Essex Property Trust Inc (ESS) 2002 Q3 法說會逐字稿

This is Premier Conferencing. Please stand by. We're about to begin. Good day, and welcome to the Essex Property Trust, Incorporated third-quarter earnings results conference call. Today's call is being recorded. With us are Mr. Keith Guericke, Chief Executive Officer, and Mr. Michael Schall , Chief Financial Officer. For opening remarks, I would like to turn the call over to Mr. Guericke. Please go ahead, sir.

Welcome to our third-quarter call. This morning, we'll be making some comments in 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. This morning, I wanted to address just a couple of topics, and then it turn it over to Michael, who will talk it about our third-quarter results, but first of all, I'd like to talk about our operating philosophy, and then secondly, discuss our markets and lay a foundation for our 2003 expectations.

It's our belief that we can maximize NOI by aggressively managing occupancy, which we've done and which you can see the results of this quarter. As disclosed in the press release, the financial occupancy on the entire portfolio for the quarter was 96.1 percent. That's 140 basis points better than a year ago, and on September 30, the actual physical occupancy for the entire portfolio was 96.4 percent. You know, with continued job losses in the northwest and the Bay Area and unemployment continuing to increase, the obvious question is: Where is this additional occupancy coming from? During the rent run-up in 2000 and early 2001, many of the renters were forced to move to secondary or tertiary markets. They were forced to move down to lesser-quality apartments or lesser-quality markets, and finally, to double up.

As rents have reduced, especially in the Bay Area, renters can afford to live closer to their jobs and reduce their commute. We're also seeing some undoubling, as well as seeing the lesser-quality properties suffer a greater vacancy than the well-priced B product. Our portfolio is made up primarily of B2B-plus product and we're benefiting from this. The strongest leasing months on the West Coast -- and I suspect the entire country -- are during the summer months. We manage our lease expirations to those months. As disclosed in the supplemental package, turnover on an annualized basis was 67 percent for the quarter, compared to 56 percent a year ago, and 49 percent last quarter. The higher turnover does not signal a trend. Since lease maturities were directed to the summer months. We expect to see the fourth quarter drop back down.

Now, let me address our three major markets and what we expect to see next year. Starting with the northwest, which represents 20 percent -- 27 cents -- 27 percent of our portfolio. In Seattle we expect to see new supply to remain at relatively low levels, multifamily approximately 3400 units or nine-tenths of 1 percent of the existing stock, and new single-family, 7500 units or 1.2 percent of existing stock. With very moderate job growth of about 1 percent. We expect to see market rents staying flat at today's level, and market occupancy at up around 94 percent. In Portland, new supply is expected to be in the 13 -- about 1300 units for multifamily or six-tenths of 1 percent of existing stock, and 9700 units of single-family or 1.8 percent of existing stock. And again, with relatively moderate job growth of approximately 1.5 percent. Market rent growth is forecast to be flat, with what we're experiencing today, and occupancy at about 94 percent.

In the Bay Area, where we have 20 percent of our portfolio, new supply is at very manageable levels and let me go through the three MSAs that make up this market. The new multifamily supply in San Jose, approximately 2900 units, 1.5 percent of existing stock. In the Oakland MSA, 1700 units or six-tenths of 1 percent of stock. In San Francisco, 2,000 units, or six-tenths of 1 percent of stock. The new single-family supply is for San Jose about 1700 units or four-tenths of a percent of stock, Oakland 5,000 units or eight-tenths of 1 percent, and in San Francisco, 1100 units, or three-tenths of 1 percent of stock. Job growth will be marginal, but positive, at about 3500 -- excuse me, 35,000 jobs for the entire Bay Area. For 2003, expect to see rents flat from where they're at today, and occupancy remain in the 94 to 95 percent range.

Southern Cal, where we have 53 percent of our portfolio, we expect to produce the best operating results next year. Again, new supply is at low levels as follows: In venture a County, multi- -- new multifamily supply is 400 units or eight-tenths of a percent of stock. LA County, 7500 units or a half a percent of stock. Orange County, 2,000 units, less than 1 percent. San Diego, 5500 units, 1.5 percent of stock. The single-family supply is as follows: 2800 units in venture an or 1.5 percent of stock; LA, 7800 units, which is four-tenths of 1 percent; Orange County, 6,000 units, which is approximately 1 percent; and San Diego, 8600 units, or 1.4 percent. The employment picture in Southern Cal is much more positive than our other markets. 2003 job growth is expected to be in the 1.5 percent range, and coupled without having significant job losses in 2002. And unemployment rates are at better than or equal to the national average.

