that are included in the revenue enhancing rehabilitation costs?

Ed Lange

Sure, Dave. I think if you look at page 12, the bump up to 958 is as much a factor of the spending dip we had in the first quarter than anything else. We run about anywhere from $5.5 million to $6 million worth of CapEx per quarter. We dipped in the first quarter, which is not unusual given that it's the rainy season out here. We usually don't get under way with our capital expenditure so that our CapEx number really hasn't moved a whole lot. I think we spend about $18.5 million a year in capital improvements, and that number really hasn't moved a whole lot in the last couple of years.

In terms of revenue enhancing rehab, we've got a couple of properties that we're finishing, and we would be the first to say without pricing power, there is no revenue enhancing rehab. When you find yourself 75% through interior rehabs, it doesn't make a whole lot of sense to just stop the work on-site, not rehab the remaining 25% of the units you've got contracts in place, you've got workers in place, and we're doing the rehabs on turn, so that we're finishing up the last two or three projects where we have interior rehabs going on. Then we'll cease with the rehabs until we get to a different economic environment. Does that help you?

Dave Bragg - ISI

Yeah, that helps. So just to summarize, $18.5 million seems like an appropriate run rate here for recurring CapEx and the rehab work is tailing off?

Ed Lange

Absolutely.

Operator

Your next question comes from Rob Stevenson of Fox-Pitt Kelton.

Rob Stevenson - Fox-Pitt Kelton

Can you talk a little bit about the sustainability of some of your expense controls? I mean you guys are only up a little bit less than 1.5% I believe on same-store expenses year-to-date. How much of that is sustainable going forward? Where do you expect to see the most upward pressure on your expenses over the next six to nine months?

Ed Lange

Well, I'll take a stab at that, Rob. I think we've done a good job this year. A lot of it has to do in the maintenance line, a lot of it has to do in the payroll line. I think just to give you a quick summary, if you take a look at whether it's our property expenses or really any operating company in our space, two-thirds of property level expenses are going to be in three categories. It's going to be in your repair maintenance category, payroll, and property taxes. They're all going to run somewhere between 20% and 22% of total property expenses.

Then after that, it's utilities and marketing, so that we've had savings and marketing this year, it's one of those things where we've been able to, as we've transitioned from print to virtually all Internet advertising, we've had a net save on the marketing line but our traffic is up.

That's not going to be sustainable going forward, now that we're, essentially migrating to a mostly Internet or almost all Internet marketing, the pressure is going to be on us and other companies to come up with a next new thing for advertising. So, that's going to put pressure on the marketing line, but it's not one of the big three.

I think we've got good expense controls from maintenance and repairs. We've got good purchasing, good centralized purchasing function. I think the pressure is going to be on payroll. You can only keep the payroll line, capped for so long, and I think at late stage, our company, our business, our industry like most late-stage recession are going to start to feel some pressure on the payroll line. I hope that helps.

Rob Stevenson - Fox-Pitt Kelton

Then one for Connie, you said earlier that you didn't expect to start any new developments until late 2010 or early 2011. Can you talk a little bit about how much of that is the readiness of those development sites sort of ready to go? How much of that is just today's market rents are just not underwriting to a high enough yield?

Then, also, even though the yield on developments would be low, is the acquisition yield today, even if you were going to do something, competitive enough that it would make more sense to buy than to develop at this point?

Constance Moore

Rob, you got all of those questions listed on your follow-up, pretty darn good.

Ed Lange

Pretty clever.

Constance Moore

Very clever. I'll let Steve jump in as well. As it relates to our starts, you'll recall earlier this year when the world was completely falling apart, we had essentially changed our development process from a parallel process to a sequential process. So we've really moved out a lot of the approvals and the issues as it relates to some of the milestones that we'll need to start those.

