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Essex Property Trust, Inc. (NYSE:ESS)

Q4 2007 Earnings Call

February 07, 2008 12.00 pm ET

Executives

Keith Guericke - President & Chief Executive Officer

Michael Schall - Senior Executive Vice President & Chief Operating Officer

Michael Dance - Executive Vice President & Chief Financial Officer

John Eudy - Executive Vice President, Development

Analysts

Anthony Paolone - JP Morgan

Alexander Goldfarb - UBS

Karin Ford - KeyBanc Capital Markets

Mark Biffert - Goldman Sachs

Dustin Pizzle - Banc of America Securities

Haendel St. Juste - Green Street Advisors

Richard Anderson - BMO Capital Markets

Paula Poskin - Robert W. Baird

Michael Salinsky- RBC Capital Markets

William Crow - Raymond James Financial Inc.

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2007 Essex Property Trust Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Keith Guericke, President and CEO, please proceed.

Keith Guericke

Good morning and welcome to our call. I’m going to apologize in advance a little bit. I think our comments are going to be a little bit longer than normal. We are trying to support the 2008 guidance, plus give you color on what’s happened for the fourth quarter. So we are going to be a little wordy. Please bear with us.

This morning we are going to be making some comments on this call which are not historical facts, such as our expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements which involve risks and uncertainty, which could cause actual results to differ materially. These risks are detailed with the company’s filings with the SEC, and we encourage you to review them. Joining me in the call today are Mike Schall, Mike Dance, and John Eudy.

Also included in our Earnings Release on our website you’ll find our market forecast for 2008. We will discuss the highlights in the market section. Also included in our Earnings Release is a scheduled time new residential supply, which includes total residential permit activity for the larger US metros, as well as information on the median home price and affordability as compared to our Essex markets. To get those details, visit our website under Investors and Media.

Last night we reported another strong quarter with core FFO increasing 12.7% per share for the quarter. The portfolio grew revenue 6.2% greater than the same quarter in ’06, and 1.3% on a sequential basis.

On today’s call, I’d like to comment on how we see multi-family financing. I’ll also comment on the basis of our 2008 guidance on a market-by-market basis. And finally I want to comment on Cap rates.

To the extent that multi-family sector has gotten painted with the same brushes as the other property sectors from this credit crunching financial situation, I think that’s been a huge overreaction. The multi-family sector still has access to financing from Fannie and Freddie. Nine months ago we were able to borrow 60-65% of value at 80 basis points over the ten-year treasury. That’s not available today. But we can still get financing in the 55-60% range, at 170-180 basis points over the ten-year treasury. In fact, in January we completed a loan on a Southern California property with an all-in rate of 5.21%.

We’ve been big believers in using mortgage debt from the agencies, since we’ve been public in 1994. I think we’ve seen unsecured market cheaper than mortgage debt maybe two months out of that entire time. So you will continue to see us use that financing strategy.

Let me talk about each of our regions quickly. Seattle’s economy remains one of the strongest in the nation. GDP for the state of Washington has one of the highest percentages of exports in the country, which is benefiting from the currency issues. The success at Boeing from record-breaking orders of the 787 as well as deliveries on the 737 has driven the growth across that region. Expansion at Microsoft and the surrounding software industry on the eastside has led to a 3.4% growth in the information and business sector jobs. Residential construction is expected to remain relatively flat over the next two years. Increases in the multi-family deliveries are being offset by declining single-family supply. So again, if you look at the permit schedule at the back of our information, those numbers don’t exactly true up.

Despite the boom in apartment rents over the last two years, the ratio of rent to median household income remains relatively low at 16%, and this is below the historic average, and renting represents approximately 51% of the costs of ownership in this market. We expect for 2008, 28,000 new jobs, and a total supply of multi-family and single-family of about 12,500 units, or 1.2% of the existing stock. We expect occupancy will increase to 96% with a 7% rent growth in this market.

In Northern California, job growth was slightly stronger than the nation in 2007. The strongest economies in Northern California are in the San Francisco and San Jose areas. The recovery of the San Francisco and San Jose economies had little to do with the single-family boom. These markets have little, if any, exposure to the sub-prime single-family market. New single-family supply in this market totaled only 0.4% of the existing stock. Internet technologies, business service, education, health, and tourism have been the drivers. We forecast 28,000 new jobs or 1.5% job growth in ’08, with new total supply of 7500 units or 0.6% of stock. Occupancy levels remain at about 96%, with rent growth of 5.5% in San Francisco, and 7% in San Jose.

The Oakland market did have exposure to the sub-prime mortgage issues, primarily eastern Contra Costa County, where we have little ownership exposure. In the second half of ’07, Oakland suffered from significant loss to construction and financial intermediary jobs, which are now back to the 2002 levels. Thus we don’t expect these sectors to remain a drag on the economies going forward. Stronger growth in the service sector will lead to overall job growth of approximately 10,000 jobs or 1% in ’08. This level of jobs should keep occupancy at about 95%, leading to a 4% rent growth.

Affordability continues to be on our side. Let me give you some statistics here quickly, relative to ownership, and I’ll do it market by market. San Francisco in ’07 actually saw home prices go up slightly 2.5%, however we think that prices are going to go down 7.5% in ’08, resulting in median home prices of about $771,000. If you then look at what the cost of ownership relative to renting is, rent will be about 53% of ownership. And if you look at what rent is as a percent of median household income, it’s about 26%.

In San Jose we saw prices pick up on the single-family homes of about 3% in ’07. Again, expecting about a 7.5% price reduction in ’08, resulting in $737,000 median home price in ’08. Rent as a percent of ownership at about 45%, and rent as a percent of median household income at 18.1%.

And then finally Oakland, prices were flat in ’07. However we expect to see a little bit larger 10% price change in ’08, negative price change resulting in $621,000 home prices. Rent as a percent of ownership at about 48%, and rent as a percent of median household income at about 19.3%.

Let me give you the rent as a percent of median household income; put that into perspective for you. Historically, across this region it’s been 23 to 24%, so in San Francisco rents are at or slightly above the historical levels. In San Jose and Oakland they are significantly below, which I think bodes well for us to be able to push ramp.

In Southern California, the economies are weaker and in some parts facing recession. However reduction of single-family construction to negligible levels will help the apartment market. In Ventura County we continue to be negatively affected in 2008 by the loss of jobs at Countrywide Financial and Amgen, and on the supply side with two large lease ups in Simi Valley and Oxnard we expect to continue to lose some construction jobs and single-family supply will be cut. We expect total new supply of about 1300 units in this region, which is about 0.5% of existing stock, and we expect to see jobs flat. Occupancies will fall slightly to 94.5%, with flat rent.

