Essex Property Trust, Inc. (ESS) Q3 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Essex Property Trust Inc. Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Schall, President and Chief Executive Officer of Essex Property Trust. Thank you. Mr. Schall, you may begin.

Thank you, and welcome to our third quarter earnings call. As a reminder, we will be making comments during the 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 uncertainties which could cause actual results to differ materially. Many of these risks are detailed in the company's filings with the SEC, and we encourage you to review them. Erik Alexander and Mike Dance will follow me with brief comments on operations and finance, respectively. John Eudy, John Burkart and John Lopez are here for Q&A. I'm going to discuss 2 topics on the call today, our Q3 results and a strategy update. So onto the first topic, Q3 results. As you know, last evening, we reported core FFO of $1.42 per share, a 14.3% increase compared to Q3 2010. Although that result was consistent with consensus estimates, that same property performance was below our expectations for the quarter, primarily due to occupancy. As Erik outlined on last quarter's call, we chose a strategy of creating higher rents for lower occupancy, which was mostly successful as rental rates increased 2.4% sequentially and 5.3% quarter-over-quarter. However, our plan to increase occupancy towards the end of the quarter was not realized as consumers reacted to the uncertainty surrounding the Eurozone and global economic issues. I am disappointed in our speed of reaction to these changing market conditions and we all realize that we must do better. In my 25 years in this business, I've learned that the road to economic recovery is not smooth but rather a bumpy path. Having said that, I believe that you will all feel much better about where we stand after the call this morning. During the quarter, we remained active on the investment front having closed 3 acquisitions for $298 million and representing 1,383 units. That brings the total closed acquisitions and preferred equity investments through September to $489 million. We have several transactions in the pipeline in Q4, cap rates remain in the low to mid 4% range for A property and A location and high 4% range for B property in A location. We also announced a new development project, Fountains at La Brea, located in West Hollywood, as outlined in the supplement. Development deals can take a long time to put together, and we've been working on this deal since 2010. There are 3 other potential development deals in our pipeline. If they come to fruition, we should be announcing them in the next several quarters. Thus far in 2011, we started construction on 4 apartment development projects aggregating almost $350 million. Development cap rates are in the 5.5% to 5.75% range based on today's rents for deals that will be construction ready within the next 6 months. There area a significant number of potential development deals being shopped around. Most of which fall below this cap rate level and therefore, they may not be started soon. Financing development deals requires a big balance sheet, and the companies with big balance sheet are increasingly occupied with their committed pipeline. As a result, I am more confident now that apartment supply will not be as big a factor as I thought several quarters ago, at least until 2014. We continue to watch the supply picture closely. We are pleased to increase our 2011 guidance as indicated in the press release. Mike Dance will review the guidance change components in his comments. Now into my second topic, which is strategy update. We expect to issue our 2012 guidance in late December or early January. The following comments relate to our outlook and focus for the company for the next several years. Our overall goal continues to be growth in core FFO per share to the extent its consistent with NAV growth. This is essentially the same basic goal that we've pursued for the last 17 years. We remain strongly optimistic about the apartment markets over the next 5 years, and we believe that we are in the early stages of recovery in rents, driven by the rebound in rents following the 14.5% reduction in market rents that we experienced from September 2008 to December 2009. At September 30, market rents were still approximately 2% below the prior peak. Given these factors and with an assumption for a slow but steady pace economic recovery, we believe that our portfolio will experience weighted average market rent growth of approximately 28% over the next 5 years. Our confidence is based on the following observations. First, the West Coast recovered later and thus has more room for growth before hitting natural limits such as rent-to-median-income ratios. Second, a better than average job growth outlook led by the tech sector. Third, for sale development continues to be at very muted levels and it will take at least a few years for apartment supply to recover. Fourth, demographic tailwinds, including retirement and downsizing by the baby boomers and their desire for accessible units and the echo boomers entering their prime rental years. On total housing supply, we believe that it will take several years for supply levels to recover. In Seattle for example, total housing supply is expected to be 0.4% of existing housing stock in 2011, growing to approximately 1% in 2014. Following a similar pattern, in 2014, housing supply is expected to reach 0.6% of stock in Northern California and 0.7% of stock in Southern California. Thus, even with limited job/demand growth, the West Coast markets are expected to have an undersupplied housing condition. We also studied the various East Coast markets and have chosen to remain focused on the West Coast largely because of the factors noted above. We have made significant improvement in the overall quality of the portfolio through our recent acquisition and development efforts. With distress abating, our focus will be on well-located B quality property. We expect to remain an active investor for the foreseeable future. As in the past, we will focus on acquisitions that are accretive to the portfolio's cash flow and AVN growth rate. For practical purposes, those acquisitions will need a minimum 9% unlevered IRR to be accretive; 9% to 11% fixed returns on structured finance investment, which we will likely limit to about 5% of total capitalization; development deals with a 10-plus-percent unlevered IRR, with the company's unfunded commitment to development expenditures targeted 5% to 7% of total capital. We will expand our property sales activities over the next several years, mostly to call the portfolio of property with lower financial recurring expectations and the sale fund, too. Our valuation thus far indicates that up to 20% of our property will be available for sale over the next several years. The key considerations in the sales decisions will continue to include use of proceeds, competitive cost of capital options, the effect of Prop. 13 in California and also growth rates and cap rates both relative to the portfolio and to the stock price. As an example, we have sold one property this year and have listed several others that were originally acquired as part of the merger with John M. Sachs in 2002. Redevelopment is an important part of our overall strategy. Our coastal markets are producing less than 1% of housing stock in a typical year. Thus over 20 years, we will produce somewhere around 20% of stock, meaning that 80% of existing housing stock will be in excess of 20 years old. Given that environment, redevelopment is an essential part of our overall strategy. With the drop in construction costs amid the great recession, we completed more than 10 major exterior modernization projects, which are now ready for interior unit term programs. Beginning in 2012, we will ramp up our unit term programs to be from 1,000 to 1,200 units per year. We expect redevelopment to contribute 8% to 10% cash and cash returns and a high teen IRRs. With respect to the balance sheet, we expect to continue to operate the company in a thoughtful and conservative manner. Given the volatility and uncertainty of the current environment, we've employed a math [indiscernible] approach to investments, whereby capital commitments are matched up against capital sources without significantly increasing our financial exposures. In this environment, having access to many capital sources is desirable. We continue to utilize joint venture partners for a significant portion of our external growth to control our forward commitments and get paid for our real estate expertise and maintain access to this important capital source. Now I'd like to turn the call over to Erik Alexander. Thank you.