So the earliest we could start one of our smaller projects would probably be late 2010. So we will continue to assess those as we move forward. As it relates to acquisition yields, as I mentioned, they're not surprising to us in coastal California and sort of the low sixes on current rents, and then clearly when we see a declining NOI going forward that those cap rates will continue to decline, so that immediately accretive acquisitions are going to be more challenging for us, although that we continue to source those.

But it does make the development pipeline certainly some of our legacy assets look a little bit more likely in terms of the spread against current cap rates, because we're looking at 150 basis to 200 basis points above those. So that's really kind of where we would look to start. Any comments on that?

Steve Dominiak

Yeah, I would just add to Connie's comments that the recent downward pressure on cap rates has help shed more positive light on the development pipeline. We've said in prior quarters that before we put a shove on the ground, each deal needs to be clearly accretive. I think to add clarity to that, we'll need to see more stabilized operations on our same-store portfolio, and a more meaningful decrease in the cost of capital, which hopefully we'll see in 2010.

Operator

Your next question comes from Swaroop Yalla of Morgan Stanley.

Swaroop Yalla - Morgan Stanley

I had a follow-up to that acquisition question. As you look at attractive acquisitions, who are the main competitors or parties who you are seeing also bidding for the same assets or are interested in the same assets? Also, if you can give us a little color on cap rates based on the quality of the assets?

John Schissel

I would say the primary competitive pool consists of private buyers, with public buyers following a distant second. Cap rates between A and B product, as Connie mentioned, spot market stabilized cap rates for core product in our markets, specifically California, are in the low 6% range, and for B product that's a wider spectrum. But those are generally rating in the high sixes to mid seven.

Swaroop Yalla - Morgan Stanley

Just to touch upon the move-outs to home purchases, you mentioned 11% for the entire portfolio, is there any specific submarkets where you're seeing substantial pick-up, especially given the homeowner tax credit, and it being extended to next year?

Ed Lange

Well, the homeowner tax credit hasn't had a whole lot of mileage in coastal California, and we're seeing, the move-outs in coastal California are less than 10% in the Inland Empire and some of our more commodity markets, it's obviously higher than 15%, closer to 20%, I would say that. Across the board, if you look a year ago, move-outs are down in general, and that has more to do with the tightening of the lending criteria, the tightening of available capital from the banks, and obviously the need for the down payment.

Operator

Your next question comes from Jay Habermann of Goldman Sachs.

Jay Habermann - Goldman Sachs

Connie, you mentioned obviously the anticipation of seeing job growth now that you're starting to see a recovery in GDP, and I know you're talking 15 months out, but can you give us some sense of just how robust you expect the recovery to be in your specific markets, and even amongst your markets which ones might lag versus the recover sooner in the cycle?

Constance Moore

Well, I think, there is job growth and then there is the unbundling of households, and I think that those two kind of work in concerts, much like we experienced in the last cycle. So that I do think that given the depth of this recession that I don't necessarily think the job growth is going to be so robust.

But what I do think is it's going to shift confidence so that once we start to see some job growth, and quite frankly in our coastal California markets as we've experienced in the past, I think as we've explained, we don't need a lot of job growth to start to get some movement in our leasing activity and our pricing power.

That really is reflective of the unbundling of the households, whereas right now, we've got people doubling up or moving back with mom and dad. Once that confidence comes back that one job growth is here and people have a job and feel good about it, those households unbundle. So that the natural sort of metric that we look at it sort of one apartment for five jobs could be in this recovery, could be one apartment for two to three jobs, since they will start to see an acceleration.

I'm just not sure that we're going to see huge robust job growth, I think it may take some time, just given that we've got not only to replace the job growth, but the job losses that we've lost over the last two years, but we've also got to make up and got to be able to pick up the Gen-Y that are coming into the job force. So, it's going to take a great deal of job growth to reduce that percentage.

Jay Habermann - Goldman Sachs

You also mentioned looking for land. Can you give us some sense of what banks or regional banks are looking to do with their land banks at this point? Are you seeing opportunities to purchase land, and I guess balance that maybe John versus thoughts on paying down the balance on all line of credit?

