Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

BRE Properties, Inc.

Q2 2008 Earnings Call

July 29, 2008 11:00 am ET

Executives

Constance Moore – President and CEO

Edward Lange Jr. – Executive Vice President and COO

Henry Hirvela – Executive VP and CFO

Analysts

Dustin Pizzo – Banc of America Securities LLC

Michael Bilerman – Citigroup Inc.

Christine Kim – Deutsche Bank Securities Inc.

Jonathan Habermann – Goldman Sachs & Co.

Karin Ford – KeyBanc Capital Markets

William Acheson – Benchmark Capital Markets

Rob Stevenson – Fox-Pitt, Kelton

Richard Anderson – BMO Capital Markets Corp.

Alexander Goldfarb – UBS Investment Bank

Jeffrey Donnelly – Wachovia Securities LLC

Stephen Swett – Keefe Bruyette & Woods, Inc.

[Ben Lenz] – LaSalle

[Hendel Sanjas] – Green Street Advisors

Operator

Welcome to the BRE Property second quarter 2008 earnings conference call. (Operator Instructions) I will now turn the call over to Constance Moore, President and Chief Executive Officer.

Constance Moore

Thank you for joining BRE’s second quarter earnings call for 2008. If you’re joining us on the Internet today, please feel free to email your questions to askbre@brepoperties.com at any time during this morning’s call.

Before we begin our conversation, I’d like to remind our listeners that our 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 represent BRE’s performance and prospects given everything that we know today. But when we use words like expectations, projections, or outlook, we are using forward-looking statements which by their very nature are subject to risk and uncertainties. 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.

During the call this morning, management’s commentary will cover our operating results, our investment activities, and our financial reporting. Today, Ed and I will be joined Henry Hirvela, our new Chief Financial Officer. Many of you met Henry during REIT Week in New York in June, and we look forward to introducing him to the rest of you over the next several months. We are so pleased that Henry has joined the Executive Team and are confident that he will accelerate many of the internal initiatives we have been working on. The three of us will provide commentary and then we will be available for Q&A.

Let me start with our second quarter results and the key takeaways as I see it for the quarter. Results for the quarter in the first half of the year met and actually slightly exceeded our expectations. However, the economic backdrop matches the concerns we expressed at the start of the year, essentially fairly decent resilience during the first six months giving way to a more recessionary pattern in the second half. While we do not expect modest… Well excuse me, while we do expect modest deceleration in the second half of the year, we remain on track as it relates to earnings guidance.

FFO was reported at $0.70 per share for the quarter and $1.38 year-to-date. Against our internal expectations, same store results are on top of targeted performance; and we picked up a couple of cents per share in the form of lower interest expense and G&A costs. Same-store NOI growth is running at 4%. Market rent and revenue growth are both running at the same level.

As reported in the earnings release and supplements, we have positive operating conditions in San Francisco, San Diego, and Seattle. Year-to-date, revenue growth in these markets has ranged between 6% to 8%. Not surprisingly, operating markets with the greatest exposure to job losses and single-family housing, specifically the Inland Empire, Los Angeles, and Orange County have posted weaker year-over-year results. Market rent and revenue growth in these markets is flat to up 2%.

The only market with materially weaker results relative to our own expectations at the start of the year is Los Angeles as growth in the entertainment industry has not materialized this year. The writer strike and unresolved actor negotiations have affectively stalled out the market leaving job losses in the other areas of the local economy uncheck.

Development leasing is preceding well and our current construction estimates relative to cost and schedule remain on target.

Ed and Henry will discuss same-store operations and financial topics, so I will continue with our investment activities. At the end of the quarter, we had six properties classified as held-for-sale, four communities in Sacramento, one in Seattle, and one in the Bay area. Subsequent to the close of the quarter, we sold one of the communities in Sacramento, Pinnacle at Blue Ravine, which we acquired from a joint venture partner in 2002. This property totaled 260 units and is actually located in Folsom. It closed mid July at a sale price of $40 million and we will record a gain on the sale of $8.5 million. The transaction cap rate was 6% and our internal return rate of return on this asset was 9.5%. Proceeds were used to pay down our floating rate debt, and again the transaction will be recognized during the third quarter.

It continues to be a difficult environment for institutionally driven property sales; however, Sacramento is not a targeted institutional market. Private buyers continue to be fairly active and are using both Fannie and Freddie Mac for debt and deals are getting closed. We have other properties under contract to sale with closing dates spread across the second half of this year, but we will not elaborate until we get to closing. We continue to expect that proceeds from property sales this year will range between $150 and $200 million.

Market cap rates continue to move upwards, but certainly not at an alarming rate. Based on the transactional data we have seen, the composite cap rate for our portfolio has moved about 65 basis points year-over-year. If you look at our supplement on Page 16 in the NAV exhibit, you will note the adjustments we’ve made. Coastal California cap rates range between the mid 4s to the high 5s, depending on location and quality. Cap rates in Seattle have a fairly wide range at 4.75%to 6% driven by submarket locations, age, and the quality of the asset. Sacramento and Phoenix cap rates appear to be priced in the mid 5s to 6.5% at the upper end. Based on what we were seeing, the Company’s current composite cap rate ranges between 5% to 5.75%, with a weighted average of 5.35%.

Turning to our development activities, there’s no material news to report with development program. Cost and schedules remain consistent with our reporting last quarter. Our three properties in lease-up, Emeryville, Pasadena, and Orange continue to make progress. Emeryville, which is 224 units, achieved physical stabilization during the quarter and is currently 95% occupied and we are burning of the leasing concession. Pasadena, which is 188 units, is currently 96% leased and we will begin burning off concessions. Orange continues to lease very well, but this is a large community with 460 units. We are 87% leased and traffic levels remain robust, averaging more than 110 per month, and interest in the community is high. We are now targeting a September/October timeframe for physical stabilization, which is about 60 to 90 days ahead of our plan.

The four ongoing construction sites, 5600 Wilshire, Anaheim, and our two sites in Seattle are progressing very well. These four properties represent almost 1,100 units. The balance to complete construction totals $117 million, which will be advanced over the next 12 to 15 months. Unit deliveries for our 5600 Wilshire community remain targeted for late September/early October. The unit deliveries of the other three sites, Park Viridian in Anaheim, and our two Seattle properties, Taylor 28 and Belcarra, will spread over 2009. There has been no changes to estimates for costs or schedule.

During the quarter, we started construction in our Santa Clara site totaling 271 units. This is a great site in a very strong Silicon Valley market. In our reporting, the community has been moved from land-owned to construction in progress. The cost estimate has been increased $3 million to $89.7 million or approximately $330,000 per unit. Most of the increase is associated with scope changes imposed by the city with respect to water and sewer lines and storm drainage. Land costs at this site are 14% of the total investment and we do expect first deliveries in the mid 2010.

