Essex Property Trust Inc (ESS) 2003 Q4 法說會逐字稿

Good day and welcome to the Essex Property Trust incorporated fourth quarter and year end 2003 earnings results conference call. Today's call is being recorded. With us are; Mr. Keith Guericke, Chief Executive Officer, and Mr. Bob Talbott, Senior Vice President of Operations and Mr. Michael Schall, Chief Chief Financial Officer. For opening remarks I would like to turn the call over to Mr. Guericke. Please go ahead, sir.

Thank you. Welcome to our fourth quarter earnings call. Today we are going to 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 to you review them. You know, 2003 is complete. I can say thank God to that. It was a tough year. During the year FFO decreased 6.7%. This isn't what we had planned or expected but frankly on a relative basis it's respectable when measured against our peers who had FFO decreases ranging from 8.8% to 17.1% for the year.

I was going to go in and hit some highlights for the year but upon further a reflect it seems clear that 2003 was the bottom and the completion of a business cycle that started in 1993. The West Coast began is ascent from the early 90's recession and through the 90's benefitted from incredible job and rental growth. The Internet boom capped that boom period followed by what we thought was a bottoming out and then the events of 911 changed that and the economy spiraled down as I've never wtnessed.

Finally it appears that we're at the bottom and ready to start the next cycle. Technically I know that the recession has been over for some time but we haven't seen the jobs yet. This cycle saw Essex go public in 94 with a market cap of approximately 300 million and a stock price of $19.50. And an investment focus on the West Coast infield markets. Today the company has market capital of about 2.7 billion, and according to the NARE Equity REIT Index Essex has produced the second best total return of all equity REIT's since '94 and is significantly ahead of its nearest multi-family competitor.

These results were produced by staying focused on our core markets and by using our research to anticipate the best growth markets and investing in those markets ahead of the pack. We've kept our balance sheet strong with debt in the low to mid 30% range, and we were one of the first companies to recognize the benefit of diversifying our capital structure with the formation of a value fund.

As we start the next economic cycle we'll continue to do the things that made us successful in the first cycle. We expect that while Southern California will remain strong, some of our other markets will produce the best acquisition and development opportunities going forward.

And we expect to continue our opportunistic use of alternative capital sources that produce a favorable economic result for Essex. Mainly my comments are going to be generally the comments that I go through. I'll talk about our markets and job growth and new supply. The acquisition development pipeline and the turnover attributable to home purchases in our markets.

The performance measured by job growth and rental growth across our metros remains mixed. As expected, the relative strength of apartment markets is reflected in the relative strength of the job markets. Our markets in the U.S. showed signs of improvement in the job market during the fourth quarter.

I am going to update you on the quarter over quarter and year over year jobs, rent, and occupancy performances by metro. We've added economic data to our supplement-supplemental on the website so it's going to be a little bit easier for you to follow some of this discussion.

I know we go through a lot of numbers. To find this information go to the website and then to Investor Relations, Analyst Resource, and hit Earnings Release, and then finally Job Supply and this data sheet will display our forecast of residential deliveries,the job growth and the resulting apartment market performance.

In addition we added a sheet that tracks jobs and labor force and unemployment for each of our markets. We continue to post the residential permit data in our estimates of single-family affordability for our markets and the larger U.S. metros There's always I believe the low single-family home affordability is a fundamental strength of our apartment markets that will lead to stronger apartment absorbtion and rental growth over time.

Just a note about the job performance and how we report it. We monitor and report two surveys both the data for these calls is really comes from two surveys of the labor market. One is the nonfarm industry job survey. This survey queries the larger, established firms as to their work force size on a monthly basis.

The second survey is the household employment survey which queries a rotating group of households on a monthly basis as to their status in the labor force. The survey determines how many people are active members of labor force and whether or not they are employed. Clearly changes in the nonfarm industry jobs affect both surveys.

However, changes in other categories such as self-employed, newer firms and small businesses, would not show up on the nonfarm industry survey but would be reflected in the household employment survey. The difference between the two surveys can be accentuated in the beginning of a business cycle.

And in fact the two surveys show different results for a number of our markets and I'll comment on those going forward. Generally the household survey is being the more positive. We believe the true employment performance is somewhere between the two which is reflected by the strong occupancies we've generally had in our markets.

In addition we've observed significant decline in initial unemployment claims for the U.S. in our markets during the fourth quarter. This measure of initial claims is completely independent of the household employment survey and the declining employment claims is typically a precursor to increasing employment. The statistics we report for jobs in unemployment represent December over December nonseasonally adjusted data unless otherwise noted.

The data is taken from B. LS website. Our nonfarm industry growth forecast are based on U.S. growth of .7 to .9% in 2004 relative to jobs, and is amid 3% GDP growth assumption. Now going to each of the markets starting with the Northwest and Seattle. In Seattle the MSA nonfarm industry survey indicated a loss of 3,100 jobs in 2003 which was 2/10 of a percent.

Household employment survey also showed unemployment holding and labor force declining slightly by 6/10. So in this case both surveys indicated that jobs were declining. However during the fourth quarter the two surveys both indicated net improvement in hiring. The largest drag on job growth was Boeing.

The company reduced employment in Seattle by 7900 jobs. 5,000 of those jobs were cut in the first half of the year. By the fourth quarter job cuts fell to 1100 and virtually nothing happened in the last month. This recent job trend along with the news that the 7E7 will be designed and assembled in Seattle leads us to expect much smaller if any job cuts by Boeing in 2004.