Thank you, Mike. It's a pleasure to being here to report our third quarter operating results and give our view of the rest of the year. The rate growth momentum that I reported on last quarter continued to be strong into the third quarter, and allowed us to post the sequential gain in scheduled rent in more than 3 years. As you might have predicted, this growth is led by Northern California in the Pacific Northwest though Southern California showed modest growth as well. The third quarter was really marked by 2 distinct periods for Essex, the early strong part of the quarter and September. Encouraged by the acceleration in new rents, strong renewal activity, lower turnover and higher occupancy during the second quarter, we aggressively pursued a strategy to push rents during the peak demand period. As expected, we did see an increase in availability, though traffic remains strong and renewal efforts were also successful throughout the period. In August, I think we experienced a bit of a headwind, even though traffic remained strong and existing residents were accepting higher rent rates, perspective residents seemed less confident and reported looking at more communities before making their decision. We took out some additional notices in our net availability grew. We made appropriate pricing adjustments throughout August but entering September, we felt that trying to find that optimal balance between occupancy and rent levels during this period of customer uncertainty could prove to be risky for the fourth quarter. Therefore, we've lowered our offered rates during September and then to October to ensure higher occupancy and a more manageable availability during the fourth quarter. Those adjustments proved to be wise as occupancy at the end of the quarter was 95.5% with a net availability of less than 6%. And just a month later, we had a peak of 96.6% in our occupancy with a 4.9% availability. Not surprisingly, we experienced more vacancy loss during the third quarter. Much of this increase in vacancy was concentrated among 3 student-dominated buildings where the traditional second wave of demand never really materialized amidst a national leading fee hike of 21%, an increase in availability per on-campus housing and more doubling and tripling of students than seen in prior years. Additionally, in Ventura County, where 12% of our portfolio resides, occupancy was slower to recover and required more aggressive pricing to lower availability. It is true that the greater sequential vacancies lost actually occurred in the Pacific Northwest followed by Northern California, but that is where we achieved 3.6% and 3.7% gains on scheduled rents for the period and that would certainly be a benefit next quarter and into 2012. The average rent gains for 4,100 new transactions during the quarter was 7.5%. Additionally, rents on new move-ins during the third quarter were 3.7% higher than the new move-ins rent achieved during the second quarter. I think this stat showed clear evidence that market rents continue to rise in our region and are consistent with what has been widely reported in independent market surveys. Therefore, I believe the loss to lease in our portfolio at the end of the third quarter was only reduced by our summer harvest and stands at 5.8%. The cost additions of this lost [indiscernible] also remains the same with the Bay Area in the Pacific Northwest having the most room to grow. Renewals also continue to grow during the third quarter and were 7.8% higher than expiring leases on 4,200 transactions. October renewals have not dropped off either as renewals were executed at an average gain of 7.5%. Therefore, the combined results for achieved rents during September as well as October was actually higher than what we achieved in June on a combined basis. As we approach the end of the year, I do expect to see some decline in our gains and renewals as market rents historically moderate compared to the summer season. Overall, we continue to believe there is an ample opportunity to increase revenue within the portfolio in the coming year. Now with respect to operating expenses, all the drivers remain similar to the second quarter in that real estate taxes insurance, management fees and administrative costs were relatively flat compared to the third quarter of 2010, resulting in a modest increase over last year of 1.5%. Utility costs remain within expectations and are up only 1.7% from last year at this time. Turnover is compared -- sorry, turnover is up compared to the second quarter and in third quarter last year, and is now equal to 2010 on a year-to-date basis. Therefore, expenses were up in this category during the quarter. Additionally, cost per turn is up in all regions as we continue to improve the quality of our products in an effort to achieve higher rents. This approach applies to our renewal efforts as well as we seek to satisfy our existing residents by granting reasonable improvement requests to their home in conjunction with higher rental rates. We expect turnover costs with payers and maintenance to decline in the fourth quarter due to lower volumes and fewer onetime expenses and will look for the other expense categories to be relatively flat to down. Now with respect to our new lease-up activities during the third quarter. Following the stabilization of Skyline near than Allegro last quarter, Bellerive, Reveal, Santee Village and Via all made excellent progress during this period. We completed our final phase at Via during the quarter and are currently 64% occupied and 75% leased at this new development. We expect to reach stabilized occupancy early in the first quarter of 2012. Santee Village was leased up ahead of schedule and was 92% occupied and 95% leased at the end of October. Bellerive also leased up ahead of schedule and was 95% occupied and 100% leased at the end of October. And finally, Reveal is leasing ahead of schedule and is currently 78% occupied and 85% leased. Now, I'll comment on each of our regions. In Seattle, market rents were up sequentially 1%. Based on submarket location, we are now within 3% to 6% of our previous peak of 2008. At the end of September, occupancy in Seattle was 94.9% among stabilized assets, with a 5.6% net availability and 96.5% as of October 30 with a 4.9% availability. The job fixture continues to be strong Seattle. Throwing at that is 6,800 jobs year-to-date and is expected to add more in 2012 to keep up with production. We believe that unemployment in the region will drop below 8% next year. Continued office space [indiscernible] more jobs in the coming year. At Seattle, it absorbed more than 1.8 million square feet so far this year, or nearly 2% of stock. In Northern California, market rents were up 3% sequentially. Based on submarket location, we are now 3% to 5% above the previous peak in 2008. At the end of September, occupancy was at 96.1% with 5.6% availability and 96.7% as of October 30 with 4.8% availability. On a strength of hiring activity in the Silicon Valley, we are revising our jobs forecast up from 36,000 to 44,000 for 2011. The future remains bright in the region as office and R&D absorption continue to be positive. An additional 800,000 square feet of office space was leased in San Francisco and [indiscernible] in the quarter, while San Jose added 1 million square feet of leased office space, an additional 800,000 square feet of R&D space, following a huge absorption in the prior quarter. San Jose has now approached 4 straight quarters of positive absorption keeping us confident in continued job growth for the region and bullish on demand for apartment. Turning to Southern California, market rents were up 0.8% sequentially. Based on the submarket location, we are now within 1% to 6% of the previous peak in 2008. At the end of September, Southern California was occupied at 95.1% and had a 6.3% net availability. By October 30, the occupancy stood at 96.5% with a 5% availability. Last quarter, we revised our jobs forecast down for the region and our forecast remains unchanged this quarter. However, we have seen some improvement in the professional and business sectors in Los Angeles versus prior quarters where it was flat to negative for the category. The quarter did see some layoffs or job relocations in Ventura County specifically, including Farmers Insurance, [indiscernible] and Bank of America. Commercial space absorption was up during the quarter, with noted improvements in downtown Los Angeles, Glendale, Burbank and Pasadena. So In conclusion, we're obviously pleased with our lasting gains in scheduled rent. Occupancy is back, and we are poised for a good fourth quarter and beyond. With that, I will turn the call over to Mike Dance.