We have moved the construction start out for our Mercer site in Seattle out to the first half of 2009, which reflects our plans to begin the buyout of this job in the first quarter of 2009. We are starting to see a slowing in construction in this market and the delay may prove beneficial. We’re also considering site-related scope changes that require additional time to work through.

With respect to our development site in L.A., [inaudible], we have amended our reporting to reflect the current entitlements that run with the land, approximately 470 units and 400,000 square feet of retail. When we acquired this site last year, we reported that we were pursuing two options with the site, one option would follow the underlying entitlements as reflected in our reporting, the other option would increase the density on the sites and require a use of a mid life product. Entitlements are currently in process and we are considering several variations of both options. There should be some clarity with respect to development scope during the next six months.

The option reflected in our reporting involves the use of a podium product, four to five levels of residential over two levels of parking and stick framed construction, very similar to our 5600 Wilshire site five blocks away. The current yield on current rents and costs is about 6% and the trend of stabilized return is projected to range between 7% and 7.25%. Anything we pursue as an alternative to this option would require a return premium above these estimates. I am personally very pleased with the progress we have made in working with the surrounding neighborhoods and the city leadership and look forward to finalizing our plans prior to year end.

Before handing the call over to Ed, let me just summarize by saying we adjusted our earnings outlook for the year by tightening our FSO guidance to a range of 275 to 282 per share. Earnings per share guidance has been adjusted to a range of $1.35 to $1.42, which reflects the gain on sale we will book in the third quarter that I mentioned earlier.

Our expectations continue to reflect our views outlined at the start of the year. Certain metro markets will enjoy relatively positive fundamentals, specifically San Francisco, San Diego, and Seattle. At the start of the year, our L.A. portfolio also demonstrated resilience, but has subsequently given way to the tough economic environment. Declining job growth and competition from single-family housing continue to impact Orange County, the Inland Empire, Sacramento, and Phoenix. We felt that the negative economic factors would be offset by a reversal in home ownership levels and improving demographics combining to increase propensity to rent levels. That’s exactly what we’re seeing, good traffic levels, high interest rent housing, but not great pricing power.

When we kicked off 2008, we indicated this would be a challenging year and set a pretty wide guidance range that considered modest job growth at the high end, an abrupt and painful mid year economic contraction across the board at the low end. We expect to experience some year-over-year deceleration during the second half, but certainly remain on course as it relates to full year guidance. The adjusted guidance heightens the range around the original mid points, reflecting expected same-store NOI growth in a range of 3.5% to 4.5%. No material change to the interest rate environment for the balance of the year and the timing of the business dispositions that has weighed more towards the end of the year.

Finally before turning it over to Ed, I want to congratulate Ed on his appointment to BRE’s Board of Directors. For the past several years, we’ve only had one member of management on the Board, but it became increasingly clear to the Board that it was time to acknowledge Ed’s many contributions to BRE during the last eight years, as well as his leadership in providing strategic direction on BRE’s many initiatives. I know I speak for the full Board and management when I say, “I look forward to working with him as a fellow Board member, and I know that he will continue to push BRE to greatness.”

Okay, Ed, your turn.

Edward Lange Jr.

It’s an honor to join the Board and I very much appreciate the support that you and the Board have shown me. My thoughts over the last week have run to the associates and the business team leaders here at BRE and the terrific support that they’ve shown both of us over the last eight or nine years and how hard they’ve worked, and I think the disappointment is as much a reflection of that hard work as it is the honor that you bestowed on me, so I very much appreciate it and thank you.

Before I get into my comments about the quarter, just a quick note, we had an earth quake yesterday in Southern California. The epicentre was in Chino Hills., which is about 47 miles southeast of Los Angeles in the Inland Empire, 5.8 on the Richter Scale. I think probably everybody heard it on the news. We didn’t have any damage, just wanted to report that no injuries with our residents or employees. We did a thorough property inspection in the affected areas. It was 5.8 will be a bit of a rock and roll so that we had some art fall of the walls; we got some water leaks, some pipes broke, and we got some cracks in the sheetrock, but otherwise the buildings are all in good shape.

So as Connie indicated, we’re fairly pleased with the operating performance relative to the economic backdrop. It’s pretty much what we expected, tough operating environment. In markets where we have job growth, Seattle and San Francisco, the absence of wage growth is making it increasingly difficult to push rents. We’re getting it done, but it’s a grind.

In other markets where there are job losses and job losses have mounted and single-family housing is competing, there’s traffic but it’s pretty beat up credit-wise. The misery factor is fairly high job losses are concerned, inflation where it hurts with food and gas, and not a lot of confidence in a growing economy. The short, where we have pricing power, we continue to exercise but cautiously, and where we don’t have pricing power, we’ve taken a defensive posture, [inaudible] for occupancy.

So let’s talk about the two factors that are affecting. I’ll start with jobs. Composite year-over-year job growth levels for our markets came at essentially flat, down by about 0.3% for the quarter and down a half point for June. Seattle still has 2% job growth, but Washington Mutual has announced a 12,000 job cuts and other small software shops are starting to cut back. So that figure may be challenged by the end of the year.

The San Francisco MSA came in about, came in up 0.4% for the quarter but down 0.2% for June. Interesting here is that more than 1%, there’s more than 1% job growth in San Francisco proper. San Jose is flat, but open fell almost 2% because of heavy construction losses. The Inland Empire and Orange County and both down almost 2%. San Diego job numbers are basically flat for the quarter with construction losses taking the June number down almost a half a point. L.A. jobs are also down about a half point year-over-year.

The pattern remains consistent with last quarter, where there are job losses, the concentration is in construction and financial services. Professional services healthcare and education areas have added jobs. In most of our coastal markets, the absence of supply is proven to be a strong offset for the job loss or job weakness, but the lack of wage growth and high inflation started to take a toll. Again, the only market that is materially softer than our expectations at the start of the year is Los Angeles. Everything else was contemplated and captured in our original range of expectations.

On the housing front, the recent market information is interesting. No, we’re not making a market call and the housing situation is still fairly crazy, but some of the sequential data is interesting relating to foreclosure and unsold inventory. In the Inland Empire, Sacramento, and Phoenix, the unsold inventory figures are now less than 12 months. Nine months in the Inland Empire in Phoenix and five months in Sacramento, isn’t down from a 10 to 18 month on average last quarter.

Foreclosures are still very high on a year-to-year basis but have dropped sequentially. Inland Empire, there were 5,000 foreclosures during the second quarter, down from 7,700 in the first quarter. In Sacramento, the level of foreclosures dropped from 3,100 in the first quarter to 1,700 in the second quarter. In Phoenix, there 4,800 foreclosures in the first quarter, that dropped to 3,500 in the second quarter.

There’s still way too much inventory in these markets and we’re far from any form of recovery. However if we see this trend continue into the third quarter, it could indicate that some of the inventory is beginning to clear and the pace of foreclosures could be slowing. Like I said, not a market call, but it is an interesting piece of information.