We're expecting occupancy to remain in the 95 percent range for 2003, with rental growth being in the 2 to 4 percent range, depending on the sub-market. As we've always stressed on these calls, it's it's-demand fundamentals that drive operations and the success of the multifamily companies. We continue to believe that. We continue to stress the importance of total residential supply as we talk about single-family in these calls. To the performance of the multifamily market. As we've seen during this period little or negative job growth for most markets, total residential supply affects apartment occupancy and rents. This has been especially true during this recent period of historically low interest rates.

In each of Essex's market regions, total permits as a percentage of stock has -- of stock has declined, and we reiterate our belief that when strong job growth returns to the U.S., these markets, the markets we're in, with lower total residential supply, will rebound more quickly. Just a quick word about acquisitions and dispositions. For 2003, we've got approximately $400 million in purchasing power left in our fund, the Essex value fund. Our goal for 2003 will be to invest those dollars through acquisitions and new development by December. We're not going foolish about it, and as we discussed in our last call, very sensitive to current cap rates. With respect to dispositions, at this time we've not identified any assets or specific markets for disposition in 2003.

Now I'd like to turn the call over to Michael Schall .

Thanks, Keith, and thanks, everyone, for joining us today. I'd like to note before I get into the core of my comments that the press release and the supplemental reporting package is available on our website or you may call our investor services department at our corporate offices in Palo Alto and obtain a company. As with the past, I'm going to cover four topics on the call. The first is the quarterly financial results. Second is loss to lease. Third is the balance sheet. And fourth is the SFO estimates for the remainder of 2002 and 2003. So for topic number 1, let's talk about FFO for the quarter. As you know from the press release, FFO per share for the quarter increased just under 1 percent to $1.12 from $1.11 in the prior year. I have several comments about the components of that overall result, starting with internal growth. Internal growth has continued to be a challenge in California, and I believe for most of the nation, relative to the comparable year, comparable period of 2001.

As expected year-over-year comparisons hit its worst point in June, and you'll recall that we had a same-property NOI of 10 percent during the June 2002 quarter. In the third quarter, we reported a 8.8 percent decline, with many of the same factors that occurred in June. Our expectation is for the year-over-year comparisons to continue to improve from this point for the foreseeable future. Wanted to make several comments about the components of the same-property revenue decline, which was 5.5 percent during the quarter. The first comment is related to occupancy. As you know, from Keith's comments, that occupancy increased for the third quarter of 2002 relative to the same quarter of 2001. It went from 94.7 to 96.1 percent.

Each market has been affected by local economic conditions and weaker than what we'd hoped for in terms of employment growth, which is the primary driver of occupancy and rents. The increase in -- the increased occupancy in the third quarter of 2002 versus Q3 of 2001 was approximately 663,000, or added 663,000 to the same-store NOI number, which is 1.7 percent positive offset to the overall same-store revenue decline. You know, again, our strategy has been to focus on leasing. We're using primarily nine and 12-month leases, try and keep them long-term during a relatively difficult period or difficult expectation for the economy and keep occupancies high as a management philosophy.

Obviously, the quarterly results represents an average of the three-month period, July, August, and September. For the month of September alone, just to give you an idea of what the trend was, financial occupancy for the portfolio reached 96.3 percent. The second component of the same-store revenue decline was scheduled rent, and that accounted for 6.5 percent of the overall 5.5 percent reduction, so obviously it was a larger number that was offset by the occupancy number and concession number that I'm going to talk about in a minute. As reflected in the loss to lease number that I'll comment on later, market rents by the end of the third quarter had dropped another 1 percent relative to the June 30, 2002 quarter, led by a 2.4 percent reduction in Northern California and a 1.5 percent reduction in the Pacific Northwest, and rents were essentially flat in Southern California.