Thanks, Erik. Today, I will provide some additional details on our '11 guidance. But before I do that, I want to highlight the changes to our debt structure that contributed to S&P's increasing their senior unsecured debt rating from BBB- to BBB. Pursuant to the $250 million secured Freddie facility, we were notified during the third quarter that Freddie would be increasing the spread on the facility effective December 1 from the current 99 basis point spread over the Freddie reference rate, to a 235 basis point spread. In preparation for the Freddie repricing, we are finalizing a new bank credit facility and opted to terminate the secured Freddie facility and expand the unsecured bank facility from $275 million to $425 million at 125 basis point spread over LIBOR with a 5-year term including the 2 1-year extension options. The termination of the Freddie facility resulted in the acceleration of the unamortized loan fees totaling $700,000, of which half is included in the third quarter as a noncore loss on early retirement of debt and the other half is in the guidance as an increase to the fourth quarter's amortization of deferred financing costs. The Freddie facility is secured by 11 assets. After the facility is paid off with unsecured debt later this month, the secured debt to gross asset value would be 36.5% and 44% of our net operating income will be unencumbered. With upcoming maturities of secured debt and on balance sheet acquisitions, the company is considering a 2012 debut public unsecured bond offering if the public debt markets are attractive. Now turning to guidance. The increase in same property NOI guidance that was provided last quarter expected a higher vacancy and a higher maintenance and repairs expense as we aggressively increase rents and cost more resident turnover. The net operating income guidance would also predicated upon achieving the 2.4% increase with scheduled rents during the third quarter, with a decline in occupancy of approximately 70 basis points. With actual vacancy increasing 130 basis points during the quarter, our new same store net operating income guidance was reduced 60 basis points to be an increase of 5.4% year-over-year. For the month of October, financial occupancy was 96.2%, with continued increases in scheduled rents from both higher renewals and new leases over expiring rents. Our preliminary October same property results are reporting an increase of $410,000 in sequential monthly gross income over September, and $577,000 higher than the average growth income for July, August and September, giving us confidence that we are well-positioned to benefit from higher scheduled rents and occupancy in the fourth quarter and into 2012. The revised midpoint guidance for '11 projects a 3.9% increase in the same property revenues for the year and a 6.4% increase in same property revenues for the fourth quarter year-over-year comparison. We are also projecting a 1.1% increase at '11 same property operating expenses and a 1.2% decline in the fourth quarter same property operating expenses compared to the comparable quarter in '10. Consistent with the fourth quarter '10 results, property operating expenses are expected to decrease significantly in the rest of the year as we reduce the number of units that will need to be turned for new resident move-ins. We had favorable change in the same-store net operating income guidance, resulting from the increase in vacancy has been offset by favorable variances from our '10 and '11 acquisitions and favorable leasing activities from the consolidated development community. As highlighted in our press release, the empty condo buildings purchased during the year will all be stabilize during the fourth quarter, and Dia is expected to be stabilized early in '12. The preliminary October results reported increase of $275,000 in nonsame property growth income in October compared to the September results. The leasing activity of West Coast joint venture Reveal property has exceeded our expectations, and the recently announced WESCO acquisition of Redmond Hill has increased our estimates for income from co-investment. The formation of a new joint venture for the Dublin development site and the WESCO acquisitions just mentioned have all increased our guidance for income from management fees. Lastly, the lower spreads on borrowings from the new bank facility and the drop in the SIFMA index on our delay -- demand no debt has reduced our projected interest costs for the year. This concludes my remarks, and I will return the call back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Swaroop Yalla from Morgan Stanley.

Mike, just to confirm so, do you say that you saw 110 basis points improvement in occupancy from end of September to end of October?

Yes.

So given that the rent trends are going the same direction, you're seeing the same strength in renewals, is it safe to expect about 3% plus sequential growth in Q4?

Not quite, just under 3%.

Got it. I mean, I think -- I guess, I was just trying to understand the NOI guidance change of 60 basis points. If occupancy is being gained back and if rents are going at the same level and also you have lower expenses, I was just wondering how, why guidance is dropping?

Because we didn't anticipate the 130 basis points decline in occupancy. We're only anticipating 70 basis points. So the regain in occupancy, we did buy back some occupancy in September that we were not expecting.

Got it. And this gain in occupancy, is it concentrated in any markets or is it sort of more uniform?

It is uniform across the portfolio, but we lost more in the Pacific Northwest followed by the Bay Area and then Southern California. So we did gain more back in Seattle as all markets now are in that mid-96 range.

Got it. That's helpful. And a question for Mike Schall. On the development pipeline, can you talk a little bit about what level of starts you anticipate going forward for the next couple of years? You did about $350 million this year. But from your comments, I think it seemed like you're not seeing too many deals, which are penciling in the 5%, 5.5% yields on current trends currently.

John Eudy is here so I'll make a couple of comments and then turn it over to him. We are seeing a pretty decent deal flow. There's a lot of deals out there for being discussed. I mentioned that we've been working on 3 other deals that are not part of the supplement and continue to be in negotiation. Therefore, there's no assurance that they will come to fruition but we're confident that they will. And so I guess from my perspective, in our perspective, we would rather develop toward the beginning of the cycle, and so we are trying to fill our development pipeline sooner rather than later. Obviously, the top of the cycle development deals even though the cap rates may be the same as the bottom of the cycle, the IRRs are dramatically different. So it is John Eudy and I talk about this all the time, and we work together to try to fill our development pipeline and I think in total, it could get to $650 million thereabouts, of which we're about half because we're doing venturing most of the development deals. So we would have unfunded commitment of somewhere around $325 million, something like that. John, do want to add in terms of just the deal flow out there? Because you're talking to a lot of these guys and there's a lot -- John and I talk about it a lot. There's a lot of stuff out there and it keeps circling around, so John, do you want to describe the environment out there?

In general, from the beginning of the spring of this year-to-date, we've seen a lot of deals that were being pitched that we didn't think met the threshold of the minimum 5.5% going in cap rate. And what we have found is the ones that had landed with the capital partner like ourselves that have [indiscernible] to do it had pretty much settled out. We have 2 to 3 more deals that are likely that we're going to be announcing in the next couple of quarters that will keep us pretty much on pace with what we started this year or next year if everything comes the way we think it's going to happen, and the deliveries would be late '13 into '14 for the entire portfolio at that time.

We want to be a little bit careful with respect to the guidance part of this, because we're going to -- that's why I tried to keep my comments to the next several years as opposed to 2012 specifically. So please hold off and wait for our 2012 guidance discussion, which will be sharee in another month or 2. I think Mike actually has one clarification.

I just want to make sure I understood your question. I wasn't to ensure whether you were asking about sequential increase in gross income or the year-over-year. In my prepared comments, I said that the year-over-year projected increase is 3.9%. The sequential increase will be closer to 2.3%.

Sequential growth rate, Mike?

Yes. And gross revenue, yes.

Our next question comes from the line of Jay Habermann from Goldman Sachs.