Now let’s move to our operating metrics. Physical occupancy during the second quarter averaged 94.3% across the portfolio; and that’s where we ended the quarter, is consistent with our first quarter levels and where we were a year ago. L.A., the Inland Empire, and Orange County were all running 93.5% to 94%. San Francisco, San Diego, and Seattle are running at or above 95%. Market rents up almost 4.5% year-over-year, averaging 14.95 across the same-store portfolio. Sequential market rents are up 1.4% from the first quarter, pretty much as planned. We have to push [inaudible] in the second quarter, but the balance of the leasing season, essentially the third quarter is going to be tough going, especially in So Cal; and this is reflected in our revised guidance.

Traffic overall is running consistent with 2007 levels, slightly ahead of our expectations. We’re attracting a sufficient level of traffic to lease from, but some of the credit issues can’t be ignored. We do ignore foreclosures and we allow second signers, but the incoming credit quality have to be there. Down the road, the higher propensity to rent levels will definitely drive renewed pricing power, but right now the higher traffic levels are offset by the weakness in the credit quality.

Concessions remain very low in the same-store portfolio, running at 4 days rent similar to last year. The level of concessions may increase, though not materially as we move through the balance of the year as we take a more defensive posture in Southern California. Lease-up properties use concessions to maintain leasing velocity and then we drop the concessions once we physically stabilize the offset.

At Pasadena, Emeryville, we used up the four-week concession during the leasing process and have started to burn them off. In Orange, we’ve used four to six weeks of concessions in response to the generally tougher market conditions there and the near-term supply in the Platinum Triangle, where the community is located.

Resident turnover is running about 64% at the moment, down from 68% last year. And other San Diego, no market is running higher than 70%. The trends we noted last quarter still apply. Renewals are running greater than 60%, obviously move outs from home purchases have declined and residents are hunkering down during this tough cycle. We’ll probably see our average length of stay move out during the next year or so, which will help turnover expense. Our turnover related expense is down from a year ago both in volume of turnover activity and a modest reduction in the cost return.

So overall, like the job we’re doing with operations this year. Each market has a certain challenge that requires a different response. In general, the relationship between occupancy pricing and concessions is quite good heading into the second half of the year. Our 30-day available metric, which is vacancy and scheduled move outs, is running at 7% across the same-store pool, which combined with our other metrics tell us that we remain appropriately priced.

Like to add a little bit of color on the subject of our land site in Los Angeles, the Wilshire La Brea site: I think as Connie reported very well, the entitlement process remains ongoing. No decisions with respect to density have been reached and we continue to process a larger program, 560 to 600 units, that would be a mid-rise half for the block and a wrap product for the balance. We’ve changed our reporting to depict what’s currently entitled with the site and why we acquired the land, essentially our baseline assumptions.

There’s two considerations with a larger program. One, a larger program with that level of density may meet resistance with respect to scale. It also requires steel for construction of the mid-rise, and steel is up more than 40% over the last nine months. January 1, California adopted a new law that requires the use of heavy gauge steel for all types of construction. Prior to January of this year, a mid-rise construction would not have required heavy gauge steel. So those are two pretty big considerations as we move forward with this process.

The project configuration may move around, as Connie reported, as we proceed with the community in the city. So we brought our reporting back to the baseline, basically what we can do and what does that look like. It’s 470 units, 40,000 square feet of retail. As Connie reported, it’s a podium product, five levels of residential, over two levels of parking, very similar to our 5600 Wilshire site which is only five blocks away, which we’re currently completing. The structure will be about 440,000 square feet, and the retails about 10% of that structure and 20% of the parking.

If the cost held, the residential cost per unit would be about $565,000 a unit, which is up 20% from the 5600 Wilshire site five blocks away, and is a pretty good indication of cost increases that have incurred to building materials and labor over the last two to three years. Retail rent in that area, along the Miracle Mile, where 5600 Wilshire is located are running in a range of $450 to $550 a month. We’re in the process of beginning our retail leasing of 5600 Wilshire right now and we expect to be at the high end of that range. Our underwriting for La Brea uses a $426 to a $450 per month per rate for the retail, so pretty conservative on the retail underwriting. I think if you kind of work through the math, the retail more than supports itself.

The unit mix will, if we go with the scheme, the unit mix would overweight the use of studies and ones. Current rents are running about $2,900 to $3,000 a unit, on average, with comparable assets, with a heavy mix of ones. The rents are currently running about $4 a foot in that market. We would expect to deliver units on this property second half or toward the end of 2012, so this is really affectively a 2012/2013 lease-up.

So with adjusted trending for the current economic conditions in ’08 and ’09, but more normalized trending for ’10 through ’12, in our operating margins that candidly run on new products, 75% to 80%, we pretty easily get to return on this property, a trended return north of 7%, somewhere in the 7%, 7.25% range. So in our view, anything larger that it adds complexity to risk, like the use of steel, has to really deliver return materially above that baseline.

So I hope that adds a little bit of color to what we’ve done with that report, and we feel obviously very comfortable with the market. The scale of the property matches the market very, very well along the Wilshire corridor. The product, which is the podium product, is something we do very day, so very comfortable with it. Excuse me, the product acceptance, I think the product that we’ve been building the several years is one huge acceptance by the Gen Y cohorts. I think the evidence of our leasing activities at Orange and Pasadena and Avenue 64 I think support that and our operating margins. We typically… We’re running 71/72% across the same store pool. Our new product, especially in Southern California, runs in the 75 to 80% area, so we feel very strong about our ability to deliver on those operating margins. So we’re left with the external conditions, jobs, wage growth, household formations, and supply and I’ll just remind everyone that from ’96 to ’06, the Los Angeles market delivered average annual market rent growth just shy of 8%. So obviously we feel very strongly about the market that we’re building this product in.

So I hope that provides a little bit of color. In general, good quarter, good first half, no real surprises, and it’s a real pleasure to turn the call over to Henry to provide some comments on the financial reporting.

Henry Hirvela

It’s a real pleasure to join the BRE Team and it’s great to have an inaugural earnings call with solid earnings and no material items to report for the quarter. There were only a few items I wanted to cover in my remarks this morning. First off, in the year-over year reporting in other income, we reported $1.2 million, other income year-to-date for 2008, which is down $4.2 million from ’07. Just wanted to note that the ’07 income included non-routine amounts from a litigation settlement of about $1.9 million and interest income from short-term of investments of proceeds from our debt issuance in March of ’07.

Turning to corporate G&A expense, G&A expense came in at $10 million year-to-date, which is up 5% from 2007. The results this year are consistent with our expectations and the annual increase is a result of additional staffing, increased expense for incentive stock compensation, and legal expense. Full year G&A expense is expected to come in at the lower end of our guidance range set at the start of this year of $20 to $22 million.

Interest expense year-to-date is running better than we guided at the beginning of the year; all balance sheet items and borrowings are in line with our expectations, and floating rate interest expenses benefited from the settle reserve actions that were taken earlier this year. Accelerated development completions and reduced construction advances may reduce our capitalized interest, which will partially offset the lower borrowing rates.