The office market continued to improve in the fourth quarter posting positive absorption. Again the strongest areas were;downtown Seattle and Bellevue, the industrial sector was flat during the fourth quarter with limited new supply being absorbed. The apartment market occupancy rate declined from 93 and 3/4 to 93.5 during the fourth quarter but was up 1% over last year.

Market rents were flat during the second half of the year and down 3% for the year. For 2004 we expect employment growth of 16,000 jobs or 1.2%. Accordingly we forecast apartment occupancy to increase to 94% and effective market rents to improve slightly until 2004. Going to Portland which represents 5% of our portfolio, after several years of steady steep declines in comp, economic conditions in Portland showed signs positive growth in the fourth quarter.

The nonfarm industry survey showed the lows of 11,800 jobs, or 1.3% of the labor force in 2003. The household employment survey showed a small decline in the employment rate and labor force declines 1.9% during the fourth quarter the two surveys indicated positive growth in the labor market. Both the office and industrial markets showed the first sign of recovery in the fourth quarter.

Net absorbtion is slightly positive at both sectors. The apartment market occupancy rate remained flat in the fourth quarter at 92% but was up slightly over last year by a 1/2 percent. 2. Market rents were flat during the fourth quarter and were down 5% for the year. We expect employment growth in '04 to be approximately 9,600 jobs or 1%. And we're expecting apartment occupancy to increase to 93% with effective apartment rents to remain flat in '04.

Going to the Bay Area. We have 17% of the portfolio oh, forecast for new supply is at low levels and virtually unchanged from last quarter. The bay area continued to lose nonfarm industry jobs in the fourth quarter for the year ended down 47,600 jobs or 1.6% for the entire Bay Area. However, the household employment survey showed unemployment rate dropping from 6.5 to 5.3 with the labor force declining just slightly.

That math would suggest that there was positive growth in the employment sector in the fourth quarter. The Bay Area Counsel recently completed and released a survey of 504 local executives regarding their expectations of jobs in 2004. The survey shows that increased optimism, 33% said they expect to increase the work force in 2004.

This is up from 10% who thought they would increase their work force when the survey was done in July of '03. The number of executives who expected further decreases went from 18% last July to 7% in this most recent survey. Now going to each MSA starting with San Francisco, slow recovery continues in San Francisco in the fourth quarter.

The San Francisco MSA for the year lost 10,000 jobs. However, household employment survey showed that unemployment rate fell from 5.5 to 4.5 and the labor force actually grew by 7/10 indicating an increase in employment. Again, the two surveys differ as their results. The fourth quarter was actually slightly weaker than the full year. The office market again posted positive absorption in the fourth quarter leading to positive absorption for the year.

The apartment market occupancy rate remained flat in the fourth quarter at 95% but was up 1% from last year. Market rent were flat in the fourth quarter were down 5% for the year. Single-family market remains strong. The average monthly sales volume in San Francisco was up 9% for the year and 3 percent, 31% in December over December, the median monthly price -the median price was up 5% to $565,000.

We did a little calculation here, assuming a 6% mortgage rate, 10% down payment, this price translates to a monthly housing payment including taxes, insurance of $3,465. That compares to rent on a three bedroom, two bath apartment, in an A. location, B. quality kind of property, of about $1,960, or 57% of the median monthly home payment.

The new home purchaser would typically receive about a 20% tax savings on their monthly home payment. For 2004 we're expecting job growth of 8200 jobs, or .9%, and we're expecting occupancy to remain at 95% and effective market rents remaining flat in '04. In Oakland, that MSA lost 6200 jobs for '03 according to the nonfarm industry survey.

The household employment survey, however, showed unemployment rate falling from 9.1 to 5.1 in the labor force growing by 7/10 of a percent indicating a growing employment base. During the fourth quarter the industry survey showed job growth was virtually flat. However, the household employment survey showed unemployment falling and labor force growing sharply indicating growing employment.

The office market again posted positive absorption in the fourth quarter. The industrial market continued virtually flat. The apartment market occupancy rate remained plat in the fourth quarter at 95% and was flat from last year. Market rents were down slightly in the fourth quarter and down 4.5% for the year.

Single-family market remained strong. Sales were up. The median monthly or the median price was up 9.9% to $399,000. This price translates into a monthly housing payment of 2445, and rent for a comparable property would be $1540, or 63% of the median home payment.

For next year we are expecting 10,700 jobs, or 1% , and we're expecting apartment occupancy to remain at 95% and effective market rents to remain flat in '04. Finally going to San Jose, after 31 months and 190,000 lost jobs, San Jose MSA appears to have stabilized and may be heading for job growth in the near future. San Jose lost another 31,000 jobs, or 3.5%, in 2003, according to the nonfarm industry survey.

The household employment survey indicated a decline in unemployment from 8.3 to 6.4. However, the decline was accompanied by a decline in labor force by 3.5 percent, indicating also here the two surveys agree that we lost employment. During the fourth quarter the industry survey indicated that job growth was virtually flat.

The office market again posted significant positive absorption in the fourth quarter. Net absorption for the year topped 2.2 million square feet. The vacancy rate fell from 23 to under 20%. We expect this absorption to translate into jobs some time in 2004.

The industrial market continued to post large negative absorption of 1.5 million square feet in the fourth quarter. Obviously this trend must recede for sustainable job growth to return to the MSA. The apartment market occupancy rate remained flat in the fourth quarter at 94%. It was up from 93.5% last year.

Market rents were down 1.2% in the fourth quarter and 8.5% for the year. San Jose single-family market performed well. Prices were up about 4% for the year, with the price -median price of-excuse me- $473,000. That price translates into a housing payment of $2,900 compared to a 3-2 apartment at about $1,600; or rent being about 55% of the median monthly home payment.