In Orange County, we saw drafting cut back in financial intermediary jobs. This sector lost about 8600 jobs or 17% of the sector in ’07, and are now back to early 2003 levels. Construction jobs were cut back by 6200 or almost 6% in ’07. More cuts in these sectors are inevitable and will lead to flat job growth overall for Orange County in ’08. Single-family construction will be cut to about 2000 units, with total supply of single-family and multi-family units of about 5700 or 0.6% of total stock and no new jobs. We expect occupancy will fall to 95%, with 2% rent growth, concentrated in north Orange County.

Los Angeles, particularly west LA and Long Beach has performed much better than the rest of Southern California. These areas have primarily multi-family housing stock, and there is virtually no exposure to single-family construction. These areas also have little exposure to credit in their intermediary jobs. The concentration of the single-family fallout in this market is in North County area, which is Valencia, Lancaster and Palmdale. We have no apartments in that area.

There will continue to be some lease-up competition in Woodland Hills, Pasadena. Overall we expect about 30,000 new jobs or 0.7% in 2008, and new total supply of 14,600 units or 0.4% of existing stock. And that’s total multi-family and single-family stock. Occupancy will remain at 95.5%, with overall rent growth of 3%, with stronger growth in the infill areas of west LA and Long Beach.

And finally, San Diego. That economy showed some resiliency in the second half of ’07. Construction jobs have fallen, and we expect that to continue to climb as residential constructional falls. Jobs outside these sectors grew at a healthy 1.9% in ’07, with strength across all the other sectors. In addition, most of the condo conversion projects have already reentered the market as rental, and we do not expect further erosion in occupancy as a result. We expect 2008 to be very similar to ’07, with market adding about 10,000 new jobs or 0.8%, and total new supply of 6200 units or 0.6%. We expect occupancy to remain at about 95%, with 2.5% rent growth.

Again, let me give you some sense of the affordability relative to single-families in this market. All of these markets had single-family prices actually drop in ’07, Ventura being the base of 5.5%, and everything else at 2.5-5%. In 2008, we see bigger price drops coming. We see in Ventura about a 12% additional drop, in LA about 10%, Orange 7.5%, San Diego 12.5%, which will result in median home prices ranging from $475,000 in Ventura to $639,000 in Orange, with the others in-between there. And that’s going to make rent as a percent of ownership cost range from about 48% to 59%. Again, the affordability is on our side. And if you look to what is rent as a proportion of the median household income, it’s at about 17% in Ventura, to as high as about 29% in LA; Orange, and San Diego being in the 21% range. Again if you put this into perspective on a historical basis, these are at about the historical levels that we’ve seen.

Finally, I’ll talk about cap rates real quickly. On our last call, we indicated that we believe cap rates increased by 25 basis points. Since that time, it has become more clear that cap rates are moving. I think depending on the property and the market quality, the increase has been 25 to 50 basis points on the west cost.

However, in our markets, I will tell you there has been very little volume in transactions, and you can’t really point to a lot of transactions to support these. However, the one interesting thing that’s happening now is, with the reduction in interest rates, I think you’re going to see cap rates staying flat from this point or maybe even ticking slightly down because there’s a potential for positive leverage.

The other point I would make is there is a significant number of new listings coming into our markets this first quarter and we expect this to lead to an increase in the number of transactions in the next three to six months which will bring clarity to the cap rate picture.

Let me turn the call over to John Eudy.

John Eudy

Thank you, Keith. In our last call I briefly touched on the market for land and specifically recycled opportunities resulting from the fallout of the condominium for sale market. The concern: Could there be a glut of development deals converting to apartments which could lead to an oversupply? We doubt it, for reasons of financial feasibility.

We have looked at several of these deals over the last year and in all of our markets and have not pursued a single transaction that was recycled in 2007 which meets apartment under-writing criteria.

I suspect other multi-family rental developers that compete in our space are experiencing the same conclusion. With the large gap that still exists between bid and ask and with entitlements which are generally not conducive to apartment developments, specifically the designed unit-size, parking requirements, and type one construction in many cases as the drivers, the transactions are simply not being consummated, combined with the continuing challenges of additional financial burdens like increasing affordability requirements, inclusionary housing and city fees.

Overbuilding in our markets as a result of conversion of for-sale recycle land deals going into the apartment development pipeline is simply not going to happen to any significant degree. There will be some opportunities that pop up and become available. But they will be more the exception than the rule.

One development cost component which appears to be going in our favor in the near term is a possible reduction in construction hard costs led by the labor side of the equation.

I have stated for the last several quarters we have seen the amount of subcontract bidding activity increase significantly in our Southern and Northern California markets, primarily due to the fall off of the wood frame home building business. We also see the very beginning signs of this starting to occur in the Seattle market as well. On the raw materials side of the equation, wood is at a seven year low, reflecting the domestic supply - demand imbalance and concrete and steel have stabilized over the second half of 2007. Both should trickle down through the system over the next several quarters.

We do not expect to see overall construction costs come down as significantly as they have gone up the last three years, of course. But there is a much higher likelihood they will retract a portion of the gains over the near term in lieu of going up any further.

If we do see a reduction it will not be enough to significantly alter the economics to spur additional apartment development or close a bid-ask gap on the recycle condo land. But it will help on the margin on deals which we are currently in the process of buying out.

The following activities occurred in our development projects during the quarter. During the quarter we added 4th Street in Berkley, a 171 unit deal, which will start construction in April. We moved our city center deal in Moore Park from development projects to land held for future development. We have not concluded negotiations with the City on bond financing and tax credits and are clarifying some aspects of the development agreement. We have delayed the construction start until the negotiations are concluded.

Our land basis is at $7.9 million or just under $39,500 per unit, which includes a full set of working drawings and engineering, which is very attractive and gives us a lot of options.

Belmont Station formerly NorthWest Gateway in Los Angeles is two months behind schedule. We will be opening the leasing office and delivering initial occupancy in April followed by substantial completion the following month.

Eastlake 2851 on Lake Union in Seattle will open a temporary leasing office this week and will deliver initial occupancy in the permanent leasing office next month, and substantial completion in April. The pre-leasing interest in this development has far exceeded our expectations to date.

The Grand in Oakland will top out the 22nd floor, that’s the top floor, next month and is on schedule for substantial completion in December 2008. Studio 41 in Studio City is scheduled for substantial completion in March, 2009, and Cielo in Chatsworth is scheduled for substantial completion in May of 2009.

In our pre-development projects pipeline the following activities occurred. We’ve added Main Street and Walnut Creek. This is an assemblage of 1.94 acres of land in the heart of downtown Walnut Creek which we just concluded and closed on December 18th of 2007.