Overall, we expect interest expense to be in line with expectations set at the state of the year and those expectations were $82 to $85 million. .

Now I’d like to turn the call back over to Connie.

Constance Moore

We’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dustin Pizzo of Banc of America Securities.

Dustin Pizzo – Banc of America Securities LLC

I guess Connie or Ed, can you just talk a bit about the ’09 supply picture in Seattle and your thoughts on the impact it may have on the lease-up of your two projects as they come on line next year, if any.

Constance Moore

Well, I think, and Ed can speak probably more to some of the specifics. I think ’09 actually doesn’t look as challenging probably as ‘010. I think there’ll be a big supply issue in ‘010, and obviously we will be contributing to that with our project up there as well. But we’re clearly mindful of the number of new construction both on condos and some of which will revert to rentals and then of course the rentals as well. So I don’t know if you want to add anything to that, Ed.

Edward Lange Jr.

No, I think that covers it. I think Connie’s right, the supply picture becomes a little bit more of a topic in 2010. I think to look at what’s been going on with leasing of new product in Seattle and Belleview, one of our peers just opened up the doors on a new podium product in Belleview and they took a very aggressive leasing strategy, offering almost up to two months free, two months of concession during the initial stages of the lease-up. I think once they got to a certain point in their leasing, they basically brought that back to a month. So I think you’re gong to see more aggressive leasing strategies as people try to get out in front of the supply issue, and I think that strategy worked well for them.

Connie Moore

I think right now, if Seattle continues to have the level of job add, I think that will mute some of the challenges with the supply; but it’s something that we’re watching very closely.

Dustin Pizzo – Banc of America Securities LLC

Then I may have missed it in your discussion when you were talking about developments, but have there been any changes to your, just underwriting yield given the continued upward move in cap rate assumptions, or they still pretty consistent with the changes you outlined last quarter?

Edward Lange Jr.

I think as we indicated last quarter, we’ve moved for new properties or new sites that we would be sourcing, we’ve moved our return thresholds up about 75 basis points so that in rough terms, I think something coming through the door today would have to have a current yield on current costs and rents of about 6.5% and we would be looking for a trend to stabilize return up in the 7.75% region.

For that to occur, we’re going to have to see either land prices moderator or we’ve going to have to see a spike in rents or we’re going to have to see building materials and labor costs come back down or a combination of the three, so we’ve moved up our return thresholds.

Operator

Your next question comes from the line of Michael Bilerman of Citigroup.

Michael Bilerman – Citigroup Inc.

This is David Doty here with Michael. A couple of questions, just to follow-up on the development pipeline: If construction costs are rising significantly and there’s some pressure from the utility and tax side, how are your current yields on development is not changing in the light of a weaker tenant environment. Are you still able to push these things through?

Edward Lange Jr.

You’re voice kind of went in and out a little bit. When we underwrite a deal, when a deal is sourced, there’s a level of cost escalation that’s built into our estimates. I want to back-up for a second and it’s a point that Connie has hit on many calls that is very critical to our business model. Because the length of time it takes to entitle a site in a California, it can take up to three years to take a non-entitled piece of dirt and turn it into an entitled piece of property, we have to trend. It’s just one of the basics of developing out here. So that when source and do our initial underwriting, so whether it’s us or any of our competitors, we will build into the, essentially there’s two contingencies. There’s a contingency or reserve that we’ll place into the underwriting for cost escalation as it relates to building materials and labor and we’ll also do normal contingency management so that as the costs are pushed through and there have been rising costs, most of it and I think in the current pipeline you can say that most of the cost escalation has been met by our escalation in the underwriting.

Constance Moore

Yes, I think to Ed’s point, I mean I think where we got caught, like I think a lot of people, when cost started escalating at sort of 1.5% a month, no one sort of factored those into their deals in the earlier days and so contingency management is something that we focus on a great deal here. So as Ed said, those are sort of factored into the number, so there’s two components of our underwriting. We’re looking at current returns and then we’re looking at trended returns. As Ed said, in terms of anything new that’s going to be put onto the pipeline list going forward, anything new has got to have a current return of about 6.5%; and that will trend based on the underwriting that we just talked about to 7.5%/7.75%.

Edward Lange Jr.

I think as it relates to trending of market rents, we’re always mindful when we’re in a tough economic climate that we’ve got to throttle back on the trending to reflect that, but I think over the long-term, our market rent trending has been pretty much spot on. We’ve got the benefit that we’re building in Northern California, Southern California, and Seattle; and when you look at those markets over a long period of time, so really almost any ten-year snapshot that we take when we do our modeling, average annual market rent growth, I mean in Seattle is at 5%, but all of the other markets that we operate in in San Francisco, Orange County, Los Angeles where we’re building, you’re talking about market, average annual market rent growth well above 5%. So the 5% trending number that we use in a normalized climate has held up very, very well. Obviously right now everything that we’re looking at we’re assuming what our expectations are for ’08 get translated right into the underwriting. It also muted expectations for 2009, which we’re probably not going into today, but those expectations get brought into the underwriting, but then we would bring it back up to a normalized level after that point.

Constance Moore

But I think the key is that when we talk about a normalized level that we don’t also project spikes in rents. As you can see, we’ve seen spikes in rents in markets, so in our underwriting, we cap the trending at 5%. So as Ed said, when we look at, when we’re opening the doors on a new product and we look at our market rents when we’re opening the doors compared to what we underwrote in our trended rents, we’re generally spot on which gives us a great deal of comfort in terms of our ability to sort of say, “On a normalized basis, let’s use 5%. Some years are going to be better, some years are going to be worse. But if we look at again the length of time from the time we initially identify a site to the time it’s leasing, it’s probably five to six years before we’re opening the doors and so that’s a great deal of time in terms of the number of economic cycles that we can have gone through.” So 5% has generally worked pretty well for us.

Michael Bilerman – Citigroup Inc.

Connie, I have one follow-up question for you. I know you can’t provide any detail with regard to the acquisitions, or I’m sorry, the disposition program that’s currently in place, but could you talk a little bit about the climate relative to potential buyers, their appetite, any gap in their expectations in your market?

Constance Moore

Well, I think, and welcome to the team, David, by the way. I think as we’ve talked about, the bulk of our dispositions are in our Seattle market, or excuse me, our Sacramento market, (Not selling Seattle, that’s not a headline, not selling.) in our Sacramento market. As I mentioned in my commentary, Sacramento is not an institutional market. There’s generally not been an institutional bid there. While we used to think that that was a negative, I think in this environment it’s actually turning out to be a positive. It tends to be a private buyer market. They have historically used both Fannie and Freddie. They continue to use Fannie and Freddie, and deals are getting done. So I think there’s no question that the cap rate has moved up. The cap rate on the deal that we just talked about was at a six. I think last year, Ed, our deals were at a 5.5, the two deals that we sold in Sacramento.

Edward Lange Jr.

That’s correct.