For '04, we are expecting to see some job growth, about 6,000 jobs, or 7/10 of a percent, and we're forecasting apartment occupancy to remain at 94% and effective market rents to remain flat in '04. Now going to Southern California. Our Southern California markets of Ventura, L.A. Orange and San Diego encompass over 7 million jobs and a population of 16.6 million, which implies that roughly one out of every 18 Americans live and work in this area.

The region remained one of the strongest economies by far in the U.S. The nonfarm industry survey showed our Southern California markets losing 27,000 jobs in '03. The household employment survey, however, showed a modest decline in unemployment from 5.3 to 5.1 and a labor force growing by 1.1%, indicating fairly robust gains in employment. During the fourth quarter nonfarm industry jobs were relatively flat.

The unemployment rate declined sharply while the labor force grew indicating continued increase in employment. The overall office market posted positive absorption in the fourth quarter, mostly in South Orange County and San Diego. The strongest areas in LA, Ventura County, were in the San Fernando Valley, West LA and downtown LA.

In Orange County and San Diego both areas absorbed roughly 4% of the respective rentable stock or 5.6 million square feet in '03. The industrial market which is an important component of expected job growth in Southern California continued to post positive net absorption with the strongest markets being Los Angeles and San Diego County.

Vacancy rate remained relatively flat at 3.6% of a base of 1.4 billion square feet. The apartment market occupancy rate was 95.5% in the fourth quarter, down 1/2 a percent from last quarter but up 1/2 a percent from a year ago. The rents were flat to slightly positive for the quarter and up 1-3% for the year, depending on the sub market.

Southern California single-family prices grew by 27, excuse me - 20% for the year, posting an average price at the end of the year of 358,000. This price translates to a housing payment of $2,200 and compares to rent on a 3 by 2 of about $1,600, rent being 73% of the monthly home payment. For '04 we're expecting to see job growth of 1.3%, or 91,000 jobs across the region.

We're expecting to see occupancy remain at 95.5%, and market rents growing by 2 to 4%, depending on the sub market. Let me just briefly touch on the turnover in our portfolio as a result of home ownership or home purchases. Starting in Seattle it was 15.3%, Portland, 20.4%, the Bay Area, 17.6%, Los Angeles, 13.1%, Ventura, 16.3, Orange County, 12.3%, and San Diego, 9.5%.

Overall the portfolio for the fourth quarter turnover, 14.8% of the turnover is represented home purchases. These results track our portability very closely with Portland being the most affordable single-family market that we operate in. Let me talk about the pipeline and cap rates.

We've been very active in the acquisition department during '03 we acquired 234 million of assets in our targeted markets. The key to these acquisitions has been the ability to match financing ranging from 4 .75 to 5.25 with acquisitions having cap rates in the 6.25 to 6.5% range. Currently we have about 150 thousand- excuse me-150 million in various stages of negotiation, primarily in Southern California; we've closed $42.2 million of acquisitions in January.

The total acquisition goal for the year is $200 million. Let me go through the cap rates quickly. The cap rates I'm talking about would you for B product in A locations. A product, A locations would obviously be lower.

But in Seattles cap rates are in the 6.25 to 6.5% range. In the Bay Area, there is very little sales activity and, in fact, there were only eight sales over 100 units in 2003. However, the transactions that are taking place are in the 5.5 to 6% cap rate range. In Southern California, despite it being very large market the cap rate seemed fairly consistent in the 5.8 to 6.3 range.

That is actually slightly less than I talked about last quarter. Development pipeline: we have four projects currently under construction, San Marcos, Hidden Valley, River Terrace and Chesapeake and these will all be delivered in 2004. As I commented on the call last quarter it's been very difficult to underwrite new development deals.

We are currently working on several potential opportunities. Even if they do underwrite, construction would not begin until 2005 at the earliest. This positions Essex owns a number of properties with approved condominium maps. Given the hot housing market we are evaluating these projects for potential sale. If we can sell in the 4 to 4.5 cap range and reinvest at 6 to 6.25 the positive accretion could be significant.

There is a potential to sell 75 million to 100 million of these projects in the second half of the year. Now let me turn it over to Bob Talbott.

Good morning. This morning I will provide you an update of current conditions in each of our major markets. First let me comment on our overall operating strategies given the current market. As Keith discuessed we're starting to see signs of stabilizing job growth and improving economic fundamentals. This is leading to improved occupancy with more establish throughout the portfolio.

When job growth returns to our markets we would expect occupancies to increase and availability to go down, creating an opportunity to increase effective market rent. Our first indicator of this will be a reduction in concession activity throughout the market. While we may only see limited signs of this occurring now we recognize that this can occur quick in a supply constrained market.

Please keep in mind that I'm speaking here, this is different from the concession reduction you are seeing in the fourth quarter compared to the third quarter for our portfolio. That reduction is a function of our decision in the third quarter to vary from the market and use concessions to increase occupancy and reduce lease exposure going into the seasonally slower fourth quarter.

As we anticipated an improving market in the context of today's environment, it affects our operating strategies in the following ways. First, we continue to maximize cash flow by maintaining high occupancy and closely managing our lease expirations. Second, we closely monitor occupancy and availability within submarkets and look for opportunities to increase effective rents.

And third, we ready our management and leasing staff for a change in the environment. By that I mean we recognize that after nearly three years of weak market conditions in the Bay Area and Pacific Northwest, those at the front line are associates charged with leasing and marketing our apartments have become conditioned to a concessionary market.