Mike, maybe just big picture in terms of the asset sales you talked about and the strategy going forward. I think you mentioned 20% of assets so maybe around $800 million. Should we think of that as roughly half of that as Fund II and then maybe the other half is obviously some of those lower growth assets you mentioned and maybe give us some sense of potential timing.

Jay, that's a good question. Timing is going to be strongly a function of the items that I talked about, which are accretion, dilution, what we're going to do with the proceeds, the Prop. 13 impact. And so I don't want to go in there, essentially be sort of focused on a certain amount of dispositions in any one year. We're trying to look for the best opportunities and if you look at a graph of cap rates, for example, between A, B, C product, you will find that it compresses towards the top of the cycle, and so, I guess, the first thing we're trying to do is we're trying to get the best of the combination of cap rate and growth rates. So we expect the markets to have significant amounts of growth, therefore, that's why we haven't sold more up to this point. But as we realize that growth and we -- and cap rates remain low, that will be the primary consideration for selling property. We want to, I guess, from our perspective, yes, there are some assets that are on our disposition list and it's pretty significant list but having said that, we're not in any particular urgent. There's no particular urgency with respect to what we're going to do with the exception of Fund II it's completed its investment cycle, its life cycle so over the next couple of years, we're definitely going to sell some Fund II assets. But I'd rather -- rather than commenting about how much and exactly when, I'd rather defer that until the 2012 guidance discussion.

Okay. And at this point, the strategy is still to reinvest within existing markets or give some thoughts in terms of perhaps what you might be considering outside of junior core markets at this point.

Yes. As I said in the comments, we will stay focused on the West Coast. Transitioning markets are good for us. I can give you an example in the city of Sunnyvale, which we have a very strong concentration in that city are -- that market contains 11% revenue growth year-over-year. In Northern California, it's 6.2% for the press release. So we have 11% in Sunnyvale. So that means there's a bunch of areas within Northern California that are in the 2% to 8% range. So in terms of real estate transactions trying to go to the areas that will benefit most in terms of growth, it's not all the same. It's not as if all of Northern California experience 6.2%. The variations are pretty dramatic. And therefore, that creates the opportunity, I think, in terms of our investment program to find the areas that are -- that we expect to recover next and invest ahead of that growth. So we will stay within our existing footprint, but we will be very careful and mindful of how far rents have grown within each submarket.

Okay. And maybe just last question in terms of Southern California. I know it's continued to lag but if you look out over perhaps into next year, I know you're not giving guidance at this point but would you still expect Southern California to lag versus the overall portfolio?

We have -- John Lopez is here, and John spends his days trying to figure out supply and demand for each of 30 submarkets and then trying to figure out, based on supply and demand what happens with rents. Now, there's dramatic changes. You get a 20% rent growth estimate in Silicon Valley, for example, and if you look at his work, he has sort of Silicon Valley as a market perform, given the incredible amount of rent growth in Silicon Valley [indiscernible] about Northern California, Silicon Valley specific and so that becomes a portfolio performer but CBD LA, Eastside Seattle and -- what am I missing, John -- Orange County, become -- pop to the top of the list in terms of where we think we'll get the most rent growth. So John, you want to comment? That's a process that we follow and so the top 5 markets -- what it was 2 years ago, it was strongly Northern California and Seattle, now it's a mixture of both. What are they, John?

Our top markets, Jay, would be over the next 2 years markets are the core infill Los Angeles markets downtown, West LA, Woodland Hills, Tri-City and in Orange county. So next year, probably overall, Southern California will be a little bit below the portfolio but that will be because we have expected San Diego to lag. It just didn't have the big drop that we saw in Orange County in LA. So it's going to be a mixed bag. Probably Ventura and San Diego will lag the portfolio, but we expect by next summer that Orange and L.A. will hop to the above portfolio growth. It's kind of a dichotomy there.

. Our next question comes from the line of Alex Goldfarb from Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just want to go back to the occupancy thing. I mean, certainly the bar is set pretty high for you guys. Some of the other companies spoke about As, being able to push more on As and having some softness on the Bs. So I want to get a better sense for what happened why you think it's a surprise and if this is sort of a reflection of more of the B nature of the portfolio or this is just something that you think there's more market-wide?

Alex, this is Mike. I will answer that and turn it over to Erik afterwards. Because of these sales condo deals that we bought over the last couple of years, I think we have close to the best assets in many marketplaces. Certainly, as it relates to Irvine, the Platinum Triangle, some of our properties in West LA and Warner Center. And so we have a lot of experience in terms of what we see on the ground, and we also have experience in obviously the Bs, which make up most of our portfolio. But the reason why I mentioned the Sunnyvale comment that I just mentioned a minute ago where we had 11% year-over-year revenue growth because we have both A and B assets in that marketplace. Your B is obviously a brand-new property, and we've tracked what's happened with rents versus our expectations at our underwriting, and we have 5 or 6 other properties in Sunnyvale, which are B oriented and so we can tell you with a lot of confidence that it has a lot more to do with submarkets than it does A versus B. So with that, I'll turn it over to Erik. You want to add anything to that?

I'll just say that we see examples of that in other markets as well, including Southern California. Mike Dance mentioned Reveal is that new product in Warner Center, and we've done well there, ahead on the weeks of schedule, slightly ahead of rents as expected and we're competing with both new and old products. In Orange County, we've seen some of the older products. B products perform better than say, Anavia, which is new, nice A product. And so to Mike's point I really think it's driven by the individual markets. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: And just so I'm making sure I'm hearing you correctly. It sounds like as the summer progressed into September, the existing, your existing residents were fine with the increases. It was really just on the new tenants and post-September, so post 9/30, what's up with the new tenants? Are they once again comfortable or are they still skittish?

It's mixed. We see traffic start to tail off as typical business has held up very well and again, we got good leasing velocity in October as we settled in at the higher occupancy rate at the end of the month. And again, I don't have a ton of data yet over the last couple of weeks because there's not a lot of transaction volume, but I can tell you that the direction of those new rents has been going up since probably mid October. So that's what I would have expected to see. I'm glad to see it, and we're not having a lot of rejection. And as I commented before even in the last couple of weeks that Reveal projects again, continue to get good rates and have strong traffic there. So we're seeing positive signs.

Let me add one additional item and that is, can you outline the expiration profile for November, December because we turn a lot of units and part of this is we got big rents on a lot of units turned because in June, July -- May, June, July, we turned a lot of units. And so keep in mind that we got big increases on a lot of turns. And the turn profile, our expiration profile changes throughout the year. You just heard what happened in October, and this goes back to our confidence for our Q4 results because there's just not that many expirations in November and December and therefore, most of it is baked in. Isn't it a good point?