Constance Moore

Yes, so there’s no question that cap rates have moved up in that market. Obviously that’s a reflection of the increased interest rates for both Fannie and Freddie as well. I don’t think that there’s a gap. I think that the private players in that market understand that while it for a company like a BRE, it’s more of a commodity-type market where it’s got sort of 3% to 4% market rent growth.

For a private buyer that sort of does these plug deals, I mean our buyers are exactly what you might expect. They’re local players. They’re doctors. They’re dentists. They’re people who own large companies that want to diversify family wealth, and that’s really sort of, it’s what we expected and it’s what we’re getting. So we always talked about the sales in the last half of the year. We closed obviously this month, but I feel comfortable with the closing that we’ll have between now and year end.

Operator

Your next question comes from the line of Christine Kim Deutsche Bank.

Christine Kim – Deutsche Bank Securities Inc.

Connie, you mentioned that you’re seeing more of a recessionary-type pattern in the second half, and I’m just wondering, does that only translate into weaker pricing power, or are you expecting occupancy to slip a little going into the second half?

Connie Moore

Well, I think as Ed said, and I’ll let him elaborate on this, I think we do think it’s more reflective of our ability to have pushed pricing. We’re still getting relatively strong traffic and we’re really sort of, as Ed said, starving for occupancy. But do you want to talk bout some the stuff that we’re doing?

Edward Lange Jr.

Yes, Christine. I think at the start of the year we described our kind of expectation for the year is that we may not technically get into a recession nationally or in our regional economies, but it might feel like one. I think that’s probably holding up pretty well. What we’re doing is we are in Southern California, when I say that we have, that we are starving for occupancy, if you take a look at our Southern California portfolio, 94% occupied and we’ve had about 2%/2.5% market rent growth in Los Angeles and Orange County; but when you did a little bit deeper, our level of concessions are essentially non-existent, especially in Orange County. If I wish Orange County as a profile for a second, concessions are less than two days rent. Level of late payments is very, very low, around a half point. I mean the national average is significantly higher than that, so that the condition, the quality of the rent role is really quite strong. So that what we’re going to probably going to see us do is probably move the concessions up, not materially but begin to move those concessions up a little bit in Southern California as a way to defend against weakening market conditions. So essentially the emphasis moves from pushing market rent growth and maximizing market rent growth to one of preserving or enhancing occupancy to preserve the revenue line. I hope that helps.

Christine Kim – Deutsche Bank Securities Inc.

It does. But given sort of all the things you spoke about in terms of inflation and gas and job losses, are you seeing more people double up or move home or anything like that?

Edward Lange Jr.

I don’t have hard data, but that is certainly from an anecdotal standpoint, that’s exactly what we’re hearing in Los Angeles, for example, that after the amount of time that it took to solve the writer strike for the entertainment industry, it was like more than 90 days and after 30 days or so, we began to see a growing number of lease terminations. You begin to see people doubling up, moving back home or, as we say, basically moving to the couch and not releasing from the couch until they get another job or it’s an call clear sign for the economy.

So if we take a look at Los Angeles, what seems to be emerging there is that the market never quite recovered from the writer’s strike and the job losses from the financial services side and construction side impacted the entire economy there and the entertainment industry didn’t grow at a level to offset those other job losses. With the actors guild not resolving their contracts with the studios, there’s a reluctance of people to release from the couch or release from doubling or tripling up for those households that come back into the multifamily rental pool.

Constance Moore

On the one hand, sort of for those of you listening on the call, talking about the writer strike and the actors guild in a market of 12 billion people might sound like: Aren’t we focusing on something very small, but when you think about the importance of entertainment to that market and the multiplier effect on the entertainment industry, when you think about writers and actors and then you think about makeup artists and set designers and costume designers, the multiplier effect is quite large and those people are renters. When they can’t sort of see where their check is coming from, they sort of freeze up and so they aren’t going to make a decision and they aren’t going to make changes or they’re going to move, as Ed said, back to the couch. So it is interesting, in such a large economy entertainment is so important to that economy, you can really see that multiplier effect and what’s happened over the beginning, first half of this year.

Operator

Your next question comes from the line of Jon Habermann of Goldman Sachs.

Jonathan Habermann – Goldman Sachs & Co.

This is Johan. I’m here with Jon Habermann. Just sort of going back to development, you mentioned expected yields and that’s sort of 6% to 6.5% range. Given the increasing challenges associated with sort of leasing up new space, do you feel that buying back stock could be an increasingly more effective use of capital at this point in the cycle?

Edward Lange Jr.

I think that’s a good question. It’s one that we’ve addressed many times over the past year, and I’ll just give your our view and I think you’ll find that it’s consistent with our past discussions as well. That buying back stock is certainly a consideration but not really relative to development but relative to property acquisitions. So that before we would buy a property onto the balance sheet, buying back the stock probably represents a better investment. I think early in a cycle, early in down cycle, there’s a lot of focus that gets brought to buying back shares. But when the economic down cycle goes from being short and shallow to something that’s a little bit more deeper and meaningful like the economic cycle with the financial crisis that we find ourselves in today, most companies then tend to lean toward capital preservation so that we will fund our construction pipeline before we will buy back stock. The returns on it and it’s accretion to shareholders over the long haul is a better investment than buying back stock and we simply can’t stop the construction that we’re involved in and it’s not, it doesn’t make economic sense for us to delay some of the properties that we have queued up to start construction given the strong markets that they are in, like a Seattle or a Santa Clara or Pasadena.

So the final consideration really is that as we buy property sales, as we sell properties and we increase the level of property dispositions, once we have sold a volume of property sufficient enough to meet our funding needs over the next two years, we would then use capital or consider capital in the next wave, excess capital, to buy back stock. I hope that helps.

Constance Moore

Yes, I think that’s right, but I would [inaudible] I think that excess capital today is having a strong balance sheet and is very precious and so we would think long and hard before we used excess capital today to buy back stock.

Jonathan Habermann – Goldman Sachs & Co.

Then just as a follow-up, can you comment a little bit about what you’ve been seeing in terms of leasing activities subsequent to the close of the quarter and whether you have seen, started to see sort of the impact from additional layoffs beginning to effect fundamentals in any of your markets?

Edward Lange Jr.

I couldn’t quite get most of that, but I think you asked: Could we provide color on our leasing activity after the end of the quarter? The leasing metrics that Connie gave you were current, as of this week so that’s about as far as we can go with that. It’s about as current as we can get. But I think in general, the traffic, and I think this is a point that Connie was making in her comments, was that we’re seeing robust traffic for the Orange site and the Platinum Triangle to be averaging 110 to 120 pieces of traffic a month. Our move-in velocity has been 45 to 50 units a month for the last several months. I mean we’re getting great leasing traffic. We’re hitting our move-in numbers. We’re hitting our leasing targets. That’s all proceeding very, very close to plan.

Operator

Your next question comes from the line of Karin Ford of KeyBanc Capital Markets.