Which leads us to a third component of the same-store revenue number result, which is concessions. The amount of concessions recognized during the quarter increased relative to the third quarter of 2001 but it decreased relative to, on a sequential basis, from Q2 of 2002. As you know, we expense free rent in the initial period of the lease rather than reporting leases on a net-affected basis. We recognized 894,000 in concessions in the third quarter of 2002, again down from Q2 of 2002, where we recorded a million sixty-four thousand, but it's up again relative to the third quarter of 2001 an increase of 510,000. Of the 894,000 total concessions on the consolidated portfolio, 685,000 was in the same-store calculation, representing a $316,000 increase over the prior-year quarter.

This increase, when -- as a component of the overall same-store revenue number accounted for .9 percent of the -- .9 percent offset of the 5.5 percent overall same-store revenue decline. In the third quarter, just a note, 11,700 units are in the same-store count. Two other points about concessions. As Keith indicated, we were aggressive in pricing units in the third quarter in order to improve occupancy from the 94 percent, and also, at the same time, meet the turnover which was by design heavier during the summer months. You know, as reflected in the turnover percentages, we turned approximately 30 -- 36 percent more units in the third quarter as compared to Q2, and at the same time, concessions declined, so overall, we think that that -- that is -- goes a long way to supporting our believe that concessions, there's been a real decline in concessions throughout the marketplace.

Next I'd like to address operating expenses, which increased by 3.5 percent for the quarter. Same-store controllables were up, controllable expenses were up 6.9 percent. Utilities declined 12.2 percent. Real estate taxes were up .7 percent. And insurance was up 27.1 percent. Again, note that, you know, overall, insurance expense is a relatively small expense when compared to revenues and our total expense numberssome (ph). During the quarter, approximately a hundred thousand of the expense increase was a onetime-only hit as a result of trying to correct a seemingly chronic occupancy problem in one of our northern California assets. Again, a hundred thousand dollars was spent on that, and that is not expected to recur.

As previously reported, we implemented, earlier this year, a rubs utility building system in California during the first quarter. That is the primary contributing factor to the reduction in utility expenses I cited earlier. I also wanted to make a couple of additional comments about Southern Cal, and just look at the results from that region. As you know, it is our largest concentration, overall concentration, of properties, even though several of those properties are held in a joint venture format and therefore they're not part of the same-store or even consolidated portfolios but they still have a major impact on our overall results. Southern Cal, as you know, continued to lead our operating results, largely attributable to a more diversified economy and a better job situation than our other regions. For the third quarter, occupancies in Southern Cal were 96.4 percent, up from 94 percent in the second quarter. A quick breakdown of the 4.1 percent increase in same-store revenue is, number one, scheduled rents -- scheduled rent increases were 2.5 percent of the 4.1 percent overall increase, increase in occupancy was 1.1 percent, and a decline in concessions in Southern Cal represented .4 percent of the increase in same-property revenue.

Again, Keith talked about turnover, so I'm not going to go into that in any greater detail. He indicated we didn't see that as a trend, and so I'll just skip that part. Talk a bit about fee and other income. As you know, fee and other income has been significantly larger over the years as we have increased our co-investment program. Interest and other income, including the add-back for joint venture depreciation, increased 582,000 to 7.3 million versus 6.7 million for the third quarter of 2001. During the quarter, the nonrecurring portion of these fees were 925,000, which is indicated in the supplement.

There were two primary components for this. First, a $475,000 incentive fee related to the sale of two co-investment assets, essentially Cassa Mango (ph) and Riverfront, which was sold earlier this year, and there's an incentive process there which came to fruition in the third quarter. So we recognized that fee. The second piece was a consulting fee of 450,000 related to providing services to the buyer of the Hawaii property related to their bond financing. As you will recall, the company sold the Hawaii property -- it's actually indicated in the press release -- in July. As part of the sale, the company carried back financing on the sale, which on -- in early October was repaid by the buyer's bond financing proceeds. In conjunction with that payoff, the company's loan was repaid that we carried back on the -- on that property, and then we will recognize a net miscellaneous nonrecurring fee income of 1.1 million in the fourth quarter. And that basically concludes the -- the sale of the Hawaii asset. It's run -- gone full circle.