Ed Lange

Well, I'll talk to the land availability. We're seeing very few land sites coming out from lenders. Most land sites or many land sites are subject to Forbearance Agreements now with some of the equity holders. So that's limiting the amount of land sites we're seeing from the regional bank.

Jay Habermann - Goldman Sachs

Well, so it's not really an issue.

John Schissel

Right. In terms of the line of credit, I think we've talked about our targeted leverage level, and that's an easy place to pay down as we raise equity under the ATM.

Jay Habermann - Goldman Sachs

That was a reduction of 2%, by year-end. Do you have a target for, end of next year?

John Schissel

I think we have said, a long-term range is 50%.

Operator

Next question comes from Michael Salinsky of RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

We've heard from several of your peers that cap rates, specifically for some of the higher end has started to come down a little bit from earlier in the year. Just in light of that are you guys reevaluating your disposition plans having pulled the assets you held for sale in the second quarter?

Constance Moore

The assets that we pulled in the second quarter were in Seattle and I don't think that Seattle is reflective right now of stronger cap rates. So again we said it's a market that it's a core market for us and we're not going to sell those assets at distressed prices. The only other market that we would be looking eventually to reduce our exposure would be the Inland Empire and that's certainly not a market where cap rates have become more attractive.

Michael Salinsky - RBC Capital Markets

You had a fairly impressive sequential increase actually in L.A. relative to several of your peers. I wonder if you could touch upon what the driver was behind that and also San Francisco seemed to perform a little bit better than several of your peers. Any color you could provide on either of those markets would be helpful.

Ed Lange

I think, I'll go back to comments we made at the start of the year. We only have a couple of thousand units in Los Angeles, and 625 of those units reside in one property. I had referenced earlier in the year that some of our operational weakness in past quarters had to do with some operating concerns or problems that we were experiencing ourselves internally at that property.

We're not completely corrected there, but we're a long ways along, and so we've corrected some of our internal operations in Los Angeles, and you're seeing that reflected in. I think at the time, it was at the end of the first quarter, I commented that if we were successful in addressing our own internal issues, you would see the pop-up in performance before the end of the year. So that's really what you're seeing.

In terms of San Francisco, we're not in San Jose, so that in normal economic times, our portfolio is South Bay/East Bay. We're not in San Jose and what happens in normal economic conditions, is actually our performance will lag because San Jose outperforms the general San Francisco and Oakland MSAs.

But in a case like this where there is more concentrated job loss in the San Jose markets, we're not getting hit with as hard an impact as some of the other tech-led markets, and that's what explained in the out-performance right now.

Operator

The next question comes from Michelle Ko of Bank of America/Merrill Lynch.

Michelle Ko - Bank of America/Merrill Lynch

I was just wondering, I know you are using the ATM programming and you're continuing to delever, but if you were to tap the unsecured debt market, what rates do you think you would be able to obtain in terms of financing?

John Schissel

Sure. Well, we're actively talking to different guest every day just to stay on top of that, and we're seeing levels of 3 to 350 in terms of spread over both the five year and 10 years.

Michelle Ko - Bank of America/Merrill Lynch

In terms of renewals, I know that you said that, current market rents are down 7%. But how are your renewals in comparison?

John Schissel

Well, we gave that data, Michelle. Our renewals are running about 1% to 1.5% discount below the prior rent with very, very small concessions.

Operator

Your next question comes from Michael Levy of Macquarie.

Michael Levy - Macquarie

Can you please talk about the occupancy trends during the quarter? I recognized that once at the end of the month things change a bit, but it still looks like occupancy bounced around a bit, and then sort of may have come back towards the backend of the quarter with a big improvement. Is that the way to look at it?

Ed Lange

No. Actually, there was nice steady improvement throughout the quarter. We actually picked up momentum as we got deeper into the quarter. So it really wasn't a lot of choppiness with the occupancy line. We had, some pretty nice steady improvement, and we're actually will see how the rest of the fourth quarter goes. It's notoriously a weak season, but we're sitting here today and its early November, we're 96% occupied.