Karin Ford – KeyBanc Capital Markets

Jonathan Habermann – Goldman Sachs & Co.

Question on your expectations in the back half of the year and maybe even a little but further. You said you’re expecting lower momentum in the second half of the year and have muted expectations for 2009. Do you have any guess as to where revenue growth might bottom in this cycle? I guess you guys were down about 6% in early ’03 and given the home ownership rate difference we have this go around probably not expecting to go that low. But do you have a sense for where things might bottom on the revenue growth side?

Edward Lange Jr.

Probably not something we’re going to address here. It’s a little earlier for us to be thinking about ’09. But I think the one thing we can address is that the current economic situation or climate or is much different than the one that we faced in ’02, ’03, or ’04. At that time, the Bay area was 35% of our net operating income, so more than a third of NOI, and we saw over a two/three-year period of time market rents in the Bay area collapse, depending upon where the footprint was, for any us or our competitors in a range of 25 to 35%. Market rents went back to almost ‘97/’98 levels. There were 300,000 jobs lost in the San Jose area. We lost 75,000 households. I mean the conditions right now are tough, but they [inaudible] apples-to-oranges compared to what happened in ’03.

Karin Ford – KeyBanc Capital Markets

My second question pertains to the development pipeline. Are you guys backfilling the pipeline with enough new starts that you’re going to be able to continue to capitalize your development overhead at the same time that you are today, or do you expect some of that to move into expensed overhead?

Constance Moore

Well, I think there’s two questions there. I mean we continue to look at new developments, and I think that as we said, we’ve moved up our return threshold so in a lot of ways it’s much tougher for the guys to keep adding to the pipeline, but we’re continuing to see transactions, and you may see additional deals come to the pipeline.

So we do feel comfortable that we will continue to do that. Should we not be able to do that, it would be imprudent for us not to look at our development overhead and sort of say, “All right, do we need to cut some of the overhead as opposed to just letting some of just to leak into the operating expenses? So if the pipeline shrinks, then so will development overhead.

Operator

Your next questions comes from the line of William Acheson of Benchmark.

William Acheson – Benchmark Capital Markets

I had a question on the Sacramento sale. You quoted a 9% IR there. I assume given your gain that that was unlevered?

Constance Moore

That was, it was 9.5%, Bill.

William Acheson – Benchmark Capital Markets

9.5%, okay.

Constance Moore

But to be clear, it was 9.5%.

William Acheson – Benchmark Capital Markets

Okay, 9.5%. Then the cap rate to the buyer was 6%. That kind of infers a fairly low required IRR on their part. Is there anything different about the way you’re measuring that cap rate and would have any intelligence on what the buyers IRR really was?

Constance Moore

Well first of all, Bill, that was our cap rate. We always talk about our cap rates so the buyer’s cap rate was actually lower than that because, as you know, in California, he would have a prop 13 adjustment.

William Acheson – Benchmark Capital Markets

Right, there you go.

Constance Moore

So he’s cap rate was actually lower than that.

William Acheson – Benchmark Capital Markets

So the IRRs here are really kind of lower than we’ve been looking at in the last several months.

Edward Lange Jr.

Well I think, Bill, there’s a couple things. That property was acquired. We acquired that property in 2002 out of a joint venture, so it was one of the original… It was one of the joint ventures that came out of the Trammell Crowe business combination in 1997, so we built that property, entered into a JV with a JV partner in 1999/2000. We bought out the JV partner in 2002 so that… I would say that that deal is not indicative. I think it’s not indicative of our typical buy long-term hold strategy where we would typically see the IRR up into the mid teens. But I think what it is a good example of is what can occur in a [inaudible] market where our going in cap rate in 2002 was a six. We grow the NOI yield up to about 7% over a five/six-year period of time and then sold the property at 6%. So that if you… Sacramento has a commodity-like characteristics to its NOI growth and the only way to make money in the commodity market is really on the buy, the sell, and using the cap rates. I think for us it’s a very good example of what can happen in a commodity-like market.

William Acheson – Benchmark Capital Markets

Then on San Francisco, sequentially you increased the lower end of the cap rate range by 75 basis points. Can you speak to transaction volume and what sort of bid spreads are going on in the market?

Constance Moore

It’s tough. That’s part of the problem with this. There’s just not a lot of visibility in transactions. There have not been a lot of transactions in the Bay Area. Now we’ve seen some of the Archstone has sold, but that’s been in the mid to low 4s.

Edward Lange Jr.

I think year-over-year, definitely that low trend has come up, and I think that when you look at the second quarter of ’07, cap rate really hadn’t started to move. I mean you were still dealing with a very low cap rate environment. It was really in the second half of ’07 you began to see the movement. There have been trades but in a couple deals in downtown San Francisco, some property that traded in the San Jose, a property that traded in Pleasanton. All of them in that mid 4% range, so that we feel pretty good about the 4.75%. I mean cap rate could be a touch lower if we wanted to get aggressive with it, but the 4.75% feels good as to low end.

Operator

Your next question comes from the line of Rod Stevenson of FPK.

Rob Stevenson – Fox-Pitt, Kelton

Ed, you were talking before about the leasing volume at some of the communities, what are you looking at these days in terms of either just the actual cost or the sort of year-over-year change in attracting new tenants?

Edward Lange Jr.

Actually that’s a great question, Rob. Actually our marketing dollars are down, but our channels of marketing have changed dramatically. We have eliminated all print advertising. Now I think that’s been a trend that’s been building across the industry and with us, but I think we’ve eliminated all print advertising, except for one-off properties where the makeup of the residents basically require it. So we’ve got some properties in South California that have a heavy ethnic diversity and they use print advertisings and that’s how they communicate. But on our new lease-ups in the bulk of our same-store pool, we are 100% Internet-driven now or Web-based with our marketing. So I think where we’ve helped or enhanced our traffic over the last year and a half is consistent with I think the rest of the industry and that is the development of a better presence on some of the search engines like Google and Yahoo, maximizing the independent or the independent leasing services, like a rent.com or a mynewplace.com, so using those ILS to drive traffic to our sites. But our property websites are ability to look at property online, look at inventory, look at pricing. Right now almost 50% of our traffic is driven from the Internet into our call center, that’s a 24/7 call center, and then there’s another almost 20%/30% that’s indirect, meaning that somebody has done the legwork themselves to short list a property. The bottom line is the traffic that’s showing up on site is a much better quality traffic from the standpoint of looking to make a deal. So traffic volumes, if you go back maybe three/four years ago, may have come down for us and for the industry, but the quality fop the traffic relative to the traffic looking to make a deal looking for to transact a lease when they’re on site is much, much stronger. I hope that helps.

Rob Stevenson – Fox-Pitt, Kelton

Then secondly, in terms of the markets where you switched over to an occupancy maintenance rather than a rental rate pushing mode, I mean what’s the sort of tolerance for keeping a person in a unit? In order to do that, are you basically having to go sort of flat with year-over-year rents or are you actually offering them marginal declines or are they still getting marginal increases past along?