So that is a good point. So expirations in November are 5.5%; in December, they're 5% portfolio-wide and that includes a low of 3.5% in Pacific Northwest. Then they inch up to 6% January. And so to Mike's point, it was strong during the -- my view is it's relatively strong throughout the period when you see those strong renewals. These pricing -- these price offerings both renewal and new are intertwined, right? We've talked about this before where customers have really good information. They can get pricing information on an hourly basis if they so choose and some people challenge us that way. But again, I think the results speak for themselves that people are comfortable with those levels. And the thing that I would add is that further confidence for the fourth quarter is I do have a fair amount of information already on November, as executed renewals are tallied, and there are some 900 of them at over 6% or 6% over expiring rates. So that again, it looks really strong and will serve us well. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then just second question here for Mark or Mike Dance. Just on the -- with the public unsecured debt markets influx, curious what's going on in the private unsecured debt markets. Is there in the same flux or maybe they're a little tighter because it's more direct underwriting.

I think it's not quite the same. We do have a number of large investors that are interested in increasing their investment in us but despite that widened, so we were hoping to price an unsecured private placement of about 50 basis points wider than what we would get on a secured. And we weren't quite there yet, but I think we can get something done 50 to 75 basis points over to a magnitude, that would be pretty meaningful.

Our next question comes from the line of Rob Stevenson with Macquarie.

When you're sitting here today taking into consideration the health of your markets, what you've been seeing in terms of rental rate growth. Is the 96.6% occupancy that you ended October at, is that where you want to be or do you want to drift that up to sort of 97? Or are you comfortable pushing rental rate harder down and seeing that trip back closer to 96? Can you sort of talk about where the sort of pricing dynamic is sort of leading you these days on the occupancy side?

Yes, I think we'll watch the response of the customers. And again, if we're seeing clear response that they continue to accept rate, we'll push a little bit because I don't think there's a lot of danger given the low net availability. Again, as I commented, traditionally, as rent moderates during this period of time, that would -- such low availability of traffic holds up. So it was up like 20% actually in October compared to last October and probably about 10% in Northern Cal, slightly positive in Southern California. It was actually greater improvement over last year in San Diego. If we continue to have that and low availability, I think we can move rates and we'll do that.

Let me add to that because Erik and I talk a lot philosophically about what the sweet spot is for occupancy, and we think it's 96% to 96.5%. And, Mike, thinning the hairline will continue to thin if we have dramatic shifts in occupancy from quarter-to-quarter, and thus we are going to strongly work on managing occupancy within a tight range.

Okay. Because, I mean, if I look back, I mean, obviously, there was different sort of mode of thought during the financial crisis. But, I mean, a lot of the fourth quarters historically, you guys have sort of run close to 97% occupancy if you go back, and so I didn't know whether or not you guys were trying to operate back up at that level or whether or not given what's been going on and your ability to push rental rate, lower occupancy is sort of where you want to be.

I think our status is strong now, and we can hold that through the end of the year and very content to do that. If we see something different, like I said based on what the customers' telling us, we'll start to drift higher on the rate and put ourselves in a position to strike early in 2012. But to Mike's point, there'll be more discussion about that balance between those 2. It's interesting. It's a hard thing to do. We thought we were gaining confidence, for example, last year going into, even October for Seattle and in retrospect that they were probably pushed too hard last year and dropped our occupancy to even low 95.5% or something like that if I recall. And again, and that was again the customer was saying, "Hey, your rate was going up too high, and I'm not interested in moving right now." So we're going to be careful.

Where did you guys send January renewal notices out at?

We haven't sent all of them out. Some of them were sent out closer to 30 days in advance, and then only the higher ones are sent out at 60 days in advance. So I don't have a summarized report for that yet but again, I would say that they are similar to what we have been doing in the past couple of months. And again, those are declining a little bit even as pleased as I am with 6% in November, that's obviously less than 7.5% in October and September, so I'd expect it closer to that.

Okay. And then last question, can you talk a little about where returns on redevelopment are trending given what's going on in the market with rents and acquisition pricing, et cetera?

Yes. This is John Burkart. The numbers are kind of a range and again, for the type of the products that we're delivering obviously, we're trying to [indiscernible] the size, see the marketplace so we had some that are on the low side in the 8% cash-on-cash and then others that are quite frankly, substantially higher in the 20 to 25. Overall, we doubled the amount -- roughly double the amount of reservations that we did in this quarter over the last quarter, and it worked very well. And as Mike mentioned, we're increasing that number in much greater flag as we go into 2012.

Okay. Just a quick follow-up for Mike Dance. I mean, when you're increasing the amount of redevelopment in portfolio, I mean, how much of an impact does that have on the recurring but noncapital enhancing CapEx for you guys?

We're targeting, Bob, with the exterior and the kitchen and bath, the dollars that we're going to spend, is that what you are asking?

No, I mean, the adjustment from it FFO to AFFO should be going down as your redevelopment spend increases because you're spending more money on units to do a whole cadre of improvements rather than just doing maintenance on them?

We try to break that out on the statement of cash flows, so I'm not sure how the analysts -- we don't put it in our AFFO number because it is revenue-generating so I don't know what...

I think the question is to the extent you redevelop something, you basically aren't going to have to do as much CapEx in the future because you redeveloped it, so what effect does it have on AFFO going forward? I think it's the question.

I don't think we do enough redevelopment to have a significant outcome on the rest of the portfolio.

It's not thus far, yes. Maybe the more significant number is we do have some rehab vacancy that is part of our vacancy number, and I don't know what that number was. I think it was around 50,000 for the quarter.

Yes, I didn't comment on that earlier, but there were certainly some in the third quarter and to the extent that the timing is right, we will take advantage in the fourth quarter of getting some units started for next year. I would add a comment on this A, B redevelopment substances where we see something as well that I think supports this sort of the market is really the bigger driver. We're renovating an exterior of a 1970 building in Orange County, and we had favorable surprise on the response and rents had gone higher than we expected there, which is very positive. And in turn, we were getting a acceptable returns, about what we thought we would get in Simi Valley, which is in Ventura County but it hasn't seen that same bigger spike that we enjoyed in Orange County. So again, I think that maybe the easy one because we talked about the softness in Ventura, but I would say that we were pleasantly and remain consistently pleased with the results in Orange County and expect some of that to happen in San Diego where we're doing work and certainly in the Bay Area where we're at.

Our next question comes from the line of Eric Wolfe from Citi.

I just wanted to follow up on Alex's question and try to better understand whether the rise in occupancy in October was really a function of you're just changing your pricing or if there was a sentiment shift among your tenants as well. So could you just talk about how much you are pushing rents on new tenants in August and September versus what you did in October? And how you think that, that should trend for the rest of the quarter?

This is EriK. That's hard to decipher. There's clearly a difference in rent levels related to improving occupancy, but I also think, as reported by the site's, the regional managers if there was, a more confident sentiment, if you will, that part is more difficult to quantify. But if I isolate out just the new rents achievements in those months that you talked about September and October, it's in the $1,400 as far as achievement. So that's about $50, $60 dollars less than what was achieved say, back in June but is slightly more than what we've achieved in just a month before that in May. So we started pushing and getting some gains in June and then we just carried that into July, in August so it's a little of both, but...

Yes, Erik, keep in mind that we turn a lot more units in June, July than we do in September, October as well. So the number of transactions actually matters here. So if you recover or you given up a little bit on fewer units than you gained on the June and July period of time. So it's still net beneficial trade from my perspective. But as Eric said, overall rent levels of what we've achieved didn't change all that dramatically from June to October.

Yes. And again, keep in mind that I just gave you those high at $50, $60 less in October compared to June. But historically, you have a decline in that measurement as well. You have maybe -- in going all the way back to even more positive years of 2008 when you see that, that those rents moved down in '09, moved down in '10 and again part of it is seasonality, part of it is consumer sentiment and part of it at least earlier, September was occupancy driven. And again, it really -- as I said, we were really surprised a little bit by just the strong results in renewals, and we'd come of these 2, 3 very good months on the new rent gains, I mean, double-digit gains in Pacific Northwest and the Bay Area. Strong traffic that's held up nicely in August, and people were just sort of looking but not doing anything. And then again, that's what I said, at some point, you say well, I don't know how long that part's going to last. Let's see if we can entice them to snap up some of these units and they did.

Got you. And so I guess since you mentioned that the $60 normally declines to some extent just given seasonality. So on a percentage basis, you did see some decline but it wasn't it was huge change in, I guess, the trajectory of your results. It was just more of a seasonal and a bit of a pause.

Well, Eric, again, it was strategy. It was a little bit of market. The market changed here somewhat in terms of what the consumer did. The consumer was reacting to current events, and we all know what they were. They range from Denver to the U.S. credit rating and the stock market so far. I remember -- I think it was actually you guys, maybe it was Michael. But commenting on our last conference call that our market cap's going to be a lot lower after the call because the stock market was in free fall that time in August. The market did change, and these properties are pretty economically sensitive. We all know that. That's nothing new. That's why this is such a big deal to everyone, and I get that. I guess I have to step back away from this and remind everyone, this is a longer-term business. I know it's quarter-to-quarter, because we're a public company but there's this little bit of inconsistency between what our objectives are and what the quarter-to-quarter objectives might be. And so hopefully, you and everyone else can appreciate that they don't sometimes line up perfectly, and we may have to go in somewhat different direction. In the beginning, I said, hey, we're disappointed in our reaction to change because I think we could have done it better. But we also -- the reason why we wanted to bring the October results here is yes, we have a very strong trajectory through the end of the year and again, we don't turn that many leases in November and December, and you know what October is so the skepticism maybe in your report last night, I think we've directly addressed here on the call.

Right. That's understood. And, I guess, sometimes with the market up and down, 200 basis points a day, it makes you want to be more short-term focused. But just one quick last question. And I was just wondering if you can have had significant presence in any other market just maybe to next year, what market that might be?

My quick answer would be Boston because it's similar to the markets that we're in on the West Coast, but I'm not sure that we want to diversify that of our tech-oriented markets and do another tech-oriented market. I'm sure that, that is ultimately what we're trying to accomplish. We're trying to find markets that are to some extent countercyclical to what we might see out here and so what happens in New York City.

Our next question comes from the line of Michael Salinsky from RBC Capital Markets.

Just kind of following up on that last question. As you look at your portfolio today and the markets that you're in, is there any markets just as you're going about repositioning -- and not as a repositioning but recycling of assets, is there any markets where you would like to lighten up or markets where you would like to increase exposure?

Well, John Burkart is here, and he's the keeper of the dispo list. So, John, you want to comment on that?

As far as lightening up our exposure, clearly we have some underperformance specifically Ventura and a couple of areas, there would be some discussions toward lightening up our exposure but overall, we're looking asset by asset and looking at where the current returns are and projected returns, and then make a decision to try to optimize the overall portfolio returns. Well, some of it is market related and some of it is asset related within that marketplace.

Actually, Mike, let me add to that because I think that yes Ventura is on the list and that's nothing new. It's been on the list for -- yes, these lists were prepared pretty close to a year ago. And we chose to execute on the Sax asset -- assets, as I commented, primarily because the rest didn't fall as much in San Diego, that's one factor. The expected rent growth is not that much, it's another factor. Our overall expectation for Ventura County, for example, just to follow up on John's comment is actually fairly positive for the next several years. And again, we're not -- we don't have a gun to our head with respect to any of these transactions. We're trying to find that sweet spot between projected rental growth and cap rates, and so we can find the appropriate exit. So I think we -- in retrospect, maybe we wish we would have done fewer of these Sax assets but nonetheless, we are where we are and we are focused on it, and it will be a bigger part of what we do going forward.

That's helpful. Second question in terms of your markets where you've pushed aggressively. Are you starting to see people double up as you're pushing along 8% and 10% renewal increases?

It's hard to quantify. Certainly in Santa Barbara, where I commented earlier only because we just have more people on the ground get involve with the student population there. We've actually ended up with more availability than we wanted. But since school started, there's actually now 5 or 6 people that were already sick of their triple share arrangement or converted to rise living or what have you. So certainly in some markets like that where the rent service is very price sensitive or at least initially was. But as far as the Bay Area goes, you get a little bit of it, but it doesn't seem to be overwhelming.

I just wanted to follow-up on that one. The studies that I see talk about the -- what is the household formation demand of the Echo Boomers just in general because they're entering their prime renter years, and the numbers that I see of range from about 500,000 to 1.5 million nationally. So I think that there's evidence that yes, there will be some doubling up, but I think there's going to probably be more undoubling, i.e -- most of the double-ups are obviously kids living with their parents. And I think that the trend will be for a net uncoupling, not a net doubling up even with the rents that we have. And except Northern California, rents are still where they where. Like I said, on our portfolio, rents are still 2% below what they were in the prior peak. So I don't think there's a lot of evidence that rents are at the point where there's widespread doubling up. I just -- I don't see that at this point in time.

And then finally, you sold West Dublin into the joint venture, and most of your developments right now are in joint ventures. I understand with the large development in San Jose multiphase, trying to reduce some risk there. But you talked about cap rates spreads being 100, 100 plus between development and acquisitions. Now I'm wondering why you're putting those and why you're choosing a little more development -- more joint ventures on a development as opposed to keeping maybe some of that upside on the balance sheet?

We talk about this a lot, and again, John Eudy is here. I guess to simply put it, we targeted an exposure of our unfunded commitment. You're right. Development has a cap rate spread over acquisitions, but it doesn't have the same ability to lock in the capital that's going to be consumed over the next couple of years. And that capital mismatch issue is a significant one in development. I mean, at this point in time, most of the stuff that we're looking at, we are ready to start construction right away. We're on Fountain La Brea, which we just announced. We're under construction now. So we're trying to get into the dirt very quickly, minimize that cost risk so we have a general contractor ready to sign the GC agreement pretty much right when we close and then get right into the real estate. So we are focused on that unfunded commitment level. And just to be -- what we're planning to do is essentially of that $325 million number, which is a number that we feel comfortable with. We'd rather develop twice as much in a joint venture than to do $325 million and own it all.

This is also most of the joint ventures have promotes in them. And so to that extent, as Mike said, we're doing twice as much, and we have promoted interest. We're actually in a great spot.

Our next question comes from the line of Paula Poskon from Robert W. Baird. Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division: Could you give us a characterization if there is any difference in the tenant profile between the tenants that are moving out and the tenants that you're backfilling with, either in terms of average household income or credit profile or any metrics that you follow?

This is Erik. I would say that it's fairly similar. I don't have a perfect information on this relative to the specific guidance that you've mentioned. We have not changed our underwriting criteria for income requirements. And so sort of by definition, the in-place rents often are lagging the market rents. And so these people that are moving out moved in previously, and the next ones are in moving in at a higher rate. So they're obviously qualifying with a greater income, both their -- sorry, [indiscernible]. So we have seen an uptick in denial this year, not huge, but, again, that's largely related to credit issues. So again, we're not sticking our neck out there. We, a couple of years ago, had reworked our underwriting models for the applicants to accommodate for people that had otherwise good credit but were just upside down on their mortgage. And we, again, I think, made an appropriate and safe bet on those people. So, yes, I guess that's -- those would be my comments about that. Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division: And then could you just give us some color on the disposition incentive program? What are some of the parameters with that? And when was it put in place? And why did you feel this need for it?

It was put in place a couple of years ago, and the parameters are either percentage of the sales price or a percentage of the gross profit. And as Mike alluded to, management here has been very ingrained in the acquisition and development side. And we're trying to improve management's willingness to let go some of these assets, the people -- oftentimes, you unfortunately get married with some of the things that you were involved in acquiring or developing. And this is a way to make sure we had them set out to do the right thing and dispose of assets that aren't going to keep up with the rest of the portfolio.

Our next question comes from the line of Haendel St. Juste from KBW. Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division: Following your comments earlier, Mike, about unwinding Fund II over the next 2 years. Given that 3 quarters of Fund II's NOI is in NoCal and Seattle, and in conjunction with your relatively positive outlook for SoCal, I guess is it fair to assume that your net exposure to SoCal will ratchet up over the next couple of years? And if so, how much exposure to SoCal are you comfortable with on a relative basis as a percentage of NOI?

Yes, Haendel, I think it will change over time. And I think we took SoCal NOI contribution to 60% at several years ago, and then we started buying Northern California and taken SoCal from 60% to 50%. And actually, we would have probably taken it further than that, further down, except that we just can't find that many deals to buy here in Northern California and Seattle. We've been pretty aggressive up here, and thus you just can't move the numbers. The portfolio is big enough that you can't move the numbers that much. So -- but having said that, I think John Burkart is probably better to talk to you about the specifics of Fund II and what impact that might have. John?

Yes, Haendel, I want to make this clear. [indiscernible] if you said NoCal and Seattle or SoCal and Seattle, but actually, the majority -- the NOI's majority assets are really NoCal and Seattle, with some in Southern Cal. And as you can imagine, the probable plan would be that we would be selling more out of the areas that have -- had higher growth, i.e., NoCal and Seattle, sooner with the Southern Cal gaps that we expect to get height and more growth going forward, bidding a lot of sale. And we have a good amount of time to execute the plan and obviously great flexibility with our partners. These are long-term partners, 10-years-plus, and all on the same page. So we have it -- we bid all of our authority to change the deadlines as we desire, if we think the market is seems appropriate to keep the asset longer.

Yes, actually, Haendel, let me take a step back. What we do is, like our 40 submarkets, try to focus in on the ones with the greatest rent growth running conversely. As we picture it, we try to buy in the top 1/3 and consider selling in the bottom 1/3 in terms of growth. Those markets are not necessarily geographically perfect. In other words, there are markets in Southern California that we're selling, and there are other markets in Southern California that we're buying. So I think it's difficult to categorize or determine a percentage by Southern Cal versus Northern Cal versus Seattle because the reality is, we could be buying and selling in Southern California. We could be trying to acquire in downtown L.A. and sell in San Diego, for example. It really goes down to more of the submarket and asset-specific factors that are driving our sales decisions, and less sort of macro percentage is tied to the 3 large regions. Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division: Got you. So certainly appreciate the color and I understand the process here. But there -- I guess there is no hard set fast rule on what the max exposure to any specific region is, though.

Yes, I'd say 60% is probably the most we're going to do in Southern Cal. It's subject to everything I just said, yes. Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division: Got you. Okay. And the average tenant income for your portfolio today, do you have a sense where that is? And if so also, would you give me a sense of where rent as percentage of income is today across the key regions and where that has tended to top out over -- as you look back over the long run?

This is Erik. Again, with all the different products and so forth out there, I'd have to say it is sort of in the mid-70s kind of range. And I don't see -- with respect to the topping out, that's hard to say. John, I don't know if you have any comment on that.

Yes, Haendel, this is John Lopez. I would probably say that right now, if we look at it from the regional in Seattle, we're still a good portion below the long run rented income levels. And particularly, when you look at what those rent income levels are during expansion years, I don't think there's any immediate pushback there. In Northern California, we're probably right at the long run average in San Francisco, maybe a little above the long run. But again, if you look at where they are in terms of expansions, we're not that far away. But we're still below in Oakland and Silicon Valley. I mean, we're much closer in Silicon Valley than we were before, but we're still probably in the 18.5-range when the average is about 19. If we go to Southern California, San Diego, we're right about at it because we didn't have the big drop in rents. But in Seattle, L.A. and Orange, that's where the biggest gap exists right now. So probably Seattle, L.A. and Orange have the big gaps. We're right there in San Francisco and San Diego. Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division: Appreciate that. And one last one, just wanted to clarify. When you guys talk occupancy for the quarter, that's average financial occupancy, right? And then with that being the case, would you give us the average month ending physical occupancy for the months of July, August, September and October?

The number I gave was, 96.2% was financial occupancy. I think Erik had a visible occupancy as of the end of the month. We'll circle back with you on each month's end. We don't have that right now. I don't...

No, other than that, I can't -- I mean, they're getting the most recent one I know, just with this, because we ended 96.5% at physical in October. And it was 96.2% financial for October, and again, expected to be higher both on physical and financial for November.

And part of the problem with the physical occupancy, Haendel, and why we'll follow-up with you with the caveat, it doesn't really mean that much because between the end of the month and the first of the month, you get a big dropoff because you get all your notices of move out one at a time. First -- so the first of the month tends to have more move-outs than the rest of the year.

That's generally true, what Mike just said, but I don't want you to be worried about [indiscernible] November. As of yesterday, we're at 96.4% physical occupancy. So even though it drops down some, we're not going to have a big drop there, looking good.

Our next question comes from the line of Andrew McCulloch from Green Street Advisors.

And, Mike, just one question from me. Have you heard anything new on Prop. 13 legislation? It seems like there is some increased scuttlebutt about a potential [Audio Gap] rule.

Andrew, we track that fairly closely. I mean, Mayor Villaraigosa in L.A., came out as you know, it just hit the press, and they're talking about repealing Prop. 13. Unfortunately, he's not part of the structure that will ultimately lead to that. So I think that Jerry Brown has a somewhat different approach to trying to raise some revenue in the State of California despite we had a background. We had a $26 billion stellar shortfall of which he implemented the cuts of around $15 billion and then there was that $8 billion in other revenues that he didn't expect, which left a -- it still left a shortfall. And he was pushing for tax increases in it. At this point in time, he's not -- they have not completed them in the State of California. There were some temporary tax increases that expired on June 30, and they were vehicle license fee, a 1% surtax on wealthy or high-income earners. And there was a third piece, sales tax increase. So that was the place that the governor wanted to go. Obviously, the Prop. 13 discussion is one that really has never gone away over the last 20 years. But practically speaking, it requires a 2/3 vote at some level, which is very difficult to get even in the great State of California. And therefore, the people that would typically fund this type of activity generally are not willing to throw their financial support behind it at this point in time, given the high threshold for approval level and the perception of success. I think that the environment is that there will be continued discussion on Prop. 13, but I suspect that, that's not the way it goes at the end of the day.

Okay. And just, hypothetically I know you guys track this. What would be the increased operating expenses or decrease in NOIs, assuming your property taxes in California were mark-to-market?

The annual increase in expenses would be in the low $20 million. $20 million, $22 million, depending on whether the [indiscernible] value came in.

Our last question comes from the line of Dave Bragg from Zelman & Associates. David Bragg - Zelman & Associates, Research Division: Mike, you've been doing this for a while, and you've been through many different periods in which the consumer has experienced a shock in the past. So could you put August and September in historical perspective for us maybe in terms of the magnitude of which occupancy came in below your target?

Yes, Dave. I think it had to do with -- first of all, every situation is different. I'm not sure that when you get to historical precedents, everything is a little different. Remember, this is always in a quarter. We're talking in a broader scheme of things. This is a blip on the radar screen, ultimately. So the reality is, I think, that the analysts have become so focused on all the moving parts within the quarter, and they ascribe great value to individual movements and new lease rates, renewal rates, occupancy rates that is really beyond the scope of what you can manage, all within a timeframe. Because again, as I said earlier, what you might do as an owner of a portfolio over the long haul can be significantly different than what you might do in the quarter. And that topic of conversation is one that Erik and I have revisited many times over the last 30 days, because he's -- we are focused on cash flow and revenue. And practically speaking, given the quarterly result thing, you may have limitations on what you can do in terms of how far you can move occupancy down in search of higher rents, for example. So I guess from my perspective, there was a pretty sudden change in consumer sentiment, as we said before. Our division managers would describe it or do describe it as effectively seasonality starting a month earlier. I think it's just related to the results, the things that happened in early August. And I think everything is -- every situation is a little bit different. And so I'm not sure that history is going to help us with this. What I also can say is, our reaction to changing conditions -- and again, we're not talking about, oh gee, the market went from being great to being horrible. We're talking about a shift of sentiment, a shift of preference and that type of thing. It doesn't change the broader picture here. And I think that we could have reacted faster and better to build occupancy quickly. One of the issues, we were a little bit more -- we had a smaller portfolio, a flatter organization than we do now. And it was easier to implement change than it is now. So that is something that we are working on and will be the focus of a meeting that begins immediately after this conference call. David Bragg - Zelman & Associates, Research Division: Well, I understand the preference for focusing on the long term. I actually think that, that's a point in my question is that given such a robust outlook, 28% rent growth over the next 5 years, people are looking for evidence of that sustainability or evidence that there may be weaker demand than expected. So on that note, just thinking about your 5-year model, what level of household income growth is embedded in that? And how important is that component to the model?

Dave, this is John Lopez. Our top market, we have probably on average over the 5-year period, probably in the range of about 3.5% annual average, obviously in chunks upfront, higher in the first 2 or 3 years. That would probably be the basis for it. And obviously, it's critical for us because that is the -- we've gotten some -- the rents went down. They came back. They probably fell more than they should have, given the drop in occupancy. And so there was a bounce back. But going forward, we are going to need those jobs and that income growth to get that rent growth. And we're seeing that. If we look at the -- what we're getting the job growth, and we are seeing the income growth, and not just overall personal income, but in wages and salaries, so we're seeing the ramp-up. We've seen it before, and we believe it's there. David Bragg - Zelman & Associates, Research Division: The multi-family supply and single-family market, this influence is pretty well understood for the next couple of years. So really, to be on track to hit that -- to hit target over the longer term, we need to start seeing household income growth of 3.5% or better over the next couple of years.

Well, yes, I think that -- yes, well, the 28% is comprised of, let's say, 3.5% times 5 years, that's 17.5%. So you're talking about outgrowing income levels by 10.5% over 5 years, which we think is sustainable given the other measurements, rent immediate income, affordability issues and that type of thing. So that is what the assumption is based on.

And you're right, Dave, because obviously, getting that consistent growth, given what we've had today based on -- now we're starting in our market the next 5 years out. I mean, we're essentially above 95% in Seattle, 96.5% in Northern California and 95% in Southern California. So we've got 2 years of very, very limited supply with moderate increases, starting at 96% occupancy. And we already have, year-over-year, 1.25% job growth. So we're very confident in those numbers. Remember, David, that it's -- we look at the national numbers and you say it's an anemic job. But we've got 3% year-over-year growth in Silicon Valley and even Southern California, where we're a little disappointed. If you look at the office absorption in Southern California, that would almost put it on the top of the chart in the entire country. I mean, Boston has done well, but their absorption isn't beating Southern California. Texas has done well, but the absorption rates -- even in the third quarter this year in Dallas, Houston, Austin would not make Southern California look bad. So we believe that -- L.A. obviously has lagged a bit. But if you look at the recent numbers, it's been very positive. And the coupling of increasing in the professional business service in the jobs in the third quarter in L.A. and absorption of office space, that wasn't a coincidental accident. So we're seeing 2%-plus growth in Seattle, 3%-plus in Silicon Valley. San Francisco is ramping up. We're above 1% in Southern California, without the participation yet of L.A. So we think we're in a really good position.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Okay, thank you. I'd like to thank everyone for joining us on the call today. As you can tell, we remain solidly optimistic about the future. We appreciate your interest in the company and look forward to next quarter's call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.