We’ve purchased a property in a joint venture with a retail developer and the property will be developed as a mixed used retail residential deal.

On land held for future development, we have moved City Place in San Diego from the pre-development projects to land held for future development. We received entitlements late last year in the process of completing working drawings and bidding out the job. The property’s current leased month to month as a parking lot and we are bidding the construction costs at this time.

We anticipate a fairly dramatic drop in construction costs in San Diego due to market conditions, and if our assumption is correct, we plan on taking advantage of it. If we are correct in our assumptions, we should be moving this back into the development pipeline in the next few quarters and would deliver it into operations in mid to late 2010, a time frame we think the hang-over of any potential San Diego shadow pipeline will be over.

On Park Boulevard, we are in the process of completing our entitlements and have entered into an agreement to sell the property for $10.9 million. Our current basis in $6.9 million. We have received a non-refundable option payment from the buyer in the amount of $436,000.

In conclusion, development is not getting any easier in our markets, only more difficult and fraught with constraints from economic, political and geographic barriers to pencil a deal.

The average time from identification of the site to stabilization has increased from probably the mid four-year range to the mid five-year range in my opinion. In my 30 years in the business at no time has it been more difficult to get apartment development deals done from site identification to stabilization than today. Our barriers of entry are strong as they ever have been, and I doubt it will change in the near future.

On our greening efforts of our pipeline we have acquiesced to lean into the rapidly changing political environment, and are doing everything we can to label ourselves green, which are revenue neutral and are considering all of our options on a case by case value added approach.

The perception of green efforts by our society and specifically our current and future tenants, we believe will continue to evolve to save the Polar Bears in the future, and we are positioning ourselves to take advantage of the marketing edge it will give us.

At this time I would like to turn the call over to Mike Schall.

Michael Schall

Thank you John and thanks everyone for being with us today.

Once again, as you know, we had a strong quarter operationally. As expected, Northern California and Seattle continue to produce superior results that were well above our 2007 guidance. In Northern California we had a 13.5% increase in property revenues and 2.3% sequential growth. In Seattle, we reported a 10.7% revenue growth and 2.2% sequential growth.

In Southern California we continue to see deterioration in operating performance, attributable to increasing multi-family supply in several submarkets and moderating job growth, and a few examples of significant work force reduction. Countrywide and Amgen immediately come to mind. Overall, for the year we generated 6.5% revenue growth representing the high end of the original guidance range and 7.9% NOI growth for the same property portfolio. Operating expenses grew at 4.1% for the quarter and 3.7% year-to-date slightly above our guidance range of 2.5% to 3.5%. The expense growth above guidance was principally due to a $1.1 million or 6.2% increase in expenses for the year and $509,000 8.7% for the quarter in Northern California.

The increase above guidance was due wage pressures, accrual adjustments that affected the entire Northern California portfolio and assets specific issues at three properties dealing with estimates of repair and maintenance, cost, and property taxes.

Before reviewing each market in greater detail, I’d like to highlight improvements in our operating platform. First, we continue to work on the migration of our GL and property management systems to Yardi. Currently over half our properties have been converted to Yardi versus 30% of the properties at the end of last quarter, and we still expect the primary conversion effort to be completed in mid 2008. In addition, we are now running YieldStar’s Price Optimizer at 17 properties.

Operator

Ladies and gentlemen, please stand by. The conference will resume shortly. (Operator Instructions)

Michael Schall

Hi. This is Mike Schall again. Sorry about that. Not sure what happened. I’m not sure exactly where this, the conference got cut off. But I’ll go back and pick up from where I think it left off.

I was talking about operating improvements to our platform here and had commented that over half our properties have now been converted to Yardi, that’s our new property management accounting system, versus 30% last year. In addition, we are now running a price optimizer, YieldStar at 17 properties and we have implemented call center support that also is in operation at 17 properties at this point in time. Both of those are scheduled for company-wide roll out up this year.

We scaled back unit turns in the seasonally weaker fourth quarter and reduced average time it takes to rehab an apartment unit. As a result, the quarterly results reflect a reduction in rehab related vacancy to 394,000 for the quarter of which 122,000 was included in the same store results.

Loss to lease, which estimate the difference between market and in-place rents without regard to concessions, declined to $8.6 million. 2.3% is scheduled rent from $13.5 million or 3.5% as of September 30th, 2007. The reduction is largely attributable to weaker conditions in Southern California and seasonal weakness and its impact on rent at the end of the fourth quarter with the largest overall reductions in Seattle and Southern Cal.

Now I’d like to briefly review each major part of the portfolio, starting in the Northwest. Seattle, as you know, continued its strong performance and has probably one of the best multi-family markets in the nation. All submarkets are participating. Construction of new multi-family properties, both apartments and condos, remain our primary concern as some properties are now actively in lease-up.

So far these lease-ups have had little impact on our portfolio, which is expected to continue as long as the current level of job growth is sustained. We improved financial occupancy in Seattle both sequentially and year over year by limiting lease explorations in December at most properties to 3%. Reflecting the strength of Seattle market physical occupancy as of January 28, 2008 in Seattle was 97.6 net availability. 3.3% home purchase activity in the Seattle area represented 18% of move outs for the quarter compared to 19.5% the prior quarter.

We reported the sale of our Portland properties in the fourth quarter, so I’ll no longer comment on that market. In Northern California, the portfolio led the company in the fourth quarter with 13.5% revenue growth in financial occupancy at 97.5%. This reflects the inclusion of our 697 unit Hillsdale Garden Property for the first time. That property is located San Mateo. It contributed a 29% increase in same property revenues for the quarter. So it helped move the overall result up.

All submarkets in Northern California continued to perform well. As of January 28, physical occupancy was 97.2% in Northern Cal, net availability at 4.5%. Home purchases represented nearly 16% of our turns for the quarter compared to 13% for the same quarter a year ago.

Now to Southern California, conditions have moderated in Southern California, reflecting limited demand growth, in many cases insufficient relative to the new supply. As stated before, development deliveries in Ventura County, Inland Empire, and certain parts in LA and Orange Counties are having difficulty reaching stabilized occupancy, pressuring rental rates and increasing concessions.

In total our Southern California portfolio generated 2.2% revenue growth in Q4 versus the prior year, and 0.6% sequential growth. Our Southern California results were impacted by a 0.6% or $369,000 drop in same property financial occupancy and $152,000 increase in same property concessions compared to Q4 2006. Physical occupancy as of January 28, 2008 in LA, Ventura, was 95.1 with net availability 6.3%.

In Orange County physical occupancy 95.1%, net availably 5.9% and in San Diego 95.6% physical occupancy; net availability at 8.2%. Move out activity attributable to home purchases increased modestly in each of our Southern California metro areas. I’d like to thank you for joining us and would like to turn the call over to Mike Dance.

Michael Dance

Thanks Mike. My comments today will review our 2007 results, provide some color to the 2008 guidance and highlight the strength of our balance sheet and debt capacity.

In the fourth quarter we missed the First Call consensus estimate from funds from operations due to an impairment charge of $500,000 related to a loan for a condo conversion in Sherman Oaks. Even with this charged FFO we did exceed the low end of the guidance we provided on the third quarter conference call. Given the current over supply of unsold homes, slowing velocity and declining home prices we have postponed the construction of our two remaining condo developments until the housing market recovers.

We stopped occurring interest income on the loan to the condo converter in third quarter and discontinued interest capitalization on the 90 (Arch) and Viewpoint condo development in Q4. After excluding non recurring items such as impairments and other income and expense items, recurring funds from operations for the year ending 2007 was $5.20 per diluted share, an increase of 12.7% over the $4.62 reported in 2006.

The 2007 results were primarily achieved with the increase in net operating income from the same property portfolio of 7.9%. During 2007, same property scheduled grants improved by $20.4 million or 7.3% increase over 2006. The 2007 same property vacancy lost increased by $2.3 million, which included rehab vacancy from approximately 300 units taken offline during 2007 to renovate kitchens and baths. The 2008 guidance assumes a continuation of the strategic unit turned program and approximately $750,000 in rehab vacancy in the same store portfolio in 2008.

In 2007, the Southern California market saw an increase in rental concessions of almost $500,000 compared to 2006. The 2008 guidance assumes $1 million in rental concessions in the same property portfolio.

Our 2008 guidance uses published economic forecast of job growth and new housing supply to estimate rental demands and property rents by market. The 2008 growth in rental income for the same property portfolio is expected to increase by between to 3-4.5%. In 2007, the year over year same property operating expenses increased by 3.7%, slightly higher than the high end of the original guidance range of 3.5%.

The 2008 guidance assumes that property operating expenses will be between 2.5% to 4%. General administrative expenses in 2007, totaled 26.3 million or $2.3 million higher than our original guidance. The increase was a result of the primarily three items. One, we had a performance based cash bonus that I discussed on the last call that was paid based on the strong 2007 results. We had additional expenses associated with the granting of an equity based performance award. And we had a write off of several projects in the pipeline that were abandoned in the fourth quarter.

The 2008 guidance assumes no increase in general administrative expenses as the performance base cash bonus will be replaced by the out performance plan. And other increases in our G&A expenses in 2008 will be offset by allocations of property management overhead, the property operations in the form of additional property management fees, which are included in the guidance for 2008’s property operating expenses.

We are starting 2008 with over 96% financial occupancy with modest concessions in some markets and rents being flat in Ventura County and growing as high as 7% in Seattle and Northern California. We estimate that 2008 funds for operations per diluted share will range from $5.85 to $6.15.

The midpoint in our 2008 guidance assumes an increase in net operating income of 4.5%. To achieve the high end of the guidance, net operating income growth will need to be approximately 5.8% and we will need to generate additional non recurring income in addition to the other income of $0.23 per diluted share realized from a transaction that closed in 2008.

We’re assuming that any impairments on abandoned projects in 2008 will be insignificant to the 2008 results. The 2008 development activity is expected to be approximately $150 million, for both construction and land acquisition costs, which will be funded by our bank facility. An additional $50 million in development cost for fund two’s construction activities will use fund two as a construction financing.

We will not be providing quarterly guidance in 2008, but hopefully the following narrative will enable reconciliation between our fourth quarter 2007 results and what we expect the recurring funds from operations, without onetime items, will be in 2008. On S3 we have disclosed recurring funds from operations that $1.26 per diluted share. On S7, footnote one; we have disclosed supplemental property taxes that were accrued in the fourth quarter but related to prior periods of $1.1 million. We incurred a disproportionate amount of G&A expenses in the fourth quarter of 2007 that will be recognized ratably throughout 2008 which is a difference of $1,250,000.

As a result of restructuring our taxable re-subsidiaries, the fourth quarter tax provision of $400,000 is expected to be an immaterial accrual in 2008. Also included in other expenses in the fourth quarter is a $300,000 business tax, related to the sale of the assets at Lake Merit to a condo converter in 2005. These fourth quarter adjustments totaling $3 million will add $0.11 per share to the FFO run-rate of a $1.26 reported in the fourth quarter 2007 or a starting run-rate of $1.37 in the first quarter of 2008.

The mid point in guidance assumes a growth rate from recurring sources of funds from operations to increase by 11% over the 2007 results of $1.30 per quarter or an average of $1.44 per quarter during 2008 for total recurring funds from operations of approximately $5.77 per diluted share. In our 2008 guidance, we stated that the combination of the cessation of interest capitalized and the additional operating costs expected by the leasing up of the two development projects will result in a reduction to our 2008 FFO of approximately $1 million.

We expect this dilution or reduced FFO in the second quarter 2008 by $0.03 and by $0.01 a share in the third quarter of 2008. These assets are expected to reach 95% occupancy by the end of 2008, so most of the external growth in the funds from operations run-rate are internal growth and external growth will occur in the third and fourth quarters of 2008.

Over the last five or six months we have gotten a number of questions concerning our access to capital to fund our external growth. As of December 31, 2007 our debt to total market capitalization is about 36% using the stock price at year-end. Using debt to total market capitalization as one metric to measure our debt capacity, we can add an additional $400 million to our current debt and still have a strong balance sheet with debt to total market capitalization of 41%. We are well within all our cash flow and debt service covers ratios on the covenant for our $200 million unsecured bank facility and we can expand the accordion feature on that facility to $350 million.

In January 2008, we obtained $49.9 million of ten year fixed rate financing at 5.21% which is secure by our Southern California assets. About 30% of our non-operating income is currently unencumbered and we see $100 million of 2008 fixed rate debt maturities as an opportunity to refinance these assets at rates less than the current rate of 6.8%, and to either take out additional proceeds from this refinancing, or add additional assets to the unencumbered pool.

This concludes my remarks and I will now turn the call back to the operator for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Anthony Paolone of JP Morgan. Please proceed.

Anthony Paolone - JP Morgan

Thank you. I have a question about the impairment you took on the mezzanine note, maybe this also relates to the rest of the notes that you have on your balance sheet. What's next in this instance? What exactly happened there that you are writing it down and is it recoverable, do you go after the property? Can you just walk through what's next there?

Michael Dance

The next is, we are currently discussing the borrower a plan for them to exit in the best interests of both parties. They have some ability to sell units but the reason for the impairment is the slowing velocity and the marketing costs that are incurred as the units are sold. So, prices have held, it's just a slowing of velocity. But we're looking at alternatives such as maybe an auction or looking at marketing plans. There is a possibility of recovering some of it. But that would probably not be until 2009.

Anthony Paolone - JP Morgan

So does the impairment reflect in this instance reduction in what the face value was expected to be?

Michael Dance

It basically reverses the interest we accrued in first and second quarter of 2007. So we still expect to recover our total principal.

Anthony Paolone - JP Morgan

Okay, understood. Another question, moving into southern California. Can you talk about how, you mentioned I think in your commentary, that you've actually seen some weakness even in parts of Los Angeles. Can you elaborate on that and give us a sense of just how that market's holding up?

Michael Schall

Yeah, there's a couple of places in LA County that are weak right now and clearly Keith mentioned about the northern part of LA County that we're not in, Palmdale, Santa Clarita Valley, Valencia area. But in addition it's not just limited to that. I'll give you Woodland Hills for example, I've commented on before. Arch don't have the lease-up deal there, Morgan Group does. ABB had a deal coming online here very soon and there isn’t the demand to absorb those units in the very short-term and so you are in a concessionary one-two month concession type of market and temporarily until those units are leased up, which is expected to be a pretty significantly long period, I think those markets will be soft. So, LA County, having said that, LA County is a huge county. There is a lot of different separate sub-markets within LA County. Keith talked about the stronger ones. Certainly Westside, LA, but at the same time there are some weak parts of LA County as well.

Anthony Paolone - JP Morgan

Okay, thank you.

Operator

Your next question comes from the line of Jonathan Litt of Citi, please proceed.

Unidentified Analyst

Hi, it's Greg (inaudible) here with John. The 2% job growth, sorry the GDP growth figure that’s underlying your assumptions seems a little high relative to some other expectations out there. How much does that impact the year specific market outlooks?

Keith Guericke

John is here and he can talk a little bit about how we got there. But I think, one of the things that we have going for us is that's the national GDP look and I think that we've got some markets, specially in Northern California and Seattle which are going to perform better than the national average. So, I think that we've taken into consideration the impact of the individual markets. For example, if you look at our forecasts we've got zero rent growth forecasts for Ventura County which is about 2200, 2300 units that we have in our portfolio. So, we've tried to be sensitive to the fact that each of our submarkets has different supply issues, has different job and growth issues and again the majority of the strength is coming from Seattle and Northern California. I don’t know if that answers your question exactly but the point I'm trying to make is that we're sensitive to the submarkets and we're not thinking that we're going to see great strength across the portfolio.

Unidentified Analyst

And in terms of the 6.2% revenue growth in the fourth quarter versus the guidance from the full year next year of 3-4.5% how should we expect that year-over-year growth to trend in '08? Are we going to see a number in the fives in early '08 or is it going to come down pretty quickly in '08?

John Eudy

I wouldn’t expect it to - as you know this is a momentum business and things don’t change greatly from quarter to quarter. So, I would expect it to moderate a bit from the 6.2% in Q4. But in this business the first quarter tends to have a little seasonality to it so I would expect it to moderate a bit. And then hopefully we have a good summer and still, exactly how all that plays out, I can't predict to that level of certainty, so I expect it to be pretty flat throughout the year, bottom line.

Unidentified Analyst

Thank you.

Operator

Your next question comes from the line of Alex Goldfarb of UBS. Please proceed.

Alexander Goldfarb - UBS

Good morning. I just want to go to the line of credit comments. If you could just remind us which one has the accordion to $350 million and then also any sense of the two lines of credit that are going to mature? I think one's in a few months and one's within the next 12 months. Any sense whether the terms on those credit lines may materially change?

Michael Dance

This is Mike. Hi, Alex. The line that has the accordion feature is the bank facility which is the unsecured line. The both lines come due in 2009, so the secured facility with Freddie, I think is a January 2009. We have started discussions with them as well as with Fannie. And we believe there to be some increase in the spread that we're currently. But not significantly be going from 55 to 75. And then the unsecured line with the bank group comes due in March 2009 but we can automatically extend that a year.

Alexander Goldfarb - UBS

Okay.

Keith Guericke

The 2008 maturity Alex is just a $10 million loan that's used temporarily, so it's not material.

Alexander Goldfarb - UBS

Okay, so really, given the accordion feature you're not really 55% drawn. You've got more capacity. And then when you refinance that you'd be looking to increase it above the 350 or you think that 350 is a comfortable amount for you guys?

Michael Dance

Our philosophy is pretty much matching capital with our investments so we like the $200 million from a discipline standpoint of going out and finding secured financing like we did in January with the southern California mortgage, but we have the ability to increase it to $350 million which is the point I'm trying to make if we see opportunities in the market.

Alexander Goldfarb - UBS

And then my second question goes to the Cap rate comment Keith, I think you were talking about. You commented about an increase of 25-50 basis points but at the same time commented that there is very little transactions going on. I just wanted to get a sense for how the increase in cap rates is - what's that based on?

Keith Guericke

Well I think it's based on partly our activity and what we're doing. We’ve actually done a transaction in the first quarter. It hasn’t closed and so we generally don’t comment on those, but the transaction that we've done and we've gotten contracted is at a cap rate that we would not have seen two quarters ago. That's evidence. The other evidence we have is that there are no transactions happening. So buyers and sellers, there is a disconnect between buyers and sellers and so clearly the things we are seeing is cap rates are slightly up and I think that there is not a lot of transactions in the marketplace but I think that part of the reason there aren’t is there is a disconnect in the cap rates and you're going to see that - we think that the buyers are going to demand a little bit higher cap rate and ultimately that's where it's going to shake out.

Alexander Goldfarb - UBS

Thank you.

Operator

Your next question comes from the line of Karin Ford of KeyBanc. Please proceed.

Karin Ford - KeyBanc Capital Markets

Hi, I have two questions. First is do you have any thoughts as to implications as to a potential Yahoo - Microsoft combination would have on jobs in any of your markets?

Keith Guericke

Right off the bat, no. There's no clear indication from either side whether there'd be cutbacks or not. We expect slight cutbacks at yahoo but not materially enough to slow down the (San Jose) markets.

Karin Ford - KeyBanc Capital Markets

Second question in your '08 guidance release you talked about making some dispositions between $100 and $200 million and using the proceeds to fund acquisitions in San Francisco and Seattle, and the stock repurchase. Can you just talk about given where pricing is and between those three options which - between Seattle, Northern California and the repurchases which you guys are targeting more these days.

Keith Guericke

Again, I think we were not specific in our guidance because frankly we are going to do what's best for us at the time. If we could see our stock at levels that are where they are at, or below today, we will be more aggressive on the stock repurchase. If cap rates are 25-50 basis points better given the better growth in Northern California and Seattle, we're going to push on that. So, I think we are going to try and be as optimistic as possible which just means that we are going to have to evaluate our options as we go. But I think generally, what we've done in the stock repurchase program, if we can do that or slightly better, we will continue to maybe do another 25-50 million there but I think that's about as good as I'm going to do for you right now.

Karin Ford - KeyBanc Capital Markets

Okay, thanks.

Operator

Your next question comes from the line of Mark Biffert of Goldman Sachs. Please proceed.

Mark Biffert - Goldman Sachs

Looking at your submarkets, I'm wondering if you are seeing any distressed opportunities on behalf of merchant builders and if you guys are going to set aside any capital? You had said before that you had added that accordion onto your line as well. Would you use that to invest in the distressed opportunities?

Keith Guericke

Well, I think, John Eudy in his comments talked about that we have not seen a opportunity to take a condo-deal and make it work on the apartment side. If you look at the real distress the homebuilders, and the majority of the big tracts of land that the homebuilders have and that you’re seeing talked about where they’re disposing those - those are generally out in the valleys around in Sacramento Valley, they're out in the Inland Empire, they’re out in the Valencia area. They’re in markets that we aren’t going to be in. So, those really aren’t going to - I don’t think we’re going to have a lot of benefits.

We continue to look at the infield situations and monitor them, but I think they were at such levels as John said we just haven’t been able to make any of those underwrite as an apartment. We continue to look at them and we continue to look at some broken condos we’re looking at those and unfortunately there aren’t a lot of those, fortunately or unfortunately, there’s not a lot of opportunities there, but we are looking at that with respect to existing product that’s been built, not sold, and especially if it's done as a separate phase where there aren’t a lot of owners involved, where we can get in and make the deal work, we’re looking at those. But again as I said the only market that there’s a lot of that in and there really isn’t much is San Diego. Northern California we don’t have a lot of exposure and generally in LA there’s not a lot of exposure. Seattle there’s been a significant number of condos done, but generally there hasn’t been any stress out there yet so we haven’t seen anything there.

Mark Biffert - Goldman Sachs

Okay, so in your comments you had mentioned that in Seattle the single-family housing supply is actually shrinking. What’s driving that?

Keith Guericke

I don’t think I said it was shrinking, I think I said that the amount of new - that what’s happening with respect to the deliveries that the multi-family side has actually grown a little bit, but what we’re seeing is we’re seeing the deliveries on the single-family side fall back so even though that in Seattle we’ve got permits at about 1.3% on the single-family side we’re not going to see all of that delivered so that’s shrinking, so it’s the deliveries that are shrinking not the existing stock.

John Eudy

And part of that is they’re approaching build outs in parts of King County so we’re not seeing any shrinking in the north end of Snohomish but it's in the builtup part of King County primarily.

Mark Biffert - Goldman Sachs

Okay, and lastly your decision to pull out of the Portland market and I’m sorry if you already said this before, but I was just curious, you had mentioned that there was a portable housing coming into the market competing with your rentals and I’m wondering what that spread is, does that speak to the entire market or is that just the sub-markets that you guys are in?

Keith Guericke

I think it speaks to the entire market because even if you have a significant submarket, Portland Metro is not that big, so even if you have a specific area, we have more affordable housing, that’s going to have some impact to depress housing values overall. But if I go back, maybe speak about the original premise in Portland which is that it was, we believe, protected by an urban growth boundary and that as soon as most of the developable sites, housing sites, were built out within the urban growth boundary that the tree-hugging Oregonians would respect it and would take on more of a supply constrained market characteristics. So we understood that there was more supply in the Portland market but we thought that we would invest into that with the expectation of it becoming more like a California or a Seattle market over the long haul. And then I think it was what John said, maybe a year ago or so that rather than respecting the urban growth boundary they blew out, the grow out boundary expanded it and very significantly which sort of wrecked our investment thesis on Portland so then we, from that point, rents were extremely low at that point. I think there were one-bedroom rents were $499 as I recall at one point, so we wanted to let the market recover a bit before we exited. So, we looked for an exit at that point in time once our investment thesis on Portland was proven incorrect.

Mark Biffert - Goldman Sachs

Okay. Thanks.

Operator

Your next question comes from the line of Dustin Pizzle with Banc of America please proceed.

Dustin Pizzle - Banc of America Securities

Thank you, Keith just going back to some of your opening comments where you were referencing the rents and where they are now relative to the historic and median income, were you talking about your rents or the market rents?

Keith Guericke

I was talking about market rents but our rents are in the market, but that was a market rent comment.

Dustin Pizzle - Banc of America Securities

Okay, so, so given that and where your rents are relative to some of your peers. I mean I would argue they’re roughly 20% below in some cases, I mean how do you think that changes the competitive dynamic do you think it’s a benefit to you?

Keith Guericke

I think that our B product in A markets has been - over the long-term we’ve got a lot of demand because in the A markets, we define A markets as markets that are infield that are close to jobs, we’ve got a demand for those and we are, our pricing it as you say, less than some of our competitors. So I see that as a positive and I see that as strengthening our ability to move the rents that we’re talking about this year.

Dustin Pizzle - Banc of America Securities

Okay and then just going back to the development pipeline quickly. Did you mention why the delay occurred at Belmont Station?

Michael Schall

No, I didn’t get into it. It's a high density 135 units of the acres deal and in working with the fire marshals and splitting the first base and the second there are some issues that we thought we could do to deliver units earlier in the first phase of 90 some odd units that we ended up not being able to execute on and just a complicated deal. I could go on for hours and I’d put more people on it and we’re there now for an April delivery.

Keith Guericke

So, it’s not so much that the project as a whole has slowed down we were going to be able to deliver the first phase and now we’re going to deliver this one phase as opposed to the two phases and that's the primary bugaboo.

Dustin Pizzle - Banc of America Securities.

Okay, Makes Sense. Thanks.

Operator

Your next question comes from the line of Haendel St. Juste of Green Street Advisors, please proceed.

Haendel St. Juste - Green Street Advisors

Good morning. Keith in your comments about cap rates and positive leverage involvement, I wanted to get your current view on fund, a possible fund three.

Keith Guericke

We’re talking about it, we’re looking at it again it’s really an issue of having everything line up it’s having the leverage line up, the opportunities line up, and the expectations on the investors line up and I think that as you know the IR hurdles that we had in our fund, Fund I and Fund II were in the mid- to high-teens. We have a cadre of investors that we like and I would probably go back to them just because it would be simple to raise the fund. I’m not sure and we’ve talked to them - I’m not sure that their expectations for hurdles have come down much and I don’t know that we could necessarily deliver mid- to high-teens returns in today’s world so we continue monitoring that and when we can line up the opportunities and the expectations on the capital side we will probably pull the trigger on that.

Haendel St. Juste - Green Street Advisors

Okay fair, enough. Quick follow up for John. You mentioned, that you expect construction cost to come down considerably in San Diego. What specifically are you seeing there. Could you give us more color on that thought?

John Eudy

Well we’re in the middle of buying out the deal down there and what we have found is the amount of sub-activity coming at us, people that are interested in the deal, is more than I’ve seen in the last five or six years in any home markets. And with lumber now at a seven year low and people very, very hungry in the constructions site cause what’s going in the home building business that usually leads to a very, very competitive environment. Labor side of the equation over the last three years was a bigger jump than the commodity side and because of that we believe there’s going to be a move in our favor. It’s the right time to buy a deal out donor.

Haendel St. Juste - Green Street Advisors

Okay, guys that’s all I have thanks.

Operator

Your next question comes from the line of Rich Anderson of BMO Capital Markets please proceed

Richard Anderson - BMO Capital Markets

Thanks, Good Morning to you guys. Just a quick modeling question in the 500,000 impairment is that in the 800,000 other expenses?

Keith Guericke

Yes, and the 300,000 I mentioned for the Oakland business tax that surprised us.

Richard Anderson - BMO Capital Markets

Okay, I missed that. And what also contributed to the big ad backs this quarter in minority’s interest?

Michael Schall

The sale of Portland. Go to our S-13 and you’ll see it back there.

Richard Anderson, BMO Capital Markets

Okay. Now the bigger picture question is on CapEx. You’re talking in your guidance of $950 a door. That sort of surprised me thinking that CapEx would be coming down. Could you talk about sort of what the change of heart is from a recurring CapEx standpoint.

Keith Guericke

You know Rich, it’s just a continuation of some of things we saw last year which is we’re still - we fixed a lot of things in 2007, but we’re not done yet. So, we’re projecting that 2008 will be another stronger year in terms of CapEx just to continue to fix some portfolio and it reflects the fact that we just didn’t do enough in the three to four years preceding 2007.

Richard Anderson - BMO Capital Markets

Okay, and then just one quick one, you mentioned development costs in some cases looking like they’re reigning in a little bit. What gives you comfort that that won’t continue to go down such that some of your real-estate competitors' developers might be more inclined to add products say not maybe not immediately because of the high barrier to entry nature of your markets, but maybe a year or two from now you start to see an uptake in development. Is that something that you’re watching and concerned about?

Keith Guericke

We’re watching it closely, but the amount of the change that I was referring to is (deminimus) overall. Instead of going up it might go down 5 or 7% not enough to spur any real activity. It’s the point, was the increases that we’ve seen all in the last three years I think in the near term are evaded.

Richard Anderson - BMO Capital Markets

Okay, great, thanks very much.

Operator

Your next question comes from the line of Matt (Dinchek) of Irving. Please proceed

Unidentified Analyst - Irving

Hi, I want to follow up on Karin’s question I was curious in your estimation if you think that there’s a positive arbitrage between your targeted disposition mostly in Southern California and your share price?

Keith Guericke

Yeah, if you look at our guidance for ’08 at just the mid-point and you look at our current share price there’s an arbitrage there. And I think that some of the stuff we’re looking at selling - we’ve got one property listed right now that we expect to sell in the low five cap rate range, if we’re successful there would be a very large arbitrage in that situation.

Unidentified Analyst - Irving

Okay at these levels would it make sense to increase leverage at all to do more repurchasing?

Keith Guericke

You know we struggle with that. We’ve got an on going business to run, we are very sensitive to leverage and if our stock price goes to 85, heck yes, if our product stock price is at our current level I think we’re going to be more sensitive to looking at dispositions and repurchases.

Unidentified Analyst - Irving

Okay and I guess lastly, I was curious to post 2008, what do you think an appropriate normal CapEx for your portfolio?

Keith Guericke

I would think it would be in the 750-800 range.

Unidentified Analyst - Irving

Okay, thank you.

Operator

Your next question comes from the line of Paula Poskon of Robert W. Baird please proceed.

Paula Poskin - Robert W. Baird

Thank you very much. I’d like to understand a little bit better your description about what’s happening with G&A expenses, in particular the reasons that they were higher in the fourth quarter and if you expect that to be a sustainable run rate.

Michael Dance

Okay, in the fourth quarter the competition committee did approve an extra cash bonus and that will not reoccur in 2008 primarily cause in December we announced that our performance plan that would basically take what we booked in the fourth quarter and had it ratably accrue in 2008.

Also we had a significant number of projects that had capitalized costs that we abandoned in the fourth quarter. That again typically occurs ratably but with our lower stock price things may have penciled with a higher stock price didn’t pencil with a $100 stock price, so we walked away from some deals. And then the other item if you look at we’re pretty transparent on what we take in G&A and allocate back to the properties in the form of management fees. That covers our some of our IT costs, HR and our regional portfolio managers.

If you look at what we do compared to our peers we’re only allocating at 1.5%. Over time, I see as we continue to add technology and other resources in the corporate office that the properties will benefit from to increase that over time. So in 2008 I think we can operate at the same level of G&A that we incurred in 2007, but it will occur ratably over the four quarters rather than all in the fourth quarter.

Paula Poskin - Robert W. Baird

That’s helpful thank you. Can you talk also about any trend differentiation you’re seeing across the markets in terms of the reasons for move out aside to home ownership?

Michael Schall

We’ve studied that a bit. I don’t see any huge trends that have really emerged that are helping us. I mentioned home purchases; we track military exposure in San Diego, we track bullet employees, we track lots of different things, there’s nothing that you can really say “Oh G” this is an overriding factor that is having a dramatic impact on us. I don’t think that we see a change really in the business, the same dynamics continue that have continued last year, we’re still pretty strong in Seattle, in Northern California; Southern California has more moving parts. We track what’s going in Amgen for example, I don’t know what’s going to happen to Countrywide, that becomes a question mark for us. I don’t see any discernable patterns that are going to have and I can just say “hey this is a new thing that’s happening out here that’s going to have significant impact on the portfolio.” I just haven’t seen that.

Paula Poskin - Robert W. Baird

Okay, and on some of the later stage development projects. Are you pleased or surprised by it in any way by the amount of pre-leasing activity that you’re seeing?

Keith Guericke

So far the only one that’s actually at pre leasing activity that’s open is the deal in Seattle. It’s very, very strong.

Paula Poskin - Robert W. Baird

Better than what you would’ve expected

Keith Guericke

Yes

Paula Poskin - Robert W. Baird

Lastly, I can’t let the save the polar bears comment go by.

Michael Dance

It was a little tongue in cheek.

Paula Poskin - Robert W. Baird

I loved it, it was great. I love to hear about what some of those efforts are in terms of helping label the company more green friendly.

Michael Dance

First off, let me give the reasons in a little bit more detail. Every city at least in California and the State of Washington in an agency that we deal with that gives entitlements has jumped on that band wagon big time. It’s really important for everyone to go in that direction because you’re going to be forced there in any event. We’re trying to be a little had that occurred. This has only really occurred in the last six to nine months for the velocity it has. It’s the reality we’re having to deal with, we’re embracing it.

As far as specifically what we’re doing, the practices in the field that you apply when you're doing the drawings that you can change to be more green than not, are really adapting your protocol more than you are actually spending money on anything. For the lack of better words, spinning it in the right direction. We have an internal guy, he’s just about to be league certified and he’s building green about to be certified so we’re following it in into the greenest revenue neutral, we’re doing everything possible into the degree that it's an active system, it costs money and we’re evaluating case by case.

But I think by the end of this year everything you’ll see we come out on the marketing side on the new developments will take that to heart. In those of you that have kids in their early twenties, you know what’s happening. it’s a total different look they perceive the green issues, than maybe some people who are old like myself, we think it's going to be a good marketing thing too.

Paula Poskin - Robert W. Baird

Thanks very much.

Operator

Your next question comes from the line of Michael Salinsky of RBC Capital Markets. Please proceed.

Michael Salinsky- RBC Capital Markets

Good morning guys. Keith in your opening comments, when you’re talking about cap rates. I thought you had mentioned something that you expect a transaction activity to pick up in the later part of the year. What do you think is the driver behind that?

Keith Guericke

I’m not sure but basically in preparation for the call I talked to - we have acquisition people in each of our markets. I talked to all of them, and they all see significant numbers of new listings hitting the marketplace which is factual. The types of things that are being listed are from many different sources, so I suspect there’s those who have a fear of what’s going to happen in the future and they’re looking for an exit. I suspect there are a number of fund assets that are owned out there that have an IRR clock ticking so if they could get out now and turn the clock off that’s beneficial to them. But I don’t think that there’s any one reason driving what’s going on.

Michael Salinsky - RBC Capital Markets

Okay. Second. You took the impairment charge in Sherman Oaks and you also stopped capitalizing a number of projects there at the end of the third quarter. Is there any further risk for an impairment charge or expenses or anything like that?

Keith Guericke

Our bases on these are still pretty attractive, so it doesn’t - meaning that our total cost invested is a very modest amount, so we see them as land held, all well-located. They’re close to other assets and markets that we track and follow. So I think it’s just a matter of either seeing further declines in construction costs or recovery in the housing market. And basically, just keep it on the balance sheet because there will be a time where we can get significant return from it, just not right now.

Michael Salinsky - RBC Capital Markets

Okay. And finally in your comments you mentioned that with the Yardi rollout and the YieldStar optimizer there that you’re rolling out, you had 17 properties. Can you talk about the performance of those 17 properties versus those of your core portfolio?

Keith Guericke

We track it internally. We pick properties that are across the street from, or down the street from other non-YieldStar properties. We’ve conducted the price optimizer tests over probably better than a year now. So, big picture, they would tell you, the industry would tell you, or the marketers of those pieces of software would tell you that 2-3% revenue pickup. I would guess that - we haven’t factored that in, we think that’s probably a little aggressive, but we certainly think that 1-2% is definitely feasible. It just does a superior job of understanding by unit type the dynamics of both your inventory and your current vacancy occupancy situation. So there is definitely some advantage there. We’re thinking it’s 1-2%.

Michael Salinsky - RBC Capital Markets

Okay. Then I think you’d mentioned too you had a transaction you were looking at in the first quarter of the year. On that, in your full-year guidance, I think it says 100 million. Is there upside to that? Am I reading that correctly?

Keith Guericke

You’re talking about on the acquisition side?

Michael Salinsky - RBC Capital Markets

On the acquisition side, correct.

Keith Guericke

That is a fairly small transaction. It’s about a $20 million transaction. Again, it’s a matter of cost of capital with other alternatives and opportunities we have. Given our share price, etcetera, I think we’re going to look at spreading our dollars between share buy back acquisitions and development, whichever is going to give us the greatest returns. Right now that’s how we’ve allocated - we think that’s what’s going to happen for the year. But if things change during the year obviously we can change those allocations fairly quickly.

Michael Salinsky - RBC Capital Markets

Okay. Thanks guys.

Operator

And your final question comes from the line of Bill Crow of Raymond James. Please proceed.

William Crow - Raymond James Financial Inc.

Good morning guys. People generalize and say that half of your portfolio is within Southern California and that’s getting painted with an ugly brush these days. If you were to rate Southern California between the good markets, let’s call it west LA, and the really bad markets, Inland Empire, at the other extreme, and maybe in between is San Diego, what percentage in Southern California are in good markets as you look to 2008? What percentage is in bad markets?

Keith Guericke

Looking at our portfolio, you mean?

William Crow - Raymond James Financial Inc.

Your portfolio.

Keith Guericke

Well, there’s a breakdown of units on S-8, for example, so I’ll use that as a guide. Ventura County looks pretty tough. And actually there’s some other data in here that gives you the market rent forecast, which is flat in that market. So Ventura I would say is flat. LA County I’d say our properties are two thirds roughly - I’m pulling this off the top of my head - two thirds strong, maybe one third not strong. The one third not strong would be the Woodland Hills area; more the Pasadena area has some lease up activity.

Those would represent - maybe it’s not correct, maybe it’s 75%, 25%, that’s probably it, 75, 25 maybe. Orange County - North Orange is stronger than South Orange. I’d say we’ve got some properties in the beach communities which are strong, so I’d say we are probably two thirds good Orange County, two thirds to three quarters good, maybe one quarter not so good. San Diego County, I think is kind of all. I think all is pretty similar. I don’t think there’s more of a good-bad part of San Diego County. And then you just have pieces in others. Riverside County, that I would say is all not good. All of Riverside County is not good. All of Santa Barbara County is good. That’s only 200 units. Anyone else want to comment on that? No.

William Crow - Raymond James Financial Inc.

That’s all. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now disconnect. Good day.

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