Consequently we need to help them get ready for a different environment. Over the next few months we'll be implementing training targeting at creating value and improving market and leasing without concessions or price discounting. Additionally, our leasing commission programs are being revised to give our associates incentives to lease at the highest possible effective rent without giving concessions while still maintaining market occupancy.

If the markets improve later this year as we expect we want to be ready to take advantage of them. Now let's take a quick look at the markets. First, let me remind everyone that the occupancy numbers I am providing here are for point in time as opposed to the financial occupancy numbers noted in the release.

Those figures reflect the average financial occupancy for the quarter. Our stabilized portfolio as of the 1st of February was 96% occupied and our net availability which is the sum of vacant and unnoticed units available to rent expressed as a percentage of the portfolio, is 6%. Looking first at Seattle, Seattle is a market that is showing signs of stabilizing.

As of February 1 our occupancy remains a solid 96% and net availability is 5%. Concessions remain prevalent throughout the market however but in some cases they are much lower. Today we're seeing anywhere from $300 to a month free and it was just a few months ago that we had seen concessions offered as high as two months free.

Traffic for the fourth quarter was down 36% and for the same quarter last year traffic was down 3%. Let me comment here that traffic is actually down in all of our submarkets this quarter. We attribute this in part to the seasonally lower demand, reduced turnover and our higher occupancy.

In Portland, Portland continues to be our most challenging market and it remains highly concessionary. One month free is still the norm and we've occasionally see two months being offered. As of this week our occupancy is 95% with a net availability of 6%.

Improvement on both counts over the last quarter and a year ago. Traffic is down about 20% from the third quarter but actually up 20% from the same quarter last year. The Bay Area is stable with occupancies in the San Jose area of 96% and in the Oakland and San Francisco metroe of 95%.

Net availability for San Jose and for San Francisco, Oakland, is 7% and 6% respectively. Concessions have eased slightly in some set markets but we still commonly see one month free commonly offered. We believe that concessions in the market have continued because although we have higher occupancy we have still not seen any real job growth.

To some extent everyone is still buying occupancy. As I mentioned earlier it shouldn't take a lot of increased demand to eliminate these concessions. Traffic is down 29% from the third quarter and down 14% from a year ago.

Now in L. A., and Ventura county. These markets continue to perform well with minimal concession activity. In a few situations if we are seeing a concession it's on 3 to $500 off, or occasionally on a building I've seen a month free offered on a vacant.

As of this week our occupancy is 96% with availability of 6%. Traffic is down 30% from the third quarter and down 18% from the same quarter a year ago. Orange County also continues to perform well with minimal concession activity. In a few situations particularly in South County we're seeing 3 to $500 as a concession offer, or occasionally even a month free on a vacancy.

As of this week our occupancy is 95% and our net availability is 7%. Traffic is down 35% from the third quarter and down 10% from the same quarter a year ago. And finally, San Diego. San Diego continues to be a solid market for us with little to no concession activity and a few isolated instances I have seen 2 to $300 offered, typically on a vacant unit.

In total our San Diego portfolio is 97% occupied and 5% available. Traffic was down 21% compared to the third quarter. I don't have meaningful traffic numbers for a year ago because it was during that period that we were bringing the Sachs portfolio on board. At which let me turn the call over to Mike Schall.

Thanks Bob, and thank you to everyone for joining us on our call. Because I'm going through a lot of numbers here as Keith did, I want to direct you to the both the press release and the supplemental reporting package which are available on our Web site.

Or if you want to you can call Investor Relations in our corporate office in Palo Alto. On the call I am going to talk about four topics. First quarterly and annual financial results, second, the impact from recent accounting pronouncements, third, the balance sheet and, fourth, estimates of FFO for 2004. So, back to the first topic. Quarterly FFO results.

FFO per share for the quarter declined by 11% to 97 cents from $1.09 in the fourth quarter of 2003. The 97 cent result represented middle of the guidance range that we discussed on last quarter's call. I'm going to provide first and overly simplistic analysis to discuss the 12-cent decline in FFO then I will go into more detail later.

So first the overly simplistic analysis. First point wanted to make is we had lower miscellaneous non-recurring income, equal to roughly four cents per share in decline from 1.4 million in the prior year to 430,000 in in the fourth quarter, 2004. Essentially opportunities generate fee income, non-recurring fee income are much more difficult to find in a harsher economic environment.

Second, we incurred some non-cash charges related to the Series F preferred stock issuance and our redemption of the Series C preferred units. Which happened in the third and fourth quarter of 2003 and that generated roughly 4 cents per share in FFO reduction.

Third, we wrote off an abandoned development project and that resulted in 1 cent per share in FFO and finally, fourth, we experienced temporary dilution following our $97 million common stock offering in October of 2003. As of now we have completed our investment plan related to that offering and believe that the associated FFO dilution has been eliminated.

During the quarter we estimate that dilution associated with that offering approximated 3 cents per share. If I do the same simplistic analysis and apply it to the year we note that FFO per share declined 6.7% from 450 in 2002, to 420 in 2003. Of the 30-cent decline, 25 cents per share can be attributed to the following. First, 17 cents a share relates to a reduction in miscellaneous non-recurring income in 2003 versus 2002.

Second, 8 cents are attributable to the common stock dilution, the write-offs, right offers of the banner project and the stock charges that I discussed a second ago as related to the fourth quarter. So now I want to go back and fill in the, make some comments about the rest of the portfolio.

As indicated in the press release Southern California region continued to generate strong revenue growth, 4.4% during the quarter and 4.8% for the year. Our supplemental package provides a detail of change in same property revenue by county both year over year and sequentially since the last quarter.

That page indicates that all counties in southern California contributed to revenue growth except San Diego County which actually had only one property in the same property pool. As you recall the Sachs portfolio had not entered the same property pool in Q4 '03. And I will talk about the results of our first year results from the Sachs merger in a moment.

Southern California led the portfolio on a sequential basis as well, generating 2% and 4% increases in revenue as compared to the September, 2003, and the June, 2003, quarters respectively. Same property financial occupancy remained strong at 97.2% for the quarter, up slightly from 97% in the third quarter.

Turnover and concessions declined as expected, annualised turnover, 61% and $274 concession on average per turn in Q3 as compared to 53% turnover and $128 concession per turn in Q4. The performance in our northern California portfolio was as expected, disappointing on a year over year basis and essentially flat on a sequential basis.

For the quarter same property gross margin decreased 9.2% over the prior year's quarter. In the last call we discussed the aggressive use of concessions to build occupancy during the third quarter of 2003. Our historically strongest leasing period. This I believe, helped us maintain high occupancy levels in the seasonally weaker fourth quarter.

During the quarter property financial occupancy was 96.3% which we believe is better than the market and also marginally better than occupancy level of 95.6% experienced during Q3. As expected the rate of turnover in Northern California declined from an annualised 69% in Q3 to 50 percent, 56% in Q4, concessions per turn also decreased from $487 per turn in in Q3 to $341 per turn in Q4.

And then turning to the northwest, our theory is that the northwest markets are improving and actually are a step ahead of Northern California in that regard. In the Pacific Northwest, same property gross income for the quarter declined .8% and but increased sequentially versus Q3 by 1.3%. Financial occupancy in the fourth quarter was 96% versus 94.8 at the end of the third quarter.

In addition, annualised turnover in the fourth quarter was down to 51% versus 70% in Q3, and concession per turn also declined to $318 per turn in Q4 versus [inaudible] in Q3. As Keith indicated we're expecting market rents to increase albeit marginally in 2004.

Next I'd like to talk about operating expenses which increased .7% for the quarter and 3.4% for the year. The end year result was at the higher end of our guidance range. Our Northern California reported the largest increase in operating expenses and really represents the reason why we are at the higher end of the range for the year.

The increase in northern California resulted from increases in a variety of categories that affected several properties in the northern California portfolio, categories included repair and maintenance, advertising, staffing, turnover costs, and we believe a significant portion of these costs relate to weaker economic conditions that were experienced in Northern California relative to our expectations for the year.

Interest and amortization expense increased by almost 2 million to 11.07 million in the quarter. This is attributable to three factors. First outstanding debt balances, weighted-average outstanding debt increased by 116 million for the quarter. Most of that is due to the Sachs merger in December of 2002.

The average interest rate on long-term debt was 6.4% this year versus 6.8% last year and finally, the decrease in our line of credit rate from approximately 2.6% in last year's quarter to approximately 1.8% in the current quarter. Favorable interest rate reduction from the line of credit alone contributed to approximately 200,000 to FFO during the quarter.

G&A increased 354,000 to almost 1.9 million and the components of G&A are included in the supplements. I won't go through them here. Loss to lease is also detailed in the supplemental package, along with a definition of how we calculate it.

Loss to lease for the portfolio at December 31 was 5.3 million, or 2.5% of scheduled rent, down slightly from 2.6 million, I'm sorry, down slightly from 2.6% of scheduled rent in the prior quarter. Loss to lease has not changed significantly from the last several quarters. In previous calls there's been a number of questions about the results from the Sachs portfolio.

You may recall that the merger with John M. Sachs Inc. in December of 2002 and acquired 3,261 apartment homes in that transaction. Most of which are located in San Diego, metro area, and several other properties.

For the year ended December 31, 2003, the properties acquired in the Sachs merger provided NOI of 22.9 million, representing a 7.59% yield on the merger price of 301 million. That result was $40,000 better than budget despite the fact that the operations in the first and second quarter of 2003 were negatively impacted by troop deployments from nearby military bases.

Obviously underwriting is a key part of the business. Being too aggressive means completing potentially bad deals. Being two conservative means killing potentially good deals. Overall we are pleased with these results. Next topic is the impact from accounting pronouncements.

Previously I reported that we would adopt FIN46 in the first quarter of 2003. The requirement to adopt FIN46 was deferred until the first quarter of 2004, except to the extent of any SPE's special purpose entities, [inaudible] in Q4, Essex does not have any SPE's as covered by FIN 46 and therefore the adoption of it has been postponed until the first quarter of 2004 Again,FIN 46 requires an evaluation of the company's unconsolidated entities and certain contracts and may require consolidation of certain of these entities.

Accordingly, we are continuing the FIN 46 evaluation with our auditors. Some of asked whether FIN 46 will change our decision to enter into co-investment transactions. And as we stated before the answer is absolutely not. These ventures are in our opinion essential to the long-term success of the company.

As we approach our tenth year as a public company the realities in the capital market are very clear. One of these realities is there will be brief windows that capital can be accessed in the public markets as a cost upon investment of real estate that leads to growth in FFO and NAV. Which are, of course, our objectives. Therefore, we believe it's absolutely necessary to have diverse capital sources and the fund and other co-investment transactions are the key part of that strategy.

Next topic is the balance sheet. Capex per unit for 2003 was $385 per weighted unit, up slightly from our previous expectation of 375. The company expects Capex in 2004 to be about 390 per weighted unit, and as stated in previous calls you can get a break out of that in the additions to real estate part of our cash flow on our 10(Q) and 10(K).

During the quarter we redeemed 25 million in 9.125% Series C. Preferred Units. Using the proceeds from the sale of our 7.8125 Series F Preferred Stock in the third quarter we also renegotiated the terms of our 9.3% Series D Preferred Units such as a distribution rate on those units will decrease to 7 7/8, effective January 28, 2004.

This leaves one series of Preferred Stock, our 9.25% Series E. Preferred Units to redeem or restructure this year. The Series E Preferred Units are not callable until September, 2004, although we've been attempting to negotiate with the existing investor.

As with the restructuring of the Series D units that was completed, we would prefer to renegotiate the terms of the Series E Preferred to save investment banking costs, to lock in a distribution rate during this currently favorable interest rate environment, and to avoid recurring non-cash charge related to a redemption transaction.

As of now with significant effort we have not been able to renegotiate the terms of the Series E Preferred unit. Now, I'd like to give you a quick update on Essex apartment value fund. As reported last quarter our first fund is now considered fully invested overall. In that fund we made investment commitments of approximately 640 million, which includes acquisitions to date, development commitments at estimated total cost.

The cost of [Marberesas] Apartments which was recently sold as a fund pro rata share of debt on Coronado apartments. After completing several transactions on balance sheet we expect to form a second fund and currently expect an initial closing in the second quarter of 2004. At this point it appears that the terms of Fund 2 will be similar to the funds of Fund 1.

The balance sheet remains strong as indicated by interest coverage of 3.5 times EBITDA and a ratio of debt to market cap of 31.2% as of December 31, 2003. Next topic is FFO expectations. In a press release dated December 15, 2003, we provided our FFO guidance for 2004. This press release contains many of the key assumptions underlining our 2004 guidance and as with most of our other information it is available on our Web site.

We continue to expect FFO to range from 419 to 429 in 2004 based on an overall .5% increase in same property NOI, and we have no change to that previous guidance at this time. So that wraps up my comments. I'd like to once again thank you for joining us and now I'd like to give you an opportunity to ask any questions you might have. Thank you.

Thank you.

The question and answer session will be conducted electronically. [Caller Instructions]. We'll take our first question from Jay Leupp with RBC Capital Markets.

Hi, good morning, here with David Ronco. First off just on your guidance for the year, the .5% expected growth in same store NOI I think you commented earlier that you were looking for a slight increase in occupancy and no real rent growth. But with Bob Talbott's comments it looks like you are gearing up for a market where you may potentially see some rents grown. Should we safely assume that if you do we could potentially see some upside in the guidance that you've given us?

Good question, Jay. You know, we are not sure exactly what's going to happen but let me give you the dynamics of the .5% increase in NOI. It's based on a revenue growth assumption of 1.3% and operating expenses growth assumption of 2.7%, to take to you NOI of .5.

Within the revenue section, Northern California is going to continue to drag us down not necessarily because of market rent change you know, if fact we expect market rents to remain pretty cloudy in Northern California but if the market rent change occurs it takes 12 to 18 months for that to get reflected into a scheduled rent which had ultimately enters the financial statistics. So essentially what that represents, so in in Northern California we're projecting that we'll record a negative 3.6% revenue change. So revenues will and, that primarily represents a scheduled rent change that occurred in 2003 that are just now impacting the portfolio in 2004.

So there's a difference here when we talk about market rent taken and what's going to happen on the portfolio. Market rent can essentially stay flat and at the same time it takes time for that to roll into our portfolio. So that's what we expect to happen and that's really the primary reason for the .5% change.

I think as before there's a little bit more variability in the forecasting because you know, we're all I think, not only Essex but many of our investors and our peers and everyone else is trying to pick the point at which jobs are turning positive, you know, and the recovery is really manifests and develops some job growth. And it's not a perfect sign as you well know and so there's still some question as to exactly when that might occur.

But, I guess the point is even if that occurs as you say, if that point is reached in most of our markets in mid 2004, it's going to take time for that to show up in terms of the revenue numbers, of the company I think, 12 to 18 months, for that to fully reflect in the numbers. So hopefully that answers your question.

Yeah, thanks. Just one follow up. In the potential 200 million of acquisitions that Keith talked about during his comments, I think he mentioned cap rate in the 5.5% range. Could you elaborate a little bit on the split between what you'd expect to bring fully into the REIT and what would be in one of your funds should you raise another one this year? And then actually maybe just some basic mechanics as to how a 5.5% cap rate is actually accretive to your overall expected results?

Yeah. Right now we've closed $42 million into the company and of that $42 million we had one transaction that was unique and really had a cap rate north of 7 It was a Southern California transaction, and then another deal in Ventura County which was 6.3.

So what we've closed to date is consistent with what we've been doing historically. The cap rates that where we're at sort of low end Northern California is at 5.5 to 6 and Southern California has continued to get more aggressive as I said last call we saw rates in the 6 to 6.5% range and now for a B product in A. locations you are looking at really 5.8 to 6.25

In Northern California if we were to buy 5.5 caps, the reason we would by 5.5 caps is because we would expect to see accelerated rental growth again. If you look at rents as a percentage of median household incomes in Southern California they are in the 22, 23%. In Northern California it's sort of at the peak in 2000, early 2001. It was in the high 20s, low 30s.

Today it's about 16, 17%. So, and we've got mean household incomes in the Bay Area that are generally higher than the rest of the state in the 80, $85,000 range. So ultimate success in this business is anticipating the growth, getting in ahead of the pack as I said earlier, and if we were to buy a 5.5 cap in Northern California we'd be expecting to see significant growth of greater than 2 or 3% over some period of time.

That doesn't, again, doesn't mean we're going to do it. We've been buying in the low 6's and have been pretty consistent with that. As far as how much gets done on balance sheet and how much gets done with a fund as I said we have $150 million that we've got in contract today that we're working diligently on. If the fund doesn't close until second quarter there's a potential for us to do some portion of that 150 million on balance sheet but perhaps up to $100 million. But we would expect to see the majority of it go into a fund, too, when it's established.

Thank you.

Now we'll hear from Andrew Rosivach with Piper Jaffray.

Hi, guys. Mike, you might have said this, what do you think you are going to do in the first quarter? Just first quarter guidance, do you have that?

Yeah, you know what, I will give you that in a moment.

And I will tell you where I'm going with it. What I'm trying to figure out is what your first quarter run rate is and then obviously you've got a little bit that's working for you in terms of refi savings and a little bit of additional leverage. How much do you need rather than on a year over year basis but a first quarter run rate do you need in a market tick up to make the midpoint of your guidance range?

Right. I understand. You know, I didn't bring those papers in. I'll comment later before we hang up here.

Okay. And then just a couple more, Keith, you mentioned it sounds like a lot of good news on the Orange County office market. And you have that note that you're not occurring interest on right now. Is there any opportunity there given how it sounds like the office market is starting to get hot?

Yeah, we have, the borrower on that note has been fairly successful. He has signed two leases representing about 60% of the space. So that is coming along. We have not started accruing yet but we're expecting him to get that thing filled up probably in the next 6-9 months and at that point in time we'll make a decision on the note and on, starting to accrue again

And that's not in your guidance now or is that kind of part of your miscellaneous non-recurring income?

It's not in the guidance right now.

Okay. Great. Then and, Mike, heaven forbid if you do get, I know I am going to get this question in the future, if the E you end up refi-ing it rather than the way you did the F and the C what would be the non-cash event?

It's about 5 cents Andrew. And actually going back to your other question, Q1 will be 104 to 105.

Okay. And in that, and in future quarters you're probably going to start to, there's just refi savings in and of itself, right?

Correct. But 105 that annualises out to 420 so obviously we don't need a lot. The other pieces are we pick up, the last peace of a dilution going back to the matrix that I started with. So if you start with 97 in the fourth quarter and you add back the 4 cents of non-recurring in the and the development write off of a penny and then you have some piece of a dilution that still impacts Q1 because that money got invested in January, so it would be for that, that takes you to 104, 105. So the dilution piece corrects itself in Q2 so that helps a little bit. That's probably a penny a share and a little bit of refinancing [inaudible] in there.

Gotcha. Okay. That's it, guys. Thanks a lot.

Moving on to Brian Legg with Merrill Lynch.

Can you guys talk about the sequential improvement? Was this just a factor of a lot of the hard work you put in to really attack the seasonally soft period in the third quarter? Because you look at revenue growth went up from the third to fourth quarter, which usually doesn't occur, on a seasonal basis, occupancy went up which certainly usually doesn't occur, and concessions per turn went down from third to fourth quarter.

Brian, I think all of us might have a piece of that one but from my perspective there were a couple of things that happened in the third quarter that made the quarter sequential number better and that is I believe, I don't have the numbers right in front of me, but I believe Q3 concessions went up by 400,000 over second quarter concessions.

Part of that due to higher turnover, but part just of an increase concession, the fact that we are trying to, we got to July of 2003 and we realized that we were not where we wanted to be from an availability and occupancy standpoint, we became very aggressive. So obviously on the sequential number that's helpful to the fourth quarter sequential number. But, you know, overall I think we just had better conditions. Bob, maybe you can comment on that?

I think generally by seeing our turnover go down and the level of our availability certainly started to stable off in the fourth quarter so I would have to agree with Mike. It's a combination of the strategies we put in place in the third quarter and I think a little better environment out there.

But, can you also reconcile that with the fact that traffic is way down? Both sequentially what you'd expect but also year over year, it seems like if you don't get as many bodies in the door it's hard to really say that things are, improving because you need those guys to come in to fill the vacancies?

Yeah, I agree to an extent but if the turnover is down, you don't have as many people moving out, I don't need to convert as many leases. Therefore, I'm not necessarily trying to pull in as much traffic.

Did you give turnover numbers?

Our turnover is in the release for the supplemental. I don't have it off the top of my head.

Okay.

The portfolio was down slightly in a couple of our submarkets it was down pretty significantly.

I mean, that's a the reason why we took our benefit in the third quarter because we know that that profit's going to be down in Q4.

Keith, just to turn to a few things, when you are quoting these cap rates, for each of these markets are you quoting cap rates after Capex or are these just cash looking forward NOI cap rates?

Those are NOI cap rates prior to Capex.

Prior to Capex, okay.

And, again, they were meant to reflect really our product type which is an A market with a B kind of product. If you were to look at A markets with A product, the cap rates would even be lower than that.

Okay. And you talked about, briefly about potential condo sales. Are these some of your more recent developments that have a condo map? I'm think of the Essex at Lake Merit as a good market for a condo converter.

Yes, we've got 7 or 8 projects, the Essex being one of them, that have condo maps on them. We've had a lot of interest from converters, as I said we are going to look at this stuff and if we can sell them in the 4 cap range so that we can create some accretion out of the repositioning we are going to do it.

We are not going to go out and sell the whole portfolio of condos because it's just too big a number but we can potentially take down 75 to 100 million. And if we did that it would probably as we get underway, would probably take 6 to 8 months to get it done. So I wouldn't expect to see any of that this stuff happening until October, November of this year.

Okay. Thank you.

Now, we'll hear from Tony Paolone with JP Morgan.

Hi. Did you all give a size or expectation of size of the second fund that you're creating?

Yeah, Tony, it's very likely to be the same or similar size as Fund 1, which is 250 in equity, leverage ratio of approximately 60 to 65%.

Okay. With that under way, any anticipation of changing the development pipeline or being more or less aggressive developing within maybe the new fund or how would you look at that, would that change your view of development?

I don't think so. I mean we would develop if we thought that the risk adjusted return on development was better than an acquisition. So the struggle that we have is we see little if any change, difference between cap rates for a development deal and cap rates for an acquisition deal. I think that there's a lot of numbers being thrown out there but I think there's a fundamental difference because if you measure the cap rate today I think we see development acquisition cap rates the same.

If you are assuming the development isn't going to come on line for three years, and it goes from a 6 to an 8.25 over that period of time, that may be well and good but I would argue that the acquisition could do the same thing. So did you really get the premium for the risk associated with development that you need? And in our view of at this point in time the answer is no.

The other obvious advantage is its much easier to lock your financing in. If you're in very low cap rate markets we think locking in long term financing is a very important component of the overall transaction because there is a chance that we'll have some bigger cap rate arbitrage going on and we think that low interest rate financing will mitigate that negative cap rate arbitrage to a large extent because, take a couple of deals that we did last year, we're locking in high single-digit cash on cash returns on some fund transactions and to that that is very attractive.

Would you pay a spread that you'd like to see on new development that would maybe get you more excited about it?

Yeah, I mean if we're currently acquiring at 6, we want to be able to see new development at least 150 basis points, so it would be 7.5, which is I mean in our history, talking about 7.5 development yields is a little ludicrous given the risk of cost overruns and timing misses and all the other risks. But having said that, if we can see 150 basis points spread, again, underwriting today, I know some of our competitors talk about 8 caps, but they are talking about trend at 8 caps which are three years out, but if we can see a 7.5 cap on a development today versus a 6 on an acquisition we would do those develops.

Unfortunately we've looked at and underwritten a number of deals in Southern California. We really haven't pushed the Northern California yet because the market has been so, so in the dump, and land prices really haven't backed up at all. But in Southern California we haven't seen 7.5 caps. We've underwritten a lot of stuff and we're coming up to up to 6.5 and 6.75 and some of them don't even make 6 so we've just passed on it and that's where we're at.

Okay. Thank you.

Once again, [Caller Instructions]. Now we'll hear from Keith Mills with UBS.

Good afternoon. It's actually [Chris Pike]. I just wanted to follow up on a couple of questions, first in the sense of your development yields, what's the current yield on the development that's just stabilizing right now?

Chris, actually in connection with our guidance we've said that the development transactions that are coming on line this year are going to have very little impact on FFO and the reason for that is that we capitalize interest at about 6.5% and they will come on line at about that type of yield.

I guess just a follow on to Andrew's question from earlier, what's the base case assumption for the redemption of the E's later on in the year? You said you were unsuccessful so far in terms of negotiating them so are you assuming that you are going to refinance them?

I mean the guidance assumption was that we would refinance them at 7 7/8 and we would do it without incurring the non-cash charge off which I'm not sure we are going to be able to do that. But I think the 7 7/8 I think we can absolutely do. Whether we do it without incurring the non-cash right off is the piece that I am not so sure about at this point. So actually that was clear in the guidance that the right off of the non-cash was not included in the guidance. That was included in the December press release.

Great. In terms of acquisitions in '04, you said your goal was 200 and you're going to back weight dispositions towards the second part of the year? What other types of sources of funds do you expect to have in '04? Once again if it's in the guidance just let me know and I'll return back to that. I don't have that in front of me?

That's the key piece. Actually the guidance does not assume the sale of any of the condo mapped properties that Keith referred to earlier. So if we did complete one of those sales it would be added to the guidance. In terms of other sources of capital we're not assuming any other transactions, just the essentially the restructuring or refinance of the Series E. which should happen in September time frame. Otherwise not a lot has happening.

Okay, great. One last question, if I may. In terms of the occupancies on the properties you acquired in Q3, I think you bought them at like 94, 95%, in that range. Have you been able to push them up to where your overall portfolio is, over the last 90 days or so?

Actually I will have Bob answer that question. Let me go back. I left out Fund 2 which is obviously a source of capital that we'll affect this year. It's in the guidance. Once we make the decision to go to Fund 2 we will essentially dedicate our acquisition development activity to bringing deals into Fund 2. Unless we do a 1031 exchange and a couple of other specified exceptions. Do you have that?

I have Forestview which is the property that we bought up in Renten is at 96% right now. I don't have a good number for Canyon Point, and Walnut Heights, give me a second here, is at 93% right now. No major change on that one but improvement on the forest view and if you give me another moment on where we are on Canyon.

You can come back Thanks a lot gentlemen.

Thank you.

And now we'll move to Ralph [Block] from Bay Aisle Financial

Keith earlier in the call you mentioned that Southern California was strong but you saw better acquisition and development opportunities in other markets going forward. Is that because rental expense as a percentage of median income is much lower in these other markets or is it because of other reasons?

It's primarily we see opportunities in primarily in the Bay Area and perhaps Seattle given the potential for rental growth being greater. I think cap rates are very the tough in those markets just like Southern California but I think we expect that over the next couple of years we can see significantly better rental growth coming out of Northern California and Seattle than we would out of Southern California going forward.

Is that because a of better job growth or because the rental expense is just lower and has more room to run?

More room to run.

Okay. Thanks.

It appears there are no further questions at this time. Mr. Guericke, I would like to turn the conference back over to you for any additional or closing remarks.

Well, again, thanks all of you for joining us on the call and we'll try and keep you up to date on everything that's happening with us. See you next quarter. Thank you.

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.