Essex Property Trust Inc (ESS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Essex Property Trust earnings and 2009 full year guidance conference call. My name is Stacy and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference.

(Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Keith Guericke, President and Chief Executive Officer. Please proceed.

Good morning. Thank you for joining our call this morning. We will be making some comments in this call which are not historical facts, such as our expectations regarding markets, financial results and real estate projects.

These statements are forward-looking statements which involve risk and uncertainty 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. Joining me on today's call will be Michael Schall, Mike Dance and John Eudy.

Included in the earnings release on our website, you'll find our market forecast for 2009. These forecasts reflect underlying assumptions that support the guidance for 2009. Also included with our earnings release is a schedule titled New Residential Supply which includes total residential permit activity for the larger US metros, as well as information on median home prices and affordability as compared to the Essex markets.

To get those details, visit our website under Investors and Media. Last night, we reported another strong quarter with core FFO increasing 10.2% per share. For the quarter, the portfolio grew revenue 3.4% greater than the same quarter in 2007, and six-tenths of 1% on a sequential basis with occupancies at 96.6%. I was originally going to go through a long-winded description of what happened to the national economy in the fourth quarter, but I realize everybody already knows what's happened.

I'd really -- we're going to look forward here. Basically, I think 2009 is going to be a pretty tough year and 2010 is probably not going to be much better. National job losses are going to be somewhere between 2 million and 3 million and it's going to hit all markets. We've built our 2009 guidance off the optimistic end of that range, assuming 2 million jobs will be lost nationally with approximately 100,000 of those job losses in our markets. All markets are going to suffer job losses. What will differentiate Essex is the low level of new supply being delivered; a still fairly large differential in the cost of single family versus multifamily, and a quality of life factor that historically has kept our population in place even during economic downturns.

There are a few positive signs in the market. Single family transactions have increased due to price corrections and very low borrowing rates. Lower oil and other commodity prices resulted in a flat [CPI] for December 2008. Current trends indicate significant year-over-year CPI declines by summer of 2009.

In addition, a majority of the home sector jobs, particularly corporate finance, have already been cut back to prebubble levels. When the financial markets do thaw, market fundamentals will be strong for departments, consumers will be stronger positioned and the residential supply pipeline, both apartments and single family, will be low. Modest job growth should drive, as in the past, driven strong rental growth.

Now, let me comment on each of our markets quickly. Demand conditions have changed in Seattle. We now expect a loss of 15,000 jobs, based on expectations of layoffs at WaMu, Boeing and others and related subcontractors. New apartments supply is forecast at 5100 units or 1.3%.

The job losses in a new apartment supply, however, is tampered by the steep drop in single family production. Only 4400 new homes or six-tenths of 1% will be delivered in 2009, leading to a total supply of 9500 units or less than 1%. This is down from 12,600 units in 2008. By contrast, the lowest previous growth of new single family homes was 1.2% in 2002. And on average -- or an average production rate since 1990 has been 1.6%.

In addition, Seattle has very low exposure to the financial -- to financial jobs after the loss of WaMu. We expect market occupancy of 95% and market rent declines of 2% in this market. Performance by sub market will vary with the weakest components being downtown Seattle where job layoffs and overlap with new supply. Newer high rise buildings will be the weakest segment of the Seattle apartment market.

In northern California, San Francisco and San Jose had minimal exposure to single family construction and mortgage finance jobs. We expect the tech sector to continue to outperform the general economy. In addition, San Francisco has the lowest exposure to manufacturing among major metros. The San Jose economy has already experienced their steep manufacturing cutbacks in our last downturn in the early 2000s.

San Francisco and San Jose are expected to lose approximately 11,000 jobs or six-tenths of 1%, almost equal across those two markets. We expect occupancies to stay at or above 95% and rents to be flat in 2009. New total supply in San Francisco and San Jose is 5900 units or four-tenths of 1%.

Oakland has more exposure to manufacturing and had a larger exposure to single family construction industry. The area has shed most of those jobs. Jobs are expected to decline by 10,000 in 2009, compared to 27,000 in 2008. Single family construction and financing jobs have been cut back to pre2001 levels.

Southern California -- overall, the southern California markets remain some of the most supply constrained in the US. However, like Seattle, the recent multifamily supply pipeline was concentrated in high end, often high rise condo projects. This pipeline will be all but completed by the end of 2009, particularly in west LA and downtown Los Angeles, the urban area of south Orange County, and downtown San Diego. A majority of our portfolio in Orange and San Diego are older, lower-priced products outside of these central notes.

New total supply is forecast at 7400 single family units and 13,400 multifamily units, which is approximately four-tenths of 1%. The housing finance jobs concentrated in Venture And Orange have been cut back to 2002 and 1990 levels respectively -- 1998 levels, excuse me. Job losses of 68,000 are forecast for 2009. This is down from 86,000 in 2008.

Rent growth will range from flat in San Diego to down 4% in Los Angeles with each -- market performance will vary across sub markets. Occupancies will range from 93% to 95% across the sub markets. 2009 is going to be a tough year, as I mentioned earlier.

We believe that all metros will experience job losses in 2009, some more than others. However, our business strategy that has been in place since 1994 which focuses on locating in supply constrained markets with high exposure to technology oriented service jobs will continue to service well. In preparation for the coming tough times, we took the painful step in December of reducing our work force by 22 employees, primarily in the development and redevelopment areas. We're going to continue our strategy of defensively operating our portfolio, keeping occupancies high.

Our balance sheet will remain one of the strongest in the multifamily sector, maintaining a low debt to market ratio and a strong fixed charge coverage ratio. Finally, we're going to remain flexible with respect to opportunities. 2009 will be tough, but I'm confident Essex will prosper. I'd like to turn the call over to John Eudy.

Thank you, Keith. Fortunately, we have been fairly conservative in our development activities. The remaining committed exposure to complete our developments which are under construction is $259 million of which $88 million is funded by undisbursed construction financing and the remaining $171 million comes from cash and our lines of credit.

Of the $171 million, $100 million of the estimated remaining costs related to [Tasmine] Place and Sunnyvale can be postponed further by delaying the unit starts if the financial markets continue to deteriorate, leaving us with a net current committed cash requirement of $71 million. We are well positioned to adjust the timing of all of our predevelopment and land held for development starts to accommodate the financing issues in the market. Building during the cost compression stage of the cycle and delivering into the recovery phase of the economy, of course, would be the best execution. The most important thing to note, in our pipeline is the average negotiation date on the land purchase price of our entire development exposure is 2004, so we avoided the overheated acquisition market of mid-2005 to early 2008.

During the quarter, we had no additions to our pipeline. Defensively, we decided to lease one of our predevelopment projects known as Essex Hollywood to a credit tenant through July 2012, hence delaying development and lowering our overall exposure. We also sold one of our land held for future development transactions, 90 Archer.

On the remaining development activity, Belmont Station in LA is now complete and 80% leased. We anticipate getting to 95% leased by mid-Q2 if the current leasing pace continues. The Grand in Oakland is substantially complete and today we have 74 units out of an offsite trailer.

Our on site leasing office and the building itself will open for occupancy February 15. Fourth Street in Berkeley and Jewel Broadway in Seattle are progressing ahead of schedule and are below our original cost estimates to date. On Tasmine Place in Sunnyvale, we have moved back the anticipated start date to September 2009 to better time the delivery date into early 2012, a time when we believe there will be both new inventory and the current job market will improve.

We are also seeing construction numbers substantially below our initial estimates and we expect this cost compression trend to continue for the near future. Our two fun developments, Studio 40, 41 and In Studio City and Seattle and [Chatsworth] are both slightly below our scheduled development cost estimate. And Studio 40 and 41 will be delivered on time and CL will be one month late.

We have been able to avoid the pitfalls of development by limiting our exposure, having income operating options to delay development, much like the Essex Hollywood deal where we extended the lease to our tenant for three years, and most importantly, by not being aggressive on land acquisitions over the last four years. Our conservative platform has positioned us to have the flexibility to better time some of the risks inherent in this business. At this time, I'd like to turn the call over to Mike Schall.

Thanks, John, and thank you for joining us today. Despite gloomy economic conditions, the fourth quarter of 2008 ended on a positive note with revenue growth in each region of Essex's portfolio, compared to the fourth quarter of 2007. Again, northern Cal and Seattle led the portfolio, performing near or above the high end of our original guidance range. For the year, revenue growth was 4.5%, equal to the high end of the guidance range.

For the quarter, most of the operating metrics were positive, given the back drop of a deteriorating economy. We made the decision to increase occupancy in each region of the portfolio earlier -- early in the fourth quarter and then held that level throughout the quarter. Financial occupancy thus increased 0.3% to 96.6%, helping push sequential revenues up 0.6%.

We've been able to continue the high occupancy execution so far in 2009, as indicated by our physical occupancy and net to lease for the portfolio as of January 26, 2009 of 97% and 4.3% respectively. Delinquencies continue to be less than budget for the quarter, although more people with job-related issues are moving out unexpectedly. Finally, same property concessions declined from $262 per turned unit in the fourth quarter of 2007 to $187 per turn in 2008.

We commented on earlier 2008 conference calls that we were maintaining a defensive bias toward revenue management, based on the weakness in the economy and rental markets. This approach favors occupancy over coupon rents, longer lease durations, diligent collection efforts and limited corporate exposure. During the quarter, we experienced widespread job losses and announcements of future job cutbacks.

At the same time, we are nearing the peak of deliveries of newly developed apartments in most sub markets, including several condo complexes now being rented as apartments. The combination of peaking new supply and reduced jobs continued to weaken our already soft southern California market and changed the rental dynamics in Seattle from favorable to challenging. While our best rental market remains northern California, it will contend with limited job reductions for many employers, including Hewlett-Packard, Intel, Yahoo and eBay.

The shock of these events and the normal seasonality was apparent in our loss to lease statistics which turned to negative, creating a gained as of December 31, 2008 of 2.8% of scheduled rent. Meaning that scheduled rent pursuant to in place leases were greater than economic rents as compared to a loss to lease of 1.9% of scheduled rent as of September 30, 2008. I should point out, however, that we use loss to lease statistics as an indicator as they can very considerably from quarter to quarter and are affected by a variety of factors. We've revised our outlook for 2009 on several occasions over the last four months, and each revision was negative given the extraordinary change in employment picture and expectation for a long-term recession.

The outlook now incorporates limited rental revenue reductions in each major area of the portfolio. Essex is, we believe, well positioned for this difficult period given its supply, its coastal supply constraint, quality of life markets and strategy based on B quality properties and A quality locations. As a result, we expect to continue to perform in the top tier of the multifamily companies.

Now I'd like to briefly review each major part of the portfolio, starting in the northwest. The Seattle area experienced a significant change during the quarter, as newly built apartments and condos rented as apartments continued to enter the market amid lower demand due to job losses at WaMu and other employers. Lots of corporate demand added to the supply demand difficulties. Deliveries of competing housing are expected to continue well into 2010, leading to our expectation of the challenging operating environment for the remainder of 2009, continuing into 2010. As of January 2009, our Seattle occupancy included approximately 2.4% Boeing employees, 0.5% Wamu employees and 6% Microsoft employees. As of January 26, 2009, physical occupancy in Seattle was 97.3%, net availability of 3.8%. Home purchase activity represented 11% of our move outs for the quarter, compared to 18% a year ago.

In northern California, we expect to experience layoffs -- or have experienced layoffs in limited development pipeline and we expect it to continue to outperform Seattle and southern California. We see very limited similarities between the current market conditions and those of 2001. San Francisco and Silicon Valley are expected to be the best performers of the bay area sub markets, while the open MSA is expected to experience moderately larger job reductions and greater supply of competing housing. As of January 26, 2009, physical occupancy was 97.9% in northern California and net availability was 3.5%. Home purchases represented 11.7% of our turns for the quarter compared to 15.7% a year ago.

And then southern California; the softest experience in southern California will continue throughout 2009 as most of the major sub markets will continue to be affected by job losses and continued delivery of competing housing. However, in most sub markets, we expect the new housing deliveries to occur -- the remaining new housing deliveries to occur in 2009 which should represent a bottoming of the housing market. As a result, we believe the challenging operating environment in southern California will continue in 2009, but that growth will resume in 2010.

On January 26, 2009, physical occupancy in LA Ventura was 95.8%, net availability of 5.3%. Orange County -- physical occupancy was 96.4%, net availability of 4.9%. And San Diego physical occupancy was 97.4%, net availability of 5.5%. For our southern California portfolio combined, move out activity attributable to home purchases was 11.5% for the quarter, compared to 13.1% a year ago. Now I'd like to turn the call over to Mike Dance. Thank you.

Thanks, Mike. Today, I will highlight our 2008 results and provide an overview of our 2009 guidance. Our 2008 funds from operations came in at a high -- at the high end of our guidance, principally due to property operations achieving the higher end of the 2008 guidance in growth in the net operating income in a very challenging economic environment.

Other contributing factors for achieving 2008 results were the low interest rates on our variable rate demand notes and our $3.5 million gain from the early retirement of $53 million of exchangeable bonds. Offsetting these gains was nonrecurring items related to severance benefits and a loan loss reserve, related to a borrower that filed for bankruptcy protection in November. As of December, we have over $100 million in cash and marketable securities and only $35 million in 2009 debt maturities.

In addition, we have over $300 million in capacity on our secured line and bank facility. And we have $60 million of construction financing for the $69 million of remaining costs to be incurred on the Jewel development. Our Fund II's remaining development costs are fully financed.

The 2008 net operating income from unencumbered assets exceeds $87 million or approximately 32% of the total net operating income for the portfolio. Our 2008 -- sorry, our $200 million bank facility has been extended through March 2010 and is our only debt that has financial covenants. We have significant capacity on all of these financial covenants and our unencumbered operating income can be used to obtain ten-year secured financing, and provide maximum flexibility and financial strength for opportunities.

The cash flow hedge liability as of December 31, 2008 was $73 million, which relates to $375 million in four starting slots that will be settled late in 2010 and 2011. The amount of this liability reflects the extraordinary stress and volatility in the financial markets that existed at the end of the year. We believe the ultimate settlement amount of these contracts will diminish or become favorable as the credit markets stabilize over the next 24 months. Our 2009 guidance was predicated on the economic outlook that 2009's gross domestic product will decline by 1.3%, which will reduce the jobs in our markets by approximately 100,000 or 1% decrease in employment.

These job losses, coupled with known supply increases, will decrease our net operating income from the 2009 same property portfolio by approximately $8.7 million. The 2009 guidance includes an estimated $1 million increase in property operating expenses for a change in our fixed asset policy. The higher than expected increase in the Seattle region's 2009 operating expenses is attributable to two items. The first is the higher assessment of property values which has increased the region's same property estimated tax expense by $900,000, a 20% increase over 2008. We will be appealing several of the property tax assessments and may be able to reduce some of this projected increase.

The second major increase of Seattle's operating expenses relates to a cost accounting change and our method of allocating overhead costs which increases Seattle's same property corporate allocation by $600,000 or a 50% increase. General and administrative expenses for 2008 totaled $27 million. The increase in the forth quarter, compared to the first nine months, was partially caused by the complete rollout of yard -- yield star and level one during the third quarter while the change in overhead that allocates these costs to the properties will be effective on January 1 of 2009. The 2009 guidance assumes a $2 million decrease in general and administrative expenses attributable to cost reduction initiatives and by increasing the allocations of property management overhead to property operations, as I mentioned in my earlier remarks concerning Seattle's projected increase in operating expenses.

Our estimate for 2009 funds from operations per diluted share will range from $5.50 to $5.90 per share. The mid-point of the 2009 guidance is $0.19 per share below the first call consensus estimate, due in part by the additional interest expense required by the adoption of APB 14-1 which will increase interest costs by $0.11 per share in 2009. The 2008 results after restatement for APB-14-1 will be $6.04 a share, compared to our 2009 guidance of $5.70 per share.

The biggest contributor to the $0.24 drop in the 2009 guidance is that our estimate of the nonrecurring funds from operation items in 2009 will decrease by approximately $8 million or $0.27 a share from the $10 million in nonrecurring FFO items in the restated 2008 results. APB-14-1 requires the 2008 gain on retirement of debt to be restated from $3.5 million to $4.9 million.

In January 2009, we retired $18 million in exchangeable bonds which will result in the $2 million in other income in our 2009 guidance. The mid-point of the 2009 forecast assumes that the weighted average APB-14-1 book value of these bonds will be approximately $148 million with an imputed interest rate of 5.75%. This concludes my remarks and I will now turn the operator for any questions.

(Operator Instructions). And please stand by for your first question. Your first question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed.

Good morning -- good afternoon, actually. Real quickly, just in the past, you've updated us on the affordability in your markets. How does that stand today just, given the pricing declines we've seen in the single family housing market right now?

The affordability of single family housing, you mean?

The affordability gap, relative to between multifamily and single family.

You know what? We did not redo that calculation. What we'll -- I'll do is we'll do it and put it up -- maybe we can put it on the website so anybody whoever wants to see it.

Okay.

I don't have that at my fingertips right now.

That would be helpful. Secondly, looking at the year, your portfolio, you have a good mix of both class A and class B assets. Have you seen any significant trading down from the class A to the class B assets?

Yes, Mike. This is Mike Schall. We've seen some of that. I think the key issue that we're dealing with is a timing issue. You have general economic weakness at a time when the bulk of the deliveries which are all class A assets are hitting the market.

You have the worst of both worlds. You've got job losses on the one hand and you've got -- especially in Seattle and downtown LA and the district of LA and various other sub markets. You've got the bulk of the deliveries coming into the market. I'd say, typically the As suffer as things compress during economic stress, which is clearly happening now. But the Bs are right behind it. I wouldn't say the Bs are immune from that, obviously.

I think everything is in the marketplace. Again, largely driven by just timing factors. There's just way too much supply coming online at a time when you have demand shock. I think everyone is affected by that. I think the As are affected to a greater extent, but nonetheless, it's painful for all.

Okay.

And on your first question, this is Joe Lopez. Even with the changes in interest rates and prices, in our markets, our affordability rates are running at or below long run averages. And our rent to incomes are at or below long run averages, so indicate that to the cost of renting versus owning is still favorable for us right now.

Those were the words of John Lopez, our economist.

That he is very helpful. Third, the $2 million of debt that you have in the first quarter there, I'm assuming that's from the exchangeable notes. Do you expect to repurchase additional exchangeable notes throughout the rest of the year?

If it's economically to our advantage, Meaning that to take those out, we're going to need to get 6.25% GSE type financing. If we can get yields to put that or at that level or better, we are a willing buyer. But we haven't seen many sellers at those type of pricing. We'd love to, but it's beyond our control.

Okay. Then finally, Keith, a question, a bigger picture question for you. You talked a little bit about 2010 as being another challenging year. Just given the gain at least in place right now in the portfolio, as well as the benefit in 2009 from more reliable rates, could 2010 be a worse year than 2009?

You know what, that's a -- that's a wonderful question and we don't think so. We think that -- we think that '09 is going to be a tough year. We think that the first half of '10 is going to continue to be the front end of the recovery. And it will still be tough, but it will start getting better. I would expect the first half of '10 to continue to be pretty tough and the second half of '10 starting to see the light of day. Overall for the whole year of 2010, I would expect to be slightly better than 2009.

That's very helpful. Thank you.

Your next question comes from the line of Michelle Ko with UBS. Please proceed.

I was wondering if you could give us more color on the move outs that you're seeing unexpectedly. Is it because of doubling and tripling up or people moving home with their parents?

Michelle, it's hard to track exactly where those are coming from, so it's more anecdotal than anything else. We had -- and I would say it's not as large a factor -- actually I said this on the last call for the third quarter. In my opinion, it's not as large a factor as the benefit we're receiving from lower move outs to buy a home and -- but still, it's something that we are beginning to track and trying to keep our eye on. It's still not a significant factor, just something that has entered the equation that's different from six months ago.

Okay. And also can you talk a little bit about renewals? It sounds like some of your competitors are becoming more aggressive on the renewal side as well. Are you giving concessions at this point on renewals to lock in occupancy?

We are in some cases and we're not in others. It really is a region by region decision. You can imply from the fact that we probably have the highest occupancy out there in the multifamily world, that we are being very aggressive with respect to renewals, which means we will give some concessions if we need to.

Obviously when you're faced with turnover costs that can range from $1,000 to $2,000, you would rather keep your existing residents in place. We're very mindful of that obviously and we spend a lot of time on renewal strategy. But I would say that there's no overriding corporate approach to renewals. It's a little bit different in every market, depending upon the factors and conditions of that market. But it's something, yes, we are very aggressively pursuing and executing as a key part of our overall strategy.

Can you talk about what some of those markets where you might have to be giving concessions, what some of those markets are and how large are some of those concessions?

The concessions are typically in the markets that have the greatest supply. Right now, you have very significant amounts of supply coming online in downtown LA -- in the marina of LA, Marina District and Woodland Hills. In Orange County, you've got a number of lease ups that are happening there. Downtown Seattle we talked about it.

All of those are areas that are offering new product coming into -- the market is offering typically two months free. You need to compete with that. And, again, a lot of this just attributable to just the timing of when the bulk of the supplies coming online, occurring exactly, when the job market is the worst it's probably been in a long time.

We have the worst of both worlds. You have typically two months free and sometimes more than that in a lot of the new product that are coming into these marketplaces and we are competing against that. You should expect that we can't outperform that dynamic by any huge margin. You've got to compete with the factors that are in place in the marketplace.

Okay. Great. Thank you.

Your next question comes from the line of Michael Bilerman with Citi. Please proceed.

Hi, guys. This is David Toty. Just a big picture question. I know you touched upon the government stimulus coming probably -- aimed at the single family housing market. Given your relatively optimistic view of job loss for the year, are you more concerned about the single family home stimulus than job loss? Or would you say it's a bigger concern for the latter half of the year?

The stimulus, the way it's been read is the tax credit in the $7,500 range, that's significant in homes that are $200,000 or less. In our markets, it's $400,000 plus in southern California, $600,000 in northern California and $400,000 in Seattle. That represents 1.1% to 1.2% of the prices. It is not as big a factor in our high-priced single family markets.

Okay. And then just moving over to the development pipeline, you've got about $100 million invested in starts and land parcels. I assume there was a year-end test for value or impairment? Given the -- I think a relatively optimistic view of your markets going forward, what do you think your tolerance is around that test -- the value test with those parcels?

David, this is Mike Dance. The impairment test is only for developments that we are not intending to develop. So far, these are all in fill type markets. We're looking at possibly delaying them, but we have not abandoned any of the development pipeline.

I noticed that you pulled dates off of the two projects in predevelopment.

Yes. Again, that's just providing flexibility, as John mentioned in his comments, to make sure we're well positioned to start when the financial markets will be able to -- when we can get financing for the developments and provide the delivery at the time there's going to be pent up demand.

And one follow-up. The land-based number that we're in at, remember, is anywhere between 4 and 4.5 years prior, which put us in a much better position than had they been deals that were tied up in the last two or three years.

How long can you guys carry those projects with it -- in terms of an extended start date?

We have the financial power or capacity to carry them for as long as we think there's going to be economics that justify the ultimate development.

And another thing to note, too, much like the Hollywood deal that we just redid the lease on, each of them, if you go down the predevelopment, Main Street, Walnut Creek, we're in the process of vacating. It includes about 65,000 square foot of office and retail right until the downtown core of Walnut Creek. We should choose -- should we decide to at some point, release it.

[Cade] campus includes about a 12, 13-year-old building. We are just in the process of moving out the tenant and that includes 262,500 net square feet of completed office building. These aren't completely vacant land parcels. They have intrinsic value at numbers -- that have alternative financial decisions that we could choose. Should we decide to further delay it, we could change our business plan.

Okay. That's helpful. And then just one last question on your disposition plans. For the $100 million, can you tell us anything about your pricing expectations? What types of assets those might be and the timing?

These assets -- the assets we're looking at in 2009 are essentially -- we're looking at assets that we have no debt again, so that would generate maximum cash proceeds from the sale. They are generally smaller properties, generally decent quality. We think in the marketplace -- the decent quality property in those markets are going to be 6% to 6.5% and that would be our expectation. That we're -- frankly, we're marketing situations so I think any comments beyond that are probably inappropriate.

This is Mike [Bilerman] speaking. Just on the capitalization -- on the land and predevelopment versus the land held for the future, what are you doing in terms of capitalizing interest on that -- on those contracts?

To the extent that we're continuing to actively develop, which would include getting bids and working on design to get the most cost effective cost, we continue to capitalize interest. To the extent that they are postponed, we're just waiting for times to improve, we've stopped capitalizing interest.

And then on the Hollywood site, what was the dollar amount in the effective yield that you're getting now on the asset?

6 cap.

In dollars?

Dollar amount of the lease?

Yes. The -- sorry, you're getting a 6 cap on -- (multiple speakers). What's the basis?

The basis is about $23 million, $24 million so 6 cap on that. I don't have the rent number right at the tip of my fingertips. Sorry.

Okay. Thank you.

Your next question comes from the line of Jay Habermann with Goldman Sachs. Please proceed.

Hey, guys. Keith, you had mentioned job losses of maybe 2 to 3 million at the national level. You guys selected the 2 million number. How much would the forecast change if you had assumed the 3 million job losses? And I think you talked specifically about 100,000 losses in your specific markets.

Right. Exactly. If you look the various expectations in the marketplace, as I said, they range -- everybody has access to the Wall Street Journal and other documents. The job losses range from 2 to 3 million. We looked at what happened in the fourth quarter and looked at -- and again, looked at the types of jobs that we have in our marketplace. A significant portion of the jobs that are -- have been lost have been manufacturing, number one. Number two is single family or just construction in general. And so if we look -- if you take -- again, looking at our markets in the $100,000 -- 100,000 jobs really related to the job stratification that we have in each of our markets. John Lopez is here and he probably could maybe give you a better answers as to -- if we looked at the $3 million range, what the -- would the job loss have been.

The 2 million to 3 million, --if it were to go to 3 million, my anticipation was because -- some of the sectors that we don't have are worse. The impact could be -- we could potentially lose -- instead of the 100,000, it would go to 125,000 135,000 which would have a small -- or not a huge impact on our rental growth up front in '09.

I'm just trying to get a sense of how much that is built into the guidance number. The follow on to that is it seems like northern California and Seattle seem to be lagging, in that they had better performance for the end of last year but they're beginning to see the slow down now.

You have to remember that -- they're big cut backs in the economies that we have that are keeping us from being cut back now occurred in '02 through '04. Santa Jose lost 100, 000 manufacturing jobs in one year and we didn't gain much of that back. Seattle and northern California went through a deep paring of jobs; more than most economies in the '02, '04 period.

Jay, I would add one more thing. My comments for southern California -- remember, southern California has been in the midst of fighting the -- some of the battles with respect to job losses for a couple of years now. Ventura County being the most notable example, San Diego county as well.

I think as you -- we're more concerned about Seattle, as I commented earlier over the longer term. But at the same time I think southern Cal works through its issues and it may one day be a very significant positive force for us. That's roughly half our portfolio. I think you have to look at each piece separately. If you're going to say, gee, northern California is still going down, don't forget that southern California probably bottoms out in 2009.

Right. And just back to the cap rates. You had mentioned maybe 6% to 6.5% for your dispositions. But if that broadly applies to the market, does that mean that you need to see development yields now of the mid-8% range? How far away are we from those opportunities? Sounds like you're shifting more towards future acquisitions is where I'm going?

We're staying -- as I said, we're going to stay flexible and look for the opportunities. If we see acquisitions in the 8% to 8.5% range, we'll jump on it. If that happens, it will probably be a very, very small window that isn't going to stay there very long, I would guess. The answer is, yes. We have always been opportunistic. We have always tried to stay flexible. Development -- when cap rates in the acquisition front were 4.5% development made a heck of a lot more sense and it will flip around on us. The wonderful thing about this market is it flips back and forth and you've got to be ready to take your spots. You can't get too focused on any one particular activity.

I'd add something to that, too. I think that the 6.5% cap expectation and obviously others have reported similar type numbers out there in the marketplace -- are fairly distinctly different from how the public marketplace is valuing our company. As long as that differential is in place, i.e. the implied cap rate of the Company, relative to the transactions in the the private world are as large as they are, it creates other opportunities where you obviously wouldn't do a lot of development or acquisition. You would look at other opportunities, such as disposing of some properties and buying your securities back which is a pretty unique opportunity right now.

You mentioned $100 million, but would you expand that?

We're flexible. The issue is we can do that $100 million and not have to do -- worry about 10-31 exchanges and use all that money for whatever we want to use it for. If we go beyond that, we have to start looking at 10-31s and it becomes less effective. But for the right opportunities, yes.

Okay. And just lastly, can you talk about homes being rented? How significant is that? Markets, especially in northern California?

It's becoming a greater factor throughout our portfolio, although it's not a huge factor. It tends to be the largest factor in the more affordable single family markets. For example, it's a huge factor in Riverside County. But still you have this differential where housing prices are still -- single family for sale prices are still very high in most of the coastal markets. And as a result, it's not viable to buy a house and rent it out, and expect to make money in that transaction. It is still the exception rather than the rule. Although, again, it certainly is happening more now than it was a year ago.

And just to add to that, in some secondary markets that I've looked at that we are not currently operating in, you can rent brand new homes competing directly with existing market rents. In other markets, it's getting much worse.

Okay. Thank you.

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

Thanks and good morning to you guys.

Good morning.

Keith, can you talk about dividend policy, and your thoughts about stock dividends and what the plan might be for Essex?

Yes. Our policy has been to increase our dividend on an annual basis, approximately at the same rate as our FFO growth has been for the previous year. Last year, 2008, we increased our dividend 10%.

This year, we've got a 10% FFO increase. However, I would not expect that we would be looking at 10% dividend increases, given the financial markets and that we will increase the dividend. But it will be minimally because it makes more sense to keep the cash in-house. Number one.

Number two, with respect to stock dividends, our payout -- our dividend payout ratio is in the 70% range. We have plenty of room. We've got a capital plan in place that is covered for -- covers us out for three years. We are not going to go to the stock and cash dividend plan that is being banded around by others.

Okay. And then maybe a question for Mike. Mike Schall. You mentioned the health -- relative health of the San Francisco, San Jose area. And wanted to know if you were seeing any impact on the negative from a pull back in the venture capital marketplace?

That's clearly part of what's happened up here. The difference is -- in reading the various press releases out there, it seems like the tech companies are dropping 1000, 2000. HP's a notable exception with its merger. But they're much smaller numbers in general. As it relates specifically to venture capital, we've seen some venture capitalists instructions to their portfolio companies to get positive and cash flow and don't expect us to change any time in the near future. As a result of that, they, too, have laid -- have joined the -- the layoff program and that has contributed to a softer outlook in terms of the northern California market.

But again, not in huge magnitude -- not huge dollar amounts or job loss amounts. Therefore, we think that we've built that into our guidance and our job growth expectation for 2009. John Lopez is here, he may want to comment on that and follow up on that. Anything specific to venture capital, John?

No, not right now.

Okay.

One thing I recall about a year ago is you guys were talking in a positive tone, of course, about Seattle. That suddenly took a turn this past quarter. Is there any risk that, DC could have a similar impact, say six months down the road to the Bay area?

Obviously, anything can happen, but remember -- Seattle, and again, I can't emphasize this enough. This is a confluence of two things. On the demand side, you have job losses up there. I've looked at a lot of press releases and I have a lot of them here -- your typical numbers in the Seattle area are like 5,000 jobs. When I look at Yahoo and eBay and those are seeing 1,000 or 2,000 jobs typically. A much bigger market in the Bay area relative to Seattle. Then the supply picture in Seattle is pretty huge and it's all concentrated. It's all hitting now. To a certain extent, a lot of this is just pure timing of when things happen.

Obviously, we've got to play the cards that we're dealt. It's going to be a difficult environment. I'd say the same thing I said -- I didn't say it today, but on the last call, which is at the end of that process, the supply pipeline dries up and we're going to be left with a period of extreme housing shortage really throughout the West Coast. To answer your question, I don't see northern California repeating what happened in the 2001 to 2003 period. Primarily because I just don't see the -- you don't have the overhang of the H1-B visas that we had back then. You had the -- you had all the Y2-K and internet bubble employment that flipped around and went the other direction.

You had venture capital at all time highs and that bubble burst. You had a bunch of bubbles back then. That's the other key point -- that burst all at once and gave back most of the employment that was gained in the late '90s. This time around, it just really isn't like that.

I don't see a bubble there to burst. Therefore, I don't see the down side with respect to the job picture. Conversely, you don't have the supply. I think it's a completely different scenario than the 2001 to 2003 period. It's a dramatically different scenario as well with respect to what's happening in Seattle and downtown Bellevue.

Okay. Great. Thanks very much.

Your next question comes from the line of Philip Martin with Cantor Fitzgerald. Please proceed.

Good morning, everybody. A question for Michael Schall, and certainly Keith as well. It was addressed a bit earlier. I just wanted to fine tune it maybe a little more.

The portfolio is made up of certainly good locations and desirable markets, but you have -- at least from my analysis, have a relatively more affordable product in your market. It's a bit older. Your cost basis might be lower than some of the competition in that market. Those factors when you combine them, how much more competitive does that make you in those markets given the economy? And when might we see that here in the cycle? When might we see that extra competitiveness that you have -- that leg up that you might have?

I think typically having been through a few of these cycles that things tend to compress as the markets deteriorate. In other words, the Bs outperform the As in the same marketplace. Now, in that scenario, it doesn't mean that one is going -- rents are going up in the Bs and down in the As. It just means that the percentage changes are different. They both go the same direction in my experience. I think you are seeing some advantage of that.

I think you can compare the fourth quarter overall revenue results across the board and I think you're going to -- I think you are seeing some of it, basically. Again, it doesn't mean that one is going to go one direction. The Bs are going to go one direction and the As are going to go a different direction. It just means that the magnitude of the change is going to be different.

From an occupancy standpoint -- I know occupancies in your markets are pretty high anyway and they're certainly high on the portfolio. But are you starting to see it even on the occupancy side yet where your occupancy is holding a bit more firm than the competitors?

I did go through the occupancy numbers, including physical occupancy in January '09 -- end of January and it seems to be hanging in there. It is somewhat more challenging to hold occupancy in this marketplace as time goes on. This is a momentum industry. I think we are carrying a fair amount of momentum into 2009 and I certainly hope that holds. I have a little bit of difficulty giving you exact guidance on where occupancy goes. We're budgeted to give up some occupancy because holding 97% in a market that we expect to b in the 95% range I think does reflect some inherent safety in the B product. I don't think we'll be able to hold a 2% differential, but clearly, we are budgeting occupancy above what is in John Lopez's market expectations published as part of the supplement.

It was more along the lines of -- from the competitive product in your market or what may be deemed competitive product in your markets. Is your relatively more affordable -- arguably more affordable older product holding up or able to hold up a bit better than some of the competitive product in your market?

I certainly hope it's apparent that it is.

Yes.

Because from my read of our fourth quarter results, again relative to others -- my read is it's holding up better.

Are you out -- do you know if you're outperforming the markets in January in terms of occupancy? Are you 100 basis higher or about equal -- ?

We are better than the markets in occupancy, yes.

Okay. Okay.

Yes. All you have to do is really go to some of the new product in some of these marketplaces and look at what they're renting the new units for. We can off line give you names of product that you can take a look at. The issue is if people on the new product -- the owners of the new product are becoming extraordinarily aggressive with respect to rents, the B product has got to become extraordinarily aggressive with respect to rents.

It doesn't -- they're not completely independent of one another. They all relate and they all compete within the same marketplace. As a result, they're shades of one another. Anyway, if you'd like to have that conversation, I'd be glad to continue.

And my last question is really -- how transient really is your typical tenant? These markets are not the cheapest markets to live in, whether it's rental or housing. They're close in to major destinations, et cetera. Or they're well located, et cetera, but how mobile -- these are in many cases two-income households or families.

It's not just real easy to pick up and move and move back in with mom and dad, especially if they're not living in California. The tenants may be losing jobs, they might be having some trouble. But I would have to imagine and I might be wrong -- but I would have to imagine that they're probably pretty sticky and they need to be there somewhere in that market. Is that a fair characterization?

Yes. I think it is. Remember, the rental market -- it changes over time. You have people that enter that are younger college graduates, entering the rental market. I have three kids, none of whom I assure you want to move home with mom and dad. I would call that pretty darn sticky.

There's another piece of the renter pool that represents people that are older that will never be able to afford a home, notwithstanding the mortgage craziness of the last year or two -- that will never be able to own a home. We like that. We think that makes up a significant amount of our renters.I think that there are some inherent safety things in the product --in the locations, given the housing -- the limited housing alternatives that you have here. I think that's helping us as well.

Okay. If California ever gets affordable, I think we're all in trouble. Okay. Thank you for your answers.

Thank you.

Your next question comes from the line of Chris [Summers] with Green Lake. Please proceed.

Earlier you referenced your ability and desire to access GSE financing. I was wondering if you could talk about what your capacity is to access those markets? And talk more about kind of what the terms of some of that debt looks like, in terms of -- is it strictly secured? What types of LCVs do they look for? How long can you go out -- in terms of duration and where is it pricing? Just to get a feeling for if you want today -- if you could really all completely refinance your balance sheet with this type of money, how much can that benefit you?

The pros on that is the -- are you there?

Yes, sorry.

The pros on having secured financing is, as I mentioned in my remarks, the fact that there's really no covenants associated with them. Once you have the loan in place, you have that opportunity to do as you described and get additional GSE financing. The GSEs are in business and they're eager to loan. What we've been experiencing is a lot of volatility in the spreads and that volatility is inversely related to the ten-year index. The ten-year takes a pop up, their spreads come down. To the extent that that ten-year goes down, then their spreads go up. They're honing in at the low 6% type range -- 6% to 6.25% depending on asset quality.

The loan to value is more of a function of a debt service coverage ratio. They're targeting 120 to 125. You can get slightly lower rates by giving them higher debt service coverage ratios. There are five-year products. There are ten-year products. Our philosophy has been to have about 10% of our debt maturing in any one year so we like the 10-year product. It just ladders our cost of funds. We're a long-term holder.

The negative is, as Keith mentioned in his call, the ten-year debt becomes inefficient over time as net operating income increases on the asset and you pay principal payments on a 30-year amortizing loan with a he ten-year balloon. And five or six years into it, it becomes inefficient and makes you look at getting second loans on some of those. Probably the biggest detriment is there are [make whole] provisions that are very erroneous if you sell the asset and the buyer doesn't want to assume the loan.

To answer your question about what our capacity is. It's a fairly easy calculation. I mentioned in my remarks that we have about $87 million of net operating income. Some of that is needed to fund the $200 million bank facility that we have on -- one of the covenants is that we set aside some of these unencumbered assets to -- in effect secure the unsecured facility.

It's an oxymoron. In essence that even though it is unsecured, they do require an unencumbered pool. But again, that's only $200 million of our debt of which none of it is currently outstanding or very little of it. We're not incumbent to keep it, but we have the flexibility of not having a bank facility. If you take the $87 million, divided by 125 debt service coverage, use whatever interest rate you want to use, that will imply what our capacity is if we dump the bank facility. Does that answer your question?

Yes. And then a couple of follow-up questions. If the six to 6.25% terms right now, how does that compare to a year ago?

They're about the same. Again, even though the index has dropped -- what's changed dramatically is the spreads. A year and a half ago, we were getting 80 basis point spreads. Now we're paying 350 basis point spreads. So --

Got it. In terms of the Fed's plan to try to target this 4% to 4.5% mortgage rate, would you expect that to benefit on your cost of financing as well, similarly?

I don't think so. I think they're using the profits they're making from the spreads on our loans to fund the losses on the single family. That's more of an administration -- you would have to -- I don't know the answer to that. I'm speculating.

Got it. They treat lending money to you guys differently than the single family market?

Yes.

Got it. Does the money come directly from Fannie or Freddie? Or are they just guaranteeing it and there's other buyers?

The latter.

For the most part, they sell it off.

Got it. That's helpful. Thank you very much, guys.

You're welcome.

Your next question comes from the line of Rob Stevenson with Fox-Pitt Kelton. Please proceed.

Thanks, guys. Just a couple of quick questions. You guys talked about how you were being aggressive on renewals before. How aggressive are you being these days with credit underwriting? Are we to the point yet where you're willing to tweak your credit requirements slightly downward in order to increase the pool of available renters?

Generally, no. We have not changed our credit or underwriting standards and we don't expect to -- other than maybe one in 100 properties or something. We generally don't want to go down that road because in our experience, you end up creating a delinquency issue which is difficult to deal with. We're going to hold tight on credit standards.

Lastly, you talked about the assumption of 100,000 job losses in your markets in 2009. What was that number in your markets in 2002 at roughly a similar point in time in the last recession?

Just to give you an example, it was almost 100,000 in San Jose alone.

In one year.

In one year.

200,000 in two years, right?

Yes. It's very little compared to just what happened across our portfolio in that time period. I would say -- I would probably say we've lost almost two to three times that in one year in our markets.

But, John, create the context. The context is there was also a huge run up in jobs prior to the 2001, 2002 job losses. You had essentially -- you had all the Y2 K and internet boom jobs and capital creating the bubble. And then the bubble burst and it came back down. Correct me if I'm wrong. There doesn't appear to be a bubble this time so 100,000 job losses when there's no real bubble to speak of is a much more -- is a reason why it wouldn't be worse. We wouldn't expect it to be much worse, right?

No. Just an example, in Silicon Valley just two years before that, the job growth -- which is typically between 1% and 2% was over 5%, and I believe 4% the previous year. There was a huge buildup. That's why we think this time came almost all from technology which we haven't had this time around. That's why we believe that the tech sector is relatively better off than some of the other sectors that have built up.

Okay. Thanks guys.

Your next question comes from the line of David Harris with Royal Capital. Please proceed.

Hi, guys. You may have touched on this. Forgive me if I'm asking something you already have gone over. Are you seeing any distress opportunities across your markets and I'm talking land as well as rental properties?

I'll let -- this is Keith. I'll let John talk about the land. The answer is we are seeing some distress in several southern California markets. However, it isn't to the level where we feel that our cost of capital makes a lot of sense. There essentially -- what we're seeing is -- we're seeing some condo deals that can't be sold. The developers are broke. The product is going back to the bank. The bank really doesn't want to deal with it so they'd probably like to sell it. But we need pretty significant or I think most investors need pretty significant price hits and it hasn't been there. But there are distressed situations clearly out there.

Keith, don't you think it would be fair to say that we don't see deals out there as distressed as our stock price?

Yes.

On the land side, we are tracking a few deals. We would love to tie up and steal a few deals over the next year because being counter cyclical -- buying in the down times and deliver on the recovery. But what tends to happen with most land deals in our -- in the core markets is, sellers usually have the option of hanging on as a general rule, unless they're over financed. Getting land loans to buy speculative lands are very few and far between, even in the really good times. There are very limited opportunities that we could pursue. If we're out in the Valley or Riverside or tertiary markets, that would not be the case. We just have not been able to see things. People pull in their horns. They decide to leave it as a parking lot longer and not sell it. Yes. We will see a few things that we may end up tying up over the next year, but I don't think it's going to be much.

Okay. Can you just remind me, have you got any capacity left in the second fund?

We do not.

Okay. Okay. Any temptation to talk to investors about a third fund to take advantage of these type of opportunities that may be six, 12 months down the track?

David, I don't know if you were on the last -- we've actually in the last couple of calls have talked about creating a Fund III. We are investigating that. Unfortunately, most investors -- most of the state pension funds, et cetera, have been suffering from the denominator effect. As a result, there's not a lot of cash flowing right now. We are continuing to monitor that and that's one of the -- I talked about being flexible. And that's one of the flexible pieces of our puzzle this year is if we can capture some of that type of capital, we will absolutely do it.

Maybe you need to market to a different constituency.

I'll call you after the call.

All right. Thanks, guys.

Okay.

(Operator Instructions). Your next question comes from the line of Karin Ford with Keybanc Capital Markets. Please proceed.

Hi, guys. Just one quick one. Just wondering about California's state budget woes and the S&P downgrade of late. Do you expect that to have any impact on layoffs if that continues? And/or do you expect any revisiting on Prop 13 if things continue the way they are in California?

Right now, the Governor has put the employees of the state on a two-day furlough. Clearly the state is trying to address these issues and control the bleeding. I don't know -- clearly if they don't solve some of these issues-- , probably some of the state projects will either get put on hold. I expect that part of the federal government's bailout is -- those cash dollars are going to come to California in a pretty significant way to solve some of these problems which is a short-term fix.

Prop 13 is a subject that comes up all the time. Clearly the Prop 13 was designed to keep the residential -- or the homeowners in their homes because taxes were going up and people couldn't afford to live there. If it were to happen, we're -- and there is no indication -- it comes up all the time. It's always been beaten down. If it were to come up, very, very clearly they would go after the nonresidential.

Clearly the homeowners would vote themselves out. It would be a matter of whether the multifamily people could ride the homeowners' coat tails. That's all speculation, having said that. There's no current indication that any of that is on the

Actually, let me add one thing, Karin, to that.

Sure.

And that is Arnold Schwarzenegger has indicated it's, quote unquote, the third rail of California politics, having been tried several times before . Politically very undesirable, not that it couldn't be tried again. But the other piece of it is that it requires a two-thirds vote which getting a two-thirds vote is pretty darn difficult in

Sure. Do you know how -- does the furlough effect you guys at all? Do you have a lot of state employees in your properties?

Again, it's a furlough of two days per month. It's not like people are --

Can't afford their rent.

Yes, can't afford their rent. It's a factor, but I don't -- we haven't had any comment from any of our residents with respect to it.

And we're not in Sacramento.

Right.

Okay. Thanks very much.

At this time, I'd like to turn the call back over to Mr. Keith Guericke for closing remarks.

Thank you all of you for being on the call. It went a little bit longer today than normal, but we appreciate your support and we will talk to you next quarter. Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.