I also wanted to make a couple other points about the quarter. Effective July 1, 2002, the company discontinued an interest accrual on a -- on two notes receivable that are secured by an office building located in the Irvine (ph) area. Essentially, several years ago we acquired an office building, along with a developable site, and we sold the office building and carried back some financing and were accruing interest on that financing. Essentially we're having some difficulty -- or the owner, current owner, is having some difficulty so we have discontinued our accrual for -- until, you know, essentially -- until further notice, and that caused a reduction in interest and other income of 425,000 for the quarter, which will likely continue for some time.

I also wanted to comment that during the quarter, the company had 19.5 million dollars invested in a 1031 exchange account which represented the proceeds from the sale of tar raw village in April, 2002. While in the 1031 exchange account, these funds earn interest at approximately 1.5 percent, at the end of the third quarter, the funds were reinvested into the March Briesis (ph) asset in Long Beach, and therefore we will have a pickup in earnings related to the difference between the yield on the March Briesis (ph) asset and the 1.5 percent that we were earning while it was in the exchange account.

Next comment is change in interest and amortization expense, which decreased by almost a million four during the quarter. This is attributable to three factors. The first is outstanding debt balances. The weighted average outstanding debt was 678.8 million for the quarter, which is an increase of 1.3 million from the comparable quarter of 2001. And actually, I want to note that the average interest rate was essentially unchanged from a year ago. The second component was a decrease in our line of credit rate from approximately 4 percent in the prior year to 3 percent in the current year. That contributed approximately 300,000 in FFO for the quarter. And then finally, capitalized interest increased 611,000 to 1.66 million during the quarter, versus a million five thousand in the prior year quarter, again related to an increase in construction in progress, which went to 135.2 million from 79.8 million a year ago. G&A decreased by 356,000 to a million four eighty-two. And actually the supplement breaks out the components of the G&A decline.

Wanted to go to topic two now, which is loss to lease. Not a lot happened in loss to lease during the quarter. And actually, the calculation of loss to lease is detailed in the supplemental package. As you know, we define loss to lease as the difference between market rents per our price sheets and our scheduled or in-place rent. Loss to lease with for the portfolio at September 30th was 7.8 million or 3.7 percent of scheduled rent. Again, essentially unchanged from last quarter. Third topic, the balance sheet. Again, we predict that capex, or estimate the capex for the year will range approximately $350 per weighted unit, and then grow at or near inflation from that point on. And so nothing new, really, there. Another -- next comment is interest coverage remains strong. It's four times EBITDA. Debt to market cap was 35.6 percent as of September 30th.

As Keith indicated, again, the fund -- wanted to comment on the fund. It provides a significant amount of fire power so that we don't have to rely exclusively on our balance sheet to fund new transactions. Again, we have approximately $400 million in capacity on the fund, or in the fund. As indicated in the press release, just to update you on our share buyback program, we acquired, in July, an additional 400,000 shares at an average price of 48.

Now, I wanted to discuss our FFO expectations for the remainder of 2002 and into 2003. Essentially, we are going to end the year with an FFO estimate of -- or current FFO estimate of 451 per share. For 2003, we remain in the approval process and review process for our property operating budget, so there's still some work to be done there. However, it appears that we're -- we believe that same-store NOI will be in a range from flat to minus 2 percent, which essentially we're taking the midpoint of that, being minus 1 percent. And the components, just roughly -- I'll go through the revenue components that make that up.

In Northern California, we're expecting revenues to be minus 3 to minus 5 percent, Southern Cal 4 to 6 percent, and the Northwest, 0 to minus 1 percent. Let's see. And then -- and then -- let's see. The -- I think the key difference for 2003 is the miscellaneous nonrecurring income. For 2003. As you know, we had a -- we had tremendous success in 2002 in generating nonrecurring income. I think at this point in time, we're going to expect a reduction in that line item of somewhere between 4 and 5.4 million, which is 19 to 26 cents per share. There is a possibility that this could increase in the future, and essentially it depends on whether or not we sell some additional joint venture assets. Overall, FFO expectation, therefore, comes in at 428 to 440 per share. Again, we'll be continuing to refine our budgets and break down those results on our next call. That concludes our comments.

We'd like to turn it over and see if anyone has a question.