Edward Lange Jr.

I don’t think we’re going to get real specific on that, but I think it’s the right question. I don’t want to make too much of the going to a defensive posture other than with every market and every property, and we’ve spoken about this before, it’s a series of inflection points. You’re looking for a series of inflection points that indicate whether you have pricing power or not and really the job of ourselves and our every operator is to compress the amount of time that it takes to react to that inflection point in pricing. What we’ve done is recognizing… Look, when you get hit across the head with a bunch of job losses, a ton of inflation, and no wage growth, all right, that’s an infection point, so kind of hard to miss that one so that you see that and you start taking the pressure off market rents, but you don’t want to lose your rent role so that you’ll use other tools in your arsenal,; reducing your market rents the last thing that you want to do. So that’s really the defensive postures that we’re defending occupancy.

We may even build it, but we’re not going to push that market rent, but you’re not going to see us give it up either. So I think in terms or renewals, we still have some loss to lease and most of our portfolio, we’re going to exercise that so that we’re aggressive about our renewals. A defensive posture doesn’t mean that you’re giving up the ghost and driving down your rent role.

Constance Moore

There’s the new resident and that market wrench is not, we’re not continuing to necessarily push that market rent so we’re attracting new residence, which are existing residents. As Ed said, we do have some loss to lease, so to the extent that we now, whether or not we capture all of the loss to lease, that will be sort of on a case-by-case basis and property-by-property depending on traffic and closing ratios and all the other elements that go into pricing. But it’s just not… When we talk about a defensive posture, it’s really more for the new resident coming in and pushing market rents.

Operator

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

Richard Anderson – BMO Capital Markets Corp.

Connie, I was wondering if you could comment on BRE strategy to deemphasize the quality of the Board?

Constance Moore

No, we thought about that and we just, we have such stellar guys on the Board, we needed a little comic relief and so we added Ed.

Richard Anderson – BMO Capital Markets Corp.

Don’t let me eat my question time here.

Constance Moore

Lori, that doesn’t count for his first question. I promise.

Richard Anderson – BMO Capital Markets Corp.

The 63 or 65 basis point increase in cap rates year-over-year, what do you think that that translates to on a sort of a property value basis decline, like 15%/20% decline in property value; is that it, or it is something more or less than that range?

Constance Moore

I don’t think it’s… I don’t think that’s it. It’s probably… I don’t know it’s… [Inaudible]…

Edward Lange Jr.

I think what we said is the sequential increase in cap rates this quarter was about $3 in terms of NAV so that would… I think you get kind of close to about 10%. It’s not something we look at every day, but I’d say it’s probably 10%.

Richard Anderson – BMO Capital Markets Corp.

Then the next question is: You mentioned briefly or quickly the Archstone asset, would you guys comment on how many of those properties have passed across your desk in the past year or so?

Constance Moore

Oh, well I mean look, our guys are certainly aware of the overall portfolio, but I don’t really want to comment on specifics. But I mean we know that there are a large number of assets for sale and so I think anybody who owns an apartment portfolio is aware of what’s being sold out there and that’s a large portfolio.

Richard Anderson – BMO Capital Markets Corp.

The whole thing you think?

Constance Moore

No, the whole thing is not for sale, so there’s a large number of the assets in pockets in certain markets that they’re looking to sell.

Operator

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

Alexander Goldfarb – UBS Investment Bank

Just wanted to go to the Wilshire deal for my first question: If you can just compare sort of what your yield expectations were as outlined in this first quarter supplemental to what, to the 6% that you’re quoting now; and then just doing sort of quick numbers, it would seem like to get to 6% you’d have to do more like $5 a square foot rent. So if you could just sort of elaborate on how the math works to get using the $4 square foot rents.

Edward Lange Jr.

Alex, I don’t think we’re going to elaborate. I think we’ve given some pretty color on it. We’re still six months away from concluding the entitlements. We’ve got plenty of time to get granular. I think the big thing is to for us to reach a conclusion with the city on which of the options that we’re going to proceed with and then I think we can down into the metrics of it. I think in general I think we’re pretty clear if we go with the larger scale option, it would be to deliver a return premium materially above what the baseline can. If the baseline is at or about the 727/25 mark on a trended basis, the pressure we’re putting on ourselves is that larger option’s got to deliver something like 75 to 80 basis points above that baseline. If it can’t do that, we’re not going to have a lot of interest in taking on that additional risk as it relates to that larger scale or the steel.

So I think that’s about as much as we can elaborate right now.

Constance Moore

Alex, I think Ed gave a pretty good detail, it certainly wasn’t a dot-to-dot, but he gave enough details it relates to… Because remember there’s the retail component, so you’ve got to back out the retail component, which is essentially 10% of the total square footage. It picks up more of its share of the parking garage and that kind of stuff, but I think if you sort of go back and review what Ed said as it relates to the specifics on that, I think you’ll find that you’ll be able to get to the numbers.

Alexander Goldfarb – UBS Investment Bank

As far as the yield expectations from the way it was outlined in the first quarter to the way it’s outlined now.

Edward Lange Jr.

I think I just addressed that.

Constance Moore

I don’t think it’s changed.

Alexander Goldfarb – UBS Investment Bank

Then the second question is: Just going back to the Board, was the position specially designed for Ed or were other independent or were independent candidates considered?

Constance Moore

No, this was a management spot. We have not had a… As I said in my commentary, we have not had a second management participant on the Board since Frank retired in 2004 and so it was really… Again, I mean the Board has had, it’s been me and then the independent directors and so those was really a management slot and, yes, it was specifically designed for Ed.

Operator

Your next question comes from the line of Jeff Donnelly of Wachovia Securities.

Jeffrey Donnelly – Wachovia Securities LLC

I hate to ask you to forecast cap rates, but I guess I’m implicitly going to anyways. Which markets do you expect, just looking at your cap rate now that you prepared in your NAV, when you think forward, I mean which markets do you think we could see more or less change in the margin from this point?

Constance Moore

I think the margin, there’ll probably still be some slight movements in Southern California and I think to the extent if the Bay area were to weaken and again it’s also a reflection of overall interest rates. Tell me where the tenure goes, and I can tell you where I think cap rates will go. So you hate to ask, so I hate to answer. But I think that there could probably be some, again, given the weakness in Southern California, I think that there could probably be some movement there. I think we talked earlier on the call about the supply issues in Seattle. If they become large enough in 2010, I think return expectations will increase. So I think it’s sort of market-by-market and then probably just be submarket-to-submarket. But I think we evaluated every quarter, I think our 5.35 weighted average for the whole portfolio, you could see that move up to another 15 to 20 basis points.

Edward Lange Jr.