Michael Levy - Macquarie

To what degree, if any, as the time in which it takes to find replace tenant changed in recent quarters?

Ed Lange

I'm sorry, I missed that, could you?

Michael Levy - Macquarie

To what degree, if any, as the time in which it takes to find a replacement tenant when one tenant leaves changed at all in recent quarters?

Ed Lange

Well, we're not seeing a big gap out in that. In fact, obviously, our new leasing activity is able to keep up with the level of move outs and, in fact, exceed it. So that with traffic being up 11% year-over-year, we haven't seen a material change in the amount of time that it takes to fill a unit once it's been vacant.

Constance Moore

Your availability has actually come down, which would indicate that it's actually accelerating through the year in terms of our ability to do it sooner. So I think that's a good sign and I think it reflects the traffic that you've had.

Operator

Your next question comes from David Todi of Citi.

David Todi of Citi

Michael is here with me as well. Can you guys talk a little bit about what your expectations are for the Seattle cycle given that it was sort of late in entering the downturn and it's a little different in the sense the supply is elevated. Could you just paint the picture for us over the next 12 to 24 months, at least as you are underwriting?

Ed Lange

Well, I don't want anybody to run for the exits, but I think our view is it could be kind of bleak. If you look at past cycles, if you look over the last 10 to 15 years in Seattle, just for example, if you take a look at the period of time, '96 through '07, average annual market rent growth in Seattle was 4% to 4.5%, yet there were periods of time in that 10-year cycle where market rents grew in excess of 9% to 10%, and then you had very strong down cycles, mostly relating to Boeing layoffs but a general contraction of the Seattle market.

That's how we look at Seattle, how a lot of research shops look at Seattle, that it's subject to more frequent economic cycles or more deeper cycles, more frequent and deeper cycles than some of our coastal California markets. That's why we try to keep a lid on the level of NOI in that market in a range of 10% to 15%.

To be candid right now we find ourselves at the outside end of that range at 15%. That is a concern for us. We think the next two years are going to be have the potential of being difficult for Seattle, both demand and supply. Now, what can help on the demand side is that if we do get to a worldwide recovery in GDP that should eventually help laid off the two big engines in that Seattle market, both Microsoft and Boeing our participants in the global economy, and global GDP is meaningful from when they start add job.

So that if we start to see the global GDP line start to laid off a little bit, that could be promising from a demand side, but we're still going to have to wrestle with supply that has come into both Bellevue and downtown Seattle, so that, we're not going to put any hard numbers around, but think we're going to be slugging that out in Seattle for at least the next 18 months.

David Todi of Citi

Just as a follow-up, given your plans to pull back on concessions over the next 12 months, do you have a tolerance for some occupancy loss in that scenario, given that you have sort of pushed occupancy to pretty elevated levels, if you see that the concession burn off is creating some weakness?

Ed Lange

David, I would love to sit here and say no, but the fact is that when we put the plan in place, because we're not a concession shop. I mean, we've operated for a long period of time with absolutely no concessions. Concessions have run historically two to three days rent. I used to joke it was the cost of a toaster oven, but I've gotten old. So I've got to change that to the cost of an iPod or something like that.

But we'd run about two to three days rents for us we running 13 to 14 days concession that's a big number for us. But we did it in a programmatic manner. We are using concessions to build the occupancy line, so that when we pivot away, we may have some softness in occupancy. We don't believe it's going to be a [reduced] level of softness but we believe that we could operate at 95% plus during the next 12 months.

In doing so, we can position this portfolio toward the end of 2010, the idea is to be positioned 95% occupied with a 30-day available figure at or below 7%, fully prepared to price into the recovery of the rent curve when it turns positive, and that will drive, all of their pricing power into the market rent wide, not the occupancy line. So, we've got our hands around this thing. There is going to be a little bit of softness, we're not going to run 96%, 97% occupied for the next 12 months, but we certainly think we could run north or add or north of 95.

Constance Moore

From my perspective, it's the plan that Ed laid out a pretty clear plan at the beginning of the year and he has really been working the plan. It's reflective in what we've done so far, and so now it's the second half of that plan. So I do think that we'll be sensitive to occupancy, but I think it's really sort of how do we position that portfolio and that rent roll so that it's ready to rock-and-roll when the economy turns around.

Operator

Your next question comes from Jeffrey Donnelly of Wells Fargo.

Jeffrey Donnelly - Wells Fargo

If I could I guess you stick with markets. I mean San Diego, just looking at some of the data you put out there, Ed, it lost the greatest proportion of its jobs over the past year in just the past 90 days, I think about a quarter of those job losses in absolute numbers, but the deterioration of San Diego's market fundamentals in Q3 doesn't seem to reflect that. I guess I'm curious do you feel like that's a result of maybe some relative tightness in that market, or post quarter are you seeing some erosion in San Diego accelerate?

Ed Lange

No, I think we've really seen couple of things in the San Diego that have helped our operations. One, while there is some job loss that's affected the retail biotech and the communications fields, and that affects North San Diego particularly. The biggest employer by far is the military. I mean, there is over 40,000 people that are employed by the military. They are the single largest employer, and what we've seen there is a great deal of stability around that number.

So that where a year or two years ago, or year and a half ago, we were still seeing what we would call a net rotation out of San Diego into one of our theaters of warfare, we've seen a net migration back in and so there's been more stability around that 40,000 employee figure. The second factor we would point to is that San Diego was kind of early into the housing side of this equation.

There was a large condominium build-up, downtown single family buildup south of San Diego and the two of this to submarket, and so it was kind early in first out. So the housing, you can still buy at attractively priced condominium if you're so inclined downtown San Diego, but that's not where we're running rental property operations.

In the areas where there was a build up in single family housing, that housing has been largely absorbed, and so that, we're not competing with as heavy a shadow market as we were 18 months ago. I think those are the two factors that have led to the performance to date.

Jeffrey Donnelly - Wells Fargo

Just a second question. You mentioned earlier about how I guess private investors were among the dominant buyers for apartments. Anecdotally around the country, we continue to hear that that same group of investors are pricing in something of a rent spike in 2011 or 2012 numbers when they're buying properties. What are your thoughts on that, and do you have any color on what sort of magnitude of rent spikes that these folks are actually using in their underwriting?

Ed Lange

I don't want to speak for Steve or Connie or John, but I think if they're looking at any of the third party research data that's out there, it would be hard to believe that anyone would be pricing in a huge rent spike in 2011. If that's the case, we might want to position ourselves to be a buyer in 2012.

The data we're seeing, both in our own internal regression work and the third party research data would suggest 2011 is positive but there is not going to be a spike.

Jeffrey Donnelly - Wells Fargo

Do you have any color, though, as to what they might be thinking for 2012 then or do you just not subscribe to that thinking?

Constance Moore

It's hard to get in the heads of somebody else buying, so we're not...

Ed Lange

Yeah, I mean we've got our own regression work. We've seen the research data, but I think will stay away from trying to put a number on 2012.

Operator

Your next question comes from James Wilson of JMP Securities.

James Wilson - JMP Securities

I guess most of my questions have been answered, but, just wondering if, as you kind of monitor the foreclosure volume that has backed up at the banks for existing homes in more of the prime markets now, sort of everything we're seeing so far in the single-family housing date has been out on the Inland Empire, places like that in the lower end markets. Do you feel like that can cause any pressure down the road as the banks eventually have to start to move that kind of mid-range and upper range inventory they're now accumulating?

Ed Lange

Well, I may not have caught all of the question that you are posing. It was a little bit hard to hear you. But you know, there is a couple of things on the foreclosure. We're seeing foreclosures come in and that's certainly helpful, but there is still an awful glut of single-family housing in the Inland Empire that still has to clear, and that's going to be with us for a while.

But, certainly, the fact that there is a little bit more tightness around the lending criteria and the fact that capital is not flowing from the banks for single-family mortgages may help to bring the multi-family market and the single-family market in the Inland Empire back in the balance at some point in time, but we can't even put an expectation on how long that's going to take.

There is a thing on the foreclosure side that we're certainly watching, that in most of the markets looking at, and that is a lot of the arms that were entered into 3.5 to five years ago will be coming up in 2010 and 2011 and a lot of those are in core markets. California participated pretty heavily in those arms.

So we're going to have to see how strong the credit is and how strong the homeowners are that went into those arms in California, and with those reprices, cause a spike or increase in foreclosures and trigger softness. Now, I think where we can take some comfort is that there is still such a healthy rent to own gap in most of our coastal California markets, we're not expecting right now a material level of disruption as we reprice through those arms over the next two years.

Constance Moore

Yeah, and I think as you said, the tightening of the lending standards will at least put a pause in terms of thinking about moving out, so that will be a little bit of a break for us, but it is something you've got to watch.

Operator

Your next question comes from Jim Cowan of Morgan Stanley.

Jim Cowan - Morgan Stanley

I was wondering, could you guys give same-store revenue guidance for 2009?

Ed Lange

Well, we did back in the first quarter.

Jim Cowan - Morgan Stanley

You didn't update it.

Ed Lange

Yeah, we didn't. We gave it in the first quarter. We said we would be down. The low end would be down about 3.5%.

Operator

Your next question comes from Jay Habermann of Goldman Sachs.

Jay Habermann - Goldman Sachs

Just a follow-up. Can you comment just a bit on price sensitivity of the customer? I guess, are tenants moving at this point? Is it to save monthly rent? Are you talking about $75 to $100 or is it really have to be much more significant in terms of monthly savings? So, I guess some standpoint of where the customer stands on price sensitivity.

Ed Lange

Well, I think, Jay certainly the customer is sensitive as to price. Right now, only 3% of our move outs relate to movement to another community. So that I think the on-site teams, our property operation team is doing a good job of getting the pricing right, because we're certainly not losing very many residents, current residents to competing properties or to any of our other properties.

But, in general, there is a great deal of price sensitivity. At this point in the cycle, your "A" rents coming into the cycle pretty much compress down on top of the B's a bit, so there is not a whole lot of price differential to begin with. So there is some sensitivity. I would say that the residents are still very sensitive to location, especially in California. They want proximity to their employment. They want proximity, urban infill sites still have an advantage over the suburban sites, but tenants are walking in and the traffic comes in the door, they have pre-priced our product versus the competition in the submarket, whether they have done it themselves or have used an Internet listing service, they have short-listed three properties and they're negotiating hard.

On the renewals, I think it's false to believe that there is less sensitivity there. I think what we're seeing though is that typical of a lot of recession patterns, people hunker down. They've got such other concerns, life-related concerns that if they can secure housing for 12 to 18 months through the recession, that's going to be their top priority, and they want to avoid the frictional cost of moving.

They've just got other things basically that they are concerned about. But we're getting out there 90 days in advance of a lease expiration and not putting a price out there. We're saying we simply want you to stay at the property, entering in a dialog, we're ending up with a renewal rate of about 1% to 1.5% below the prior rent, but that doesn't mean there isn't some back and forth. So I would say, yes, there is a lot of price sensitivity.

Constance Moore

I think as you mentioned earlier, where some of the sensitivity comes from our new residents, in terms of the concessions that it's really that check-writing experience, as they don't really want the upfront concession they want to write the same, they want to spread out over the 12 to 15 months of their lease. So I think there's that sensitivity as we call that check-writing experience.

Jay Habermann - Goldman Sachs

My last question, could you just comment on at what price you would become a buyer, and I guess the return that you would need on development, given today's underwriting? Is it 6.5 caps on acquisitions, is it 8.5 on development, but give us some sense at which, point you know start to shift in becoming an investor again.

John Schissel

We're being very selective on the opportunities we do consider. We are aware that market, downward pressure on market cap rates has occurred. At the beginning of the year, we were in the high 6s to low 7s. We're now looking in low 6s. So we're aware of those cap rates. On the development side, again, until we know where the cost of capital is going to come in at it's really hard to target say large return.

Ed Lange

Jay, I think it will be easy for development company to jump on the cap rates so that have been quoted in the supply constrained markets on the East Coast or West Coast and say, hey, all clear, we're looking at, cap rates in the high 5s to low 6%, depending upon whether you're using in place or forward NOI and say, hey, look, with the right risk premium, its got a seven in front of it quarter ago. I think for a one of our property, you could probably get away with doing that if you had enough embedded internal liquidity to pull that off.

I think from a programmatic standpoint, though, I think, Steve, and we're going to need to see a little more volume around that acquisition side to firm up the views on cap rates to give us a lot more comfort on what the appropriate risk premium is. Also I think on the development side, there is a capital consideration. Its one thing for us to be able to tap the unsecured debt markets, which that is clearly available.

But I think in support, it's kind of our own views is that to support a development business nationwide or development program for a platform, you really got to see the other participants come in to feel comfortable that there is going to be a sufficient level of liquidity to support the program. That means we've got a to see the secured construction lenders in the forms of the banks and life companies step back into the arena and lend at levels that make sense for I think any of us to feel comfortable dipping into the liquidity we have worked so hard to build-up over the last year or nine months, to then, just jump into a development program.

Constance Moore

I mean we've certainly seen the capital markets come to our favor, but as Ed said, not enough of the players are in the market right now, and so, if we're going to be a developer, we're going to a programmatic developer rather than a one off.

Jay Habermann - Goldman Sachs

Just finally, any thoughts on real estate taxes for 2010, we should be worry about prop 13 or any changes there?

Ed Lange

Well, you asked two different questions on taxes. I mean one, yeah, we're always worried about taxes, because we have to pay them. We're going to have to wait and see, I think, we've talked about this before, there is an effort of foot to create a split measure in California. We don't know how much mileage it will get. Other efforts have failed. That's always a risk in California. I don't think right now we can gauge.

Connie Moore

Yeah, it's too early to gauge it.

Ed Lange

I think in terms of the other markets, we and other operators are getting hit with some pretty high assessments in Seattle this year that don't seem to make sense with. It's one of those years where the assessments will come out and start going in the same direction as value, so we've all hired our consultants, our hired guns are going to be all going in there to repeal these taxes in the next 12 to 18 months the next time it comes around. So that I don't see outside of prop 13 property taxes being a big burden to the company.

Operator

(Operator Instructions). Your next question comes from Michelle Ko of Bank of America/Merrill Lynch.

Michelle Ko - Bank of America/Merrill Lynch

Just a quick follow-up question. In terms of your same store NOI guidance deteriorating 50 basis points from the start of the year, can you give us a sense was that deterioration more on the revenue side or on the expense side?

Ed Lange

When you say deterioration, I mean, our guidance was 5.5. It's going to end up at or above 6. So it's kind of hard to line up and get crazy about 50 basis points, but I think as we described, there is going to be some softness. We're experiencing more softness in the Seattle today than we were anticipating at the start of the year.

We're going to start to re-price the portfolio to move away from concessions three to six months earlier. It's going to put pressure on the revenue line in the short term. So I think that's where it's coming from.

Constance Moore

Okay. Paula, we will just do one more question if we have it, otherwise we can wrap up.

Operator

We have no further questions at this time.

Constance Moore

Well, thank you everyone for participating on the call. We'll see most of you at next week and hopefully it will be nice and warm there in Phoenix. So have a great day.

Operator

This concludes your conference. You may now disconnect.

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