Operator, are you there?

Thank you. The question and answer session will be conducted electronically today. If you do have a question, please press the star key, followed by the digit 1, on your touch-tone telephone. We will proceed in the order that you signal us, and take as many questions as time permits. Additionally, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, to ask a question, please press star 1. Our first question comes from Dan Oppenheim at Banc of America Securities.

Dan Oppenhiem (ph): Thanks. Just was wondering if you could go through a little bit more on the 2003 guidance in that if we're finishing 2002 around 451 a share, and then there's a 19-cent -- or 19, 20-cent decline in FFO just from the nonrecurrings and then another decline from the same-store NOI and then possibly from the loan receivable on the office property, wouldn't that put us closer to the lower end of the guidance?

Yeah, I -- there's a couple of positives, though. One would be the -- the development assets. You know, essentially we are delivering a property in -- or leasing up a property in Richmond, and one in downtown Oakland, which will have a -- somewhat positive effect. And then we do have the possibility for some external growth as well.

Dan Oppenhiem (ph): Okay. Thanks. And then in terms of the fund, with 400 million available, have you seen any change in the cap rate in Southern Cal that would make you more opportunistic about finding opportunities?

To date, we haven't, but we are aggressively out there beating the bushes and, you know, we believe that there's a lot of -- there are a lot of transactions happening, there -- which is the positive. There are more transactions happening today than there were three to six months ago, and I think as more property comes to the market, cap rates may become more reasonable, and that is giving us some hope.

Dan Oppenhiem (ph): Okay. Great. Thanks very much.

And Mr. Oppenheim, was there anything further?

Dan Oppenhiem (ph): No. That's it.

Great. And our next question comes from Brian Legg, Merrill Lynch.

Yes. Keith and Mike, can you talk about the -- the cap rates you're looking for in this fund? Is it -- is it still -- is it low 7's before capex or is it even lower, because I know you have your -- your IRR threshold and it just seems hard to get there with a low seven percent. And in that vein, do you really think you can get out $400 million out the door by the end of '03 when the drop-dead date hits?

Well, let me start with the first part and then I'll let Mike get his crystal ball out with respect to the second part . We -- if you look at -- you know, first question -- first part of that is, no, we're not going to drop -- we are not expecting to drop cap rates at less than seven and a quarter. We're trying to stay at seven and a quarter and above, to answer your first question. And we're looking at, you know, we've got a -- you know, a five- to six-year hold and, you know, right now we're in a position where we have no rental growth and we're expecting no rental growth the first, you know, year to -- well, in Southern Cal we are expecting a little bit of rental growth, as I said in my discussion of the market. You know, 2 to 4 percent. But if we can get over, over time, an average of 4 to 5 percent over that period, so years 3, 4, or 5, maybe we get 5 to 6 percent, we can make our -- our IRR work for us, assuming that we can sell at, you know, not a huge increase in the cap rate. So as long as the cap rate stays within a band of 25 to 30 basis points of where we're buying, the growth will take us to where we need to be.

Okay. And you think you'll be able to fund the entire 400 million of dry powder?

Well, I said that's our goal, and our goal is always to do what we're asked to do. As I also said in my comment, that we're not going to do anything stupid just to put the money out because that's not what the investors in the fund bargained for when they agreed to invest. So our goal is to invest it wisely. It's our goal to put it all out. We are going to push very hard to do it, and maybe even hire some additional people. But we're not going to put it out at any cost. So I don't know. I mean, my -- you know, as I said, we're going to work hard and we've generally met our goals, but we're not going to do it stupidly.

Okay. And Mike, can you go over what on interest and other income in your equity income and co-investments line. It dropped by a million dollars sequentially. Can -- you said that 450,000, I don't know if it falls in that line action comes from the mortgage on the office building. Is there anything else in there that explains the drop? .

Actually, I'm going to ask Mark to -- Mark you will to comment on that one.

I'm trying to think about this, Brian. It could be -- you might have to give me a minute or two. 'Might have to get back to you off-line. But just on the surface --

You go from 2.8 million to 1.8 million are in that line. 2.8 million was in the -- was in the second quarter, and 1.8 million in the third quarter.

Uh-huh.

I just want to know if that's all sort of recurring, if that's a good run rate. If you want to get back to me off-line, that's fine, or --

Yeah, why don't we do this, Brian. Why don't we -- why don't we spend a few minutes and then between questions, we'll answer that.

Okay. And my next question is: Can you guys just talk about what's going on in the northern California? It seems strange to have a sequential decline of 2 percent which annualizes closer to 8 percent when your occupancy goes up 2 percent and your -- and concessions fall by 10 percent. Is it just rolling down your leases to market and how many more quarters do you think it will take before that gain to lease becomes flat?

Well, I think if you look at -- if you look at the gain to lease on our supplemental, it's now down to $650,000, so we would expect -- you know, it's not going to all roll off in a quarter, but the magnitude of the roll-off over the next couple quarters should be greatly diminished, and -- and, in fact, we expect to see -- to see that.

Yeah, Brian, I would just add to that that, you know, the outlook for next year is, you know -- and I think consistent with a lot of the views out there -- that, you know, the job growth driver in these markets is not going to be very strong. Certainly in the earlier part of 2003. And therefore we're going to have to -- you know, we're going to have to be aggressive in our leasing activities, and it will be difficult to grow rents and -- it will be difficult -- it will just be a difficult pricing environment during that period of time. So essentially we're going to assume that until there's some direction in the economy, positive direction in the economy, and positive direction with respect to job growth, that we're going to sort of, you know, be continuing sort of a malaise here until, you know, that starts picking up.

I guess my question was asking: Are you still -- was this -- the concessions were coming down because you were cutting your base rents? Is that does that sort of explain the 2 percent explain the 2 percent decline in sequential growth.

Well, I think so, yeah. We were trying to build occupancy. We're -- I think our view is, with a year ago and actually it continues to be the same way. A year ago in the summer, we said it's going to be a difficult period of time economically. Let's try to lock up as many, you know, nine- to 12-month leases as we can, so that we essentially could push through the winter months without having a -- you know, any operating -- you know, major operating issues. And we did that. And so those leases came -- came to fruition -- many of them came to fruition in the July-August-September period or June through September period, and again, you know, we wanted to do the same thing. You know, essentially trying to take a more defensive view of the world and make sure that we have things fairly well locked in for the winter months. So I think we did that, and we priced units accordingly in order to get the -- you know, hopefully the safety represented by longer leases and trying to minimize our turnover during the winter months.

Okay. And over the next 12 quarters or so -- 12 months or so, do you expect to sell any more? You said you didn't expect to sell any assets, but I think last quarter you were talking about some in your AW JV, you might sell 75 to a hundred million of additional assets. I think those are four properties. Is that still correct?

It continues. I mean it's a discussion that is not completely ours to control, and we're in constant, you know, discussions with our partners he is about that. At this point in time, there's a couple of properties that we're talking about selling, but there's just nothing firm. And again, we would rather be, you know, pretty firm in terms of our guidance for next year. So if we're not sure, we'd prefer to exclude it rather than include it.

And I assume there's no on balance sheet acquisitions, then to ...

Yeah. We're -- at this point in time, we're focusing on 2003 activity being in the fund.

Okay. Last couple questions. What was the yield on your ash re-tum (ph) purchase, and state if it's on a pre-capex or post-capex basis.

On.

The Arboretum.

Yeah, it was in the seven and a quarter range pre-capex.

Yeah.

And essentially, Brian, just to reiterate what Keith said before, we're trying to hit a 18 -- minimum 18 levered IRR and, you know, you get there by stacking up to seven to seven and a quarter initial cap, and, you know, annual rent growth of around four percent, combined with where leverage is today and, you know, you get that number.

Right.

So we're pretty focused on that, as you can imagine.

Right. And that translates into about 141,000 per units? That (inaudible) new property?

Yes.

Okay. And the last question. Are you guys going to plan to provide in your supplemental package a breakdown of your capex and tie it to your cash flow statement in the future?

You know, Brian, we have broken that down in the 10-Q.

Okay.

In the cash flow statement of the 10-Q. It's there.

Okay.

And Brian, on your question on the sequential change, money a low a was in the equity income in the second quarter, sold there July 1, moved up into interest income, so that was one major piece and then the other piece, mango and river front, the joint venture assets were sold in the second quarter so there was some component of income there that they contributed in the second quarter that wasn't in there in the third quarter. Those are the two largest pieces.

Okay. So there's some in the interest income section that will go away too, so that 1.7 million will be lower in future quarters?

To the extent that -- yes -- the upon a low a paid off, exactly.

Okay. Thank you.

And we will continue on with Andrew Rosivach with US Bancorp Piper Jaffray.

Good morning, guys. I was wondering, your interest coverage and fixed charge coverage, does that include JV debt? Sorry?

Yeah. No, it does not.

You wouldn't happen to know what it is, since that's kind of a larger part of your business now?

Do you have that -- I'm trying to think through this thing. We have -- I mean, obviously we don't have the joint venture's share of the equity in that number either, so --

Right.

What we have is our pro rata share of the income. And, you know, most of these are -- they are structured in such a way that they are stand-alone, you know -- you know, expand-alone type entities. The (inaudible) rates I guess you could argue is somewhat different --

Supplement. I mean you see all the debt that's out there.

Yeah, you do give me the pieces. I was just wondering if you happen to know it offhand.

No, I don't have it handy.

Okay. Next up, the Irvine (ph) Office Building, are there any prior period adjustments that are going to be related to the interest accrual?

Not that I'm aware of, no.

Okay. Kind of jumping around, and I apologize, but for your forward guidance, the negative 1 percent same-store, is that -- is that full-year '03 over '02, or is it kind of a run rate from your current rent roll going forward?

Well, given that we're not through '02, there is a certain projection element in that number by -- by default, by necessity. It's our best estimate of what that might be for Q4.

So it is -- it's '03 over '02? Full year over full year?

It's the estimate of '03 over '02.

Uh-huh.

With the known uncertainty that, you know, we have -- the Q4, we had to estimate.

Yeah.

Q4 of '02, we had to estimate.

Gotcha. Okay. And then last up, it seems like your miscellaneous income, if -- if you take out the reduction that you have, is the net number pretty close to zero? That you're anticipating for '03?

You know, that's where -- that's where we're starting from. We're assuming that we will have limited other income in '03, unless, of course, as I said before -- I mean, it doesn't include, you know, any possible incentive fees from the sale of, you know, joint venture assets, which, you know, I don't have any firm commitments to do so at this point.

Right. Okay. That's it. Thanks, guys.

And our next question comes from Richard Payola ABP Investments.

Hello, guys. I have a question for you. I -- Mike, I think you mentioned that you're taking the midpoint of what you see as the most likely range for NOI next year. What is a 1 percent swing in that number mean, in terms -- on a per-share basis, just for sensitivity analysis, to get, you know, essentially where you think the further downside could be?

Rich, let's see. I will -- we'll calculate that in a second and -- do you have that number, Mark?

Yeah. I think it's --

Six --

One percent would be --

1.2 million is one percent?

Yeah.

That's gross numbers. Divided by 20.7 million shares. So around six cents.

Okay. And then could you guys just give me a little more color on the Seattle market? I know you've tried to structure your ownership away from, you know, I think the -- you know, the Boeing and such, but what's going on there? I hear, you know, concern about also I think it's United Airlines has a considerable amount of operation up in that area, and then also the potential ripple effect, you know, maybe not just the direct Boeing effect but, you know, the ripple effect to the economy. It does not look like the airline business is going to be getting on its feet anytime soon. Could you just give me some color?

Well, actually, we've got John Lopez here as well who might be able to do that better. But you're right. I mean, Boeing -- it seems that Boeing is at the bottom with respect to -- unless there's another shock. The problem we had most recently is that the manufacturing -- manufacturing sector, besides Boeing, had some additional cutbacks which cost approximately 20,000 jobs so far this year. Positives are, Microsoft is hiring, Washington mutual is consolidating some operations into that market. You know, there are, generally, some smaller businesses that are growing. Besides that, let me throw John into the mix and have him add some color to this.

Well, you know, the biggest loss this year, obviously, was the impact of 16,000 high-paid Boeing jobs that were lost, and if you look at that, you know, about 85 percent of that came in the first six months of the year, so we think that those losses have stopped temporarily. There may be something down the road, but, you know, we believe what we're doing in the next year, given the fact that the technology component in Boeing -- in Seattle was not the semiconductor part but more software, that gives us room for more optimism in the re- -- the startup of more job growth, which we think the semiconductor sector will lag further than the software side.

Okay. Thank you that much. That's the end of my questions.

And a reminder to the phone audience, if you do have a question, please press the star key followed by the digit 1 on your touch-tone phone. And our next question comes from David Harris, Lehman Brothers.

Yeah. Hello there, everyone. Keith, could you just remind me of what your rent expectations are for the Bay Area? I missed that in your initial remarks.

Okay. Yeah. We said that both Seattle and the Bay Area were going to be flat next year from where we're at today, so essentially what we're saying is, where we're at today, we're going to go ahead and absorb the rest of our gain to lease, if you will, and -- but we're going to -- we believe that we can maintain occupancy in the 90 -- in the northwest at about 94 percent, and the Bay Area 94, 95 percent in the various different sub-markets.

Okay. Did -- Mike, did you provide guidance as to what your occupancy assumptions are on your portfolio in your '03 guidance for us?

Actually, the guidance -- or those numbers that I gave you were actually -- we sort of mixed you up a little bit. That was what we thought -- that's what we based our budgeting going forward on, 2003, was the occupancies that I threw out to you, which -- which is probably, in some cases, different than market. Maybe I mixed -- I mixed those two together.

Yeah. That's the thing I'm slightly struggling with. In Southern Cal, I think you said revenue growth in your guidance would be from four to six.

No, two to four.

Is that on a market basis or --

Yeah, Keith is doing.

Market growth.

I'm doing our portfolio. So --

Is there a delta between the two and can you give some explanation as to why there should be? You know, where that originates from? I mean particularly in Southern Cal, you seem to be throwing out revenue assumptions that underpin your guidance which seem to be different from --

I guess there are a couple of factors. One is where you're properties are actually located. In fact, if you'll look at the job growth results among even Southern Cal, they're pretty spotty. LA County has very limited job growth. Whereas San Diego and some of the other areas are positive. So that's one area that it can be different. The other area it can be different is, you know, Keith is using, you know, market rent growth and obviously we have some loss to lease in Southern Cal, so that would help our portfolio relative to the market .

Okay. So in Southern Cal, you get to do outperform and in the other two markets, you're going to perform in line or would you expect some out-performance there as well.

But again, I think there's two different issues here. One is what is the market rent going to grow in the market, and the other is, how much revenue growth. So if we have a portfolio that has rents that are significantly below market, we can have revenue growth that is different than market rent growth, but really all we're doing is we're -- our loss to lease. So I don't know -- I don't know that that's a -- the right characterization is to outperform the market.

Okay. No, I understand where you're coming from. You've got about $25 million left on your share buyback program, and you've been -- seems like you've been pretty firm on buying the stock at the 48 price level. Could you give some color on what your thinking is with regard to usage of the balance of that capacity and whether you might return to the market -- return to renew the program and whether there's any of that included within your guidance for next year?

Actually, we do -- we do expect to recommence that program in the near future, and have moderate share -- actually, we have the assumption that we will complete that program in 2003.

Okay. But no more?

That's correct.

And what underpins the 48? Is that an NAV-based calculation?

Sort of. I'd say it's more like our view of a compelling buy type of scenario.

I'm sorry, Mike?

It's more like a compelling buy, a level at which we think it's a compelling buy relative to NAV and all the factors.

Okay. So NAV is part of it but not the sole criteria?

Well, it's -- you know, it was the board's decision. You know, there was vigorous debate and all these things, but I think if I can tell you what they were thinking, I think it went back to, you know, the concept of that it's a -- you know, it's a very -- it's a very good asset to acquire at that price.

Okay. Great. Thank you.

And Mr. Greece, there are no further questions. I'll turn the conference back over to you.

Thank you very much. And we appreciate everybody joining us today on this -- for this call, and hope to speak with all of you again next quarter. Thank you for joining us.

And that concludes today's conference call. On behalf of Essex Property Trust Incorporated and Premier Conferencing. We thank you for your participation and wish you a wonderful day.

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