I think that’s consistent with our views when we’re asked a few quarters ago where we thought the damage could do and we were reluctant to provide [inaudible] and cap rates at that time. But at the same time, there was a lot of initial, I’ll say shock related reporting that was estimated that cap rates for some of our markets could gap out 150 basis points or more from the mid 2007 levels. Our view at the time was that we certainly agreed that we were in a rising cap rate environment. We thought maybe 150 basis points at the end of the day would prove to be excessive depending upon where the tenure treasury lands after all is said and done. Our view is that we thought cap rates would move about 100 basis points. I think that’s still pretty consistence. That would be our view today.

Jeffrey Donnelly – Wachovia Securities LLC

Did you think that markets in central Phoenix might be done if you will in terms of a cap rate environment now that you’re beginning to see the most recent occupancy pick- up?

Edward Lange Jr.

No, I think that’s a great question. I think the theme that we have stuck with it and I think most of the industry’s view is that there’s probably more cap rate damage to be done in the secondary and treachery markets than there are in the supply constrained or primary markets. I think that would be our view today that once you… I mean there’s probably the institutional bid rematerializes or sticks in these coastal markets, but in the secondary and treachery markets there’s probably still some damage to be done.

Operator

Your next question comes from the line of Steve Swett of KBW.

Stephen Swett – Keefe Bruyette & Woods, Inc.

Ed, you had mentioned that traffic was up, but the credit quality of the potential renters was down. I assume you pick that up in lease rejections or those are actually people that have moved forward to actually making the application. Is this something that you’ve tracked in past downturns? I’m just curious to know kind of how bad you have seen credit quality get in the past and whether right now it’s just kind of an inflection point and it might get in fact worse.

Ed Lange Jr.

It’s kind of the hard part of the business here. You’re dealing with people’s income levels and their credit quality all the time and so there are some markets that we operate in and there’s some market nationally that other operators deal with where you kind of have, it’s more of a constant part of the business or a problem. So for us, I’d say like the Inland Empire is market where year in and year out regardless of economic conditions that we struggle with credit quality, so that’s income levels. It’s their credit scoring, levels of foreclosures, etc that’s there.

If the question is: Are we seeing it leak into some of our better markets, credit quality is not an issue today in Seattle or San Francisco. We’re not seeing a lot of credit quality issues in the San Diego market right now, but we are seeing some of the credit quality issues leak into some of the traffic in Orange County. I think we are seeing some migration, again, hard to get good, good data where we can basically point to absolute numbers or percentage changes, but we are starting to see as we thought as people have been released from single family housing either ownership or renting in the Inland Empire, if they working in Orange County, we are seeing some migration back into Orange County. I think a very good point of data or an example of that could be what’s going on at our Orange property.

Now the renaissance in Orange is in the Platinum Triangle and while there’s been a lot of attention given to the level of supply in the Platinum Triangle, I mean we think appropriately. What’s been a little bit lost in the discussion is the level of jobs that are in that area. You’ve got Disney. You’ve got two major medical systems. There are more than 50,000 jobs that surround the Platinum Triangle and a lot of those people have not been able to afford to live in Orange County for a long, long time.

Part of that high level of traffic we’re getting in Orange is the demand that’s coming in from some of the points in the Inland Empire and there are concerns with credit. Now I’ve got to tread a little softly here because I’m not going to basically disparage our residents, but I’m going to say it’s a constant struggle to make sure that the rents that we’re charging can be afforded by our resident. We don’t enter into a 10-month or 12-month lease and have somebody not be able to meet that lease obligation.

Stephen Swett – Keefe Bruyette & Woods, Inc.

For my second question, I guess along a similar vein, you guys have been pursuing some transit oriented projects, have you seen any differentiation from residents around those projects just given where energy costs are and transportation costs are? Are they looking in a greater degree to those types of properties versus more suburban areas?

Edward Lange Jr.

Yes, that’s an outstanding question. We made the move to targeting transit oriented urban infield sites seven/eight years ago, so our property that’s located in Fullerton is a great example of that. I mean Fullerton today is 97% occupied and we’re moving rents, and that’s in Fullerton, so you’re right on the border between Orange County and Inland Empire .We’re two blocks away from the Commuter Rail Station into downtown Los Angeles.

Pasadena is 97% leased. We had no problems with getting pretty aggressive rents in that location and really didn’t have to move concessions out. Pasadena is part of the Los Angeles market so that we’ve leased up very, very well on that site and I think Avenue 64 in Emeryville, we’re at the high end of our lease, of our rent expectations. There was an accelerated leasing there. We stabilized about six weeks earlier than we anticipated and we’re burning off concessions. So I think it’s really just three or four pieces of information. But I think our view is that the resident cohort, the primary resident cohort will pay up for transit oriented urban infield locations that have strong proximity to workplace and entertainment.

Constance Moore

Well I think that the traffic that you’re seeing in Orange, while Orange is not necessarily within the walking distance of mass transit, it is within the hub of all those major transportation arties to sort of get people to go either north or south and so I think the traffic, the people traffic that you’re getting to that property is a reflection of the location of that property.

Operator

Your next question comes from the line of Ben Lenz of LaSalle.

Ben Lenz – LaSalle

You modestly changed your NOI guidance. Was that all revenue or was some expense expectation changed as well?

Edward Lange Jr.

It was mostly revenue, Ben.

Ben Lenz – LaSalle

Expenses changed a little bit though?

Edward Lange Jr.

To the better actually, so it’s mostly, it’s a revenue-driven adjustment.

Operator

Your final question comes from the line of Hendel Sanjas of Green Street Advisors.

Hendel Sanjas – Green Street Advisors

My question is on the L.A. portfolio. I guess with a third or so of your units actually in Ventura County, can you break out the performance of the L.A., the true L.A versus the Ventura and also give some prospective thoughts on the two?

Edward Lange Jr.

We’re not going to break it out that granularly.

Hendel Sanjas – Green Street Advisors

But some form of relative sense.

Edward Lange Jr.

I think the stuff… I’ll tell you the reason I’m sort of jumping around thinking about all the properties and where they’re located, for example, we’ve got properties in Korea Town. They are incredibly insulated from what’s going on in the L.A. market.

Hendel Sanjas – Green Street Advisors

Refocus it Ventura versus Miracle Mile then.

Edward Lange Jr.

Well that’s what I’m kind of getting to. I think where you look at Ventura, although Ventura still has, you’d be surprised the level of people that are employed by the entertainment industry up in Ventura. But I would say our properties north of Los Angeles are performing probably a little better than the ones that are probably closer or more associated with the core of the entertainment center. I think that’s about as far as we really want to go. I don’t think we’re going to break it down property-by-property.

Hendel Sanjas – Green Street Advisors

Can you give me an update also on Stadium Park II, any thoughts on start dates, any new updated thoughts on that project, the other lot?

Edward Lange Jr.

Really no plans at this time. It’s still to be determined. We’re trying to get a decision on that before the end of this year, but we’re doing a lot of assessment on it.

Operator

We have reached the allotted time for questions and answers.

Constance Moore

Well thanks, everyone, for participating. We’re pleased with the second quarter, and we look forward to talking to you at the end of the third quarter. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BRE Properties, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts