Essex Property Trust Inc (ESS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Essex Property first quarter conference call. My name is Mary and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host of today's call, Mr. Keith Guericke, President and CEO. Please proceed, sir.

Good morning. Welcome to our first quarter earnings call. This morning, we'll be make something comments on 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 the risks are details 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, Michael Dance, and John Eudy. Included in the earnings release on our website, you will find our market forecast for 2009. These forecast is have been revised to reflect the change in jobs and rent growth for several of our markets for 2009. Also included with our earnings release is a schedule titled new residential supply, which includes total residential permit activity for the larger U.S. metros, as well as information on median home price 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 9.4% per share for the quarter. Portfolio grew revenue 2%., greater than the same quarter in 2008. For those of you who have followed us for the last 15 years, know that we pride ourselves in our research and our goal to be conservative in our projections. For us to be revising our employment and rent projections for each of our markets so soon after releasing guidance speaks to the dramatic deteriation we've seen in our economy. Mike Schall will discuss the change by market in his comments and give color as to when we think each market will start to improve.

Big picture, though, we think our markets will benefit from the fact that we have little exposure to manufacturing, and that our coastal markets do not depend on and are not driven by housing construction. What does drive our markets is significant technology industry and a business services sector which we believe will be the first sectors to recover driven by business investment. We're not counting on the U.S. consumer, but rather the emerging markets and the general global demand to be the catalyst for the increase in business investment spending. On the supply side, as the current projects are delivered, we do not expect there to be any significant new projects started. And in many of our markets, there are no new projects being started. This is consistent with our business plan. We have completed all of our active developments except two by the third quarter of this year. I've asked John Eudy to give some additional color on development later on in the the call.

On the acquisition side, we have not entered into any transactions this year. We continue to monitor cap rates given the volume of transactions is very low. We've sold several small billings at cap rates that range in the 6% to 6.5% area. And we have several additional small buildings are listed. The private investor with family money and the small syndicator are still in the market for these types of transactions. We will not be buyers until we see cap rates that create positive arbitrage to our cost to our debt and equity. But as a general statement, we think that it is still early to be making acquisitions.

I would like to just make one last point. After reading the various reports regarding our results, the conclusions range from good job to very concerned about core earnings. It's as if some of the investment community believes that the rental housing market are permanently damaged. While we're concerned about them near term, we know the economy and therefore our markets will recover, and that profitable opportunities will present themselves along the way. Essex will benefit from this environment, especially given it's strong balance sheet and finance strategy. The quarter demonstrated this. We opportunistically obtained additional well placed GSE debt and deferred a development deal. Specifically, we deferred the Cabinet project saving $100 million. And we used that to opportunistically buy back various securities and by doing so created a dollar of FFO, and about $32 million of shareholder equity.

As we now believe the rental markets are getting worse, I suspect all the markets across the country are going to see similar deterioration. However, things will get better. NOIs may drop in the short term, but in my career, they've always come back. Housing production is dropping. Kids will grow tired of living with their parents. More affordable rents will entice them to move out. Jobs and job growth will resume. People will continue to grow older, and populations will increase. This will lead to a housing shortage. It's just a matter of time. I guess the message is housing is a basic need. It's not Starbucks. It's not a vacation. So, we have very strong confidence in our sector. I would now like to turn the call over to John Eudy.

Thank you, Keith. We didn't start any new developments during the quarter, nor will we in the near future until the economy shows significant signs of improvement. Our developments under construction are all ahead of schedule and are under budget with the exception of Seattle being two month behind but still under budget. Six of the seven land parcels we own, which are not yet under development have entitlements and the remaining deal will have entitlements in the next few months. Our pre-development land basis is $126 million. It is important to note, all of our land locations are urban infill in our core markets and improved with over 430,000 square feet of type one buildings. Given the current economic environment, we can and have extended leases and can lease up the balance of space at significant discounts to market and mitigate the drag on the $126 million.

Given the lack of new development starts over the last several quarters and the likelihood this will continue for the next several quarters, there will be little new supply hitting the market starting in Q3 2010, and extending into 2013 or later. Given our entitlement status, we should be able to time our development starts at the first sign of a job growth and recession ending and deliver the units into the heart of a recovery. At this time, I would like to turn the call over to Mike Schall.

Thanks, John. And thank you everyone out there for joining the call this morning or afternoon. This last quarter was one of the most difficult that I've experienced in my 22 years here at Essex. As discussed in previous calls, pervasive job loss and peaking development pipelines including many condo conversions now being rented as apartments have thrown most West Coast markets into a disarray. There were essentially two groups. Those that met the market in terms of offering rents that resulted in leases, and those that held out for stability. With 97% financial occupancy, Essex obviously chose to meet the market, requiring us to pursue a variety of tactics, each of which resulted in lower rents, until we found that point that allowed us to achieve our leasing goals. As you can imagine, this was an onerative process throughout the quarter, and so there was no predetermined discount that was used to maintain occupancy. I'm very pleased with the responsiveness and team work of our operations staff amid a chaotic and deteriorating environment.

At our operations staff meeting each week, I ask about signs of rental rate stabilization. Clearly, the rate of decline in rents has abated, but the future remains unclear until the massive national job losses end, which we believe will happen in the near future. The sudden and dramatic change in the employment picture combined with supply issues in Seattle and various submarkets in Southern California, make the near term future difficult to predict. Nonetheless, we have updated our market rent estimates as part of our market forecast for 2009, which is included in the supplement and available on our website. We believe that the best locations will begin to benefit once the shock of the rental housing market has abated, allowing people that could not afford the better locations to relocate. In addition, our B quality property focus will appeal to the new consumer, who has overnight become very price sensitive. Longer term production of competing housing will slow to a trickle, creating a housing shortage in a few years. We decided to remove the loss to lease statistics from the supplement package as this data can change rapidly and can be misconstrued. Essentially the same information is reflected in the forementioned market forecast for 2009. As before, loss to lease is negative, meaning that in place rents pursuant to leases are higher than market rents in each of our regional areas. In total, negative loss to lease was 7.1%, a scheduled rent as of March 31st, 2009, that's calculated excluding the Belmont station and the Grand, both of our lease up transactions. Delinquencies have increased modestly during the quarter and were .45% of scheduled rent, versus our target of .35% and .4% in the prior year for a same property portfolio. The largest increases were in Northern and Southern California.

As with prior quarters, move-outs to purchase single family homes are significantly less than in the prior year. Overall, 8.5% of our move-outs left to buy a home, which is down from 12.2% in the first quarter of 2008. This decline occurred throughout our portfolio, except for Orange County, where move-outs to purchase homes increased from 8.6% in the prior year to 11.9% in the first quarter of 2009.

Now I would like to briefly review each major part of our portfolio starting in the Pacific Northwest. We have made a major revision in our outlook for the Seattle market, consistent with the continued deterioration of the U.S. economy. Previously, we estimated 1% job loss in 2009, which was significantly better than our 1.5% job loss estimate for the entire nation. Our updated job forecast now indicates a loss of 40,000 jobs, or 2.7% of the work force in Seattle, which is slightly worse than the national average of 2.6%. These job losses affect nearly all major local employers including Boeing, Microsoft, Starbucks, WaMu, et cetera, perhaps Amazon is the notable exception. To compound the impact from these job losses, Seattle's development deliveries are very high. Seattle will deliver approximately 5,100 multi-family units through both condos and apartments from now through 2010.

The impact of both supply and demand disruption has caused rents to spiral downward. We now estimate that year-over-year market rents for the Seattle MSA will be off 12.5% in 2009, versus our previous estimate of minus 2%. We believe that Seattle would be the last part of our portfolio to recover. Seattle's job market should continue to follow the national average, which will be a drag in the short term. Given its larger than average supply of competing properties, we expect recovery in Seattle's rental market to begin in mid 2011. As of April 2009, our Seattle occupancy included approximately 2.8% Boeing employees, 1.2% WAMU, now J.P.Morgan employees, and 1.4% Microsoft employees. As of April 27th, 2009, physical occupancy in Seattle was 96% with net availability of 4.6%.

In Northern Cal. We also made major revisions to our 2009 Northern California job forecast during the quarter. We now forecast the Bay area to lose 2.2%, or 66,000 jobs, slightly better than our outlook for the national job loss of 2.6%. A third of the job losses in Northern California are expected to come from professional business services, which is 19% of total jobs. The San Francisco MSA is expected to perform the best of the three Bay area MSAs due to its higher concentration of jobs in healthcare and biotech, as its top employers include Genentech, Kaiser, Catholic Health Care West, and UC San Francisco. In contrast, Silicon Valley and the Oakland MSA have greater manufacturing presence. Relative to the nation, Northern California has fewer projected job losses and a much more limited supply of competing housing. Multi-family supply represents only .8% of total multi-family stock. In 2009, we forecast market rents to decline 7.8% in Northern California. We believe that the rental markets in Northern California will begin to recover in mid-2010. We're in the process of leasing up our 238 unit the Grand project in Oakland. We are currently 50% occupied and 60% leased. Rents are approximately 5% below budget, and we're using approximately one additional month of concessions as part of the lease up. As of April 27th, 2009, physical occupancy was 96.7% in our Northern California portfolio, and net availability was 4.2%.

Finally, Southern California. Our job outlook in Southern California has also deteriorated, but not as significantly as Seattle and Northern California. We previously estimated a .9% job loss in Southern California, which has been revised to a 2% job loss or approximately 140,000 jobs. Southern California entered the recession earlier than Northern California and Seattle. As a result, most of the job losses in the housing sectors in Southern California were previously realized, causing the expected 2009 job losses to be less than the national average. Southern California has a greater exposure to tourism, hospitality, and wholesale retail trade, which has contributed to their job loss estimates. We forecast Southern California supply to be .6% of multi-family stock, and .2% of single family homes. Most of this supply will be delivered in 2009, and should be followed by minimal delivers of competing housing thereafter. For the next year, supply deliveries will continue to pressure rents, leading to our updated projection of market rent declines of 9.5% for Southern California in 2009. We believe that recovery in Southern California rental markets will begin in late 2010. We have achieved stabilized occupancy at our 275 unit Belmont station project in downtown Los Angeles. We are currently 96% leased and occupied at that property. On April 27th, 2009, physical occupancy in L.A. Ventura was 95.7% with net availability of 5.2%. Orange county, 95.9%, with net availability of 7%, and in San Diego, 96.4% occupancy with net availability of 5.7%. Now, I would like to turn the call over to Mike Dance. Thank you.

Thanks for joining the Essex first quarter conference call. During the first quarter, we have several non-recurring investing and financing transactions that are explained in the press release and are broken out separately on schedule S3 in the supplemental information. Our January guidance underestimated the severity of the job losses in our markets. And accordingly, we have reduced our 2009 same store net operating income from a decline of approximately 4% to a decline of between 5% and 6%, or a $0.30 decline in FFO per diluted share. To put this in perspective, same property recently income increased by 4.5% in 2008, and the revised 2009 guidance assumes the same property rental income will decline by approximately 3.5%. The Company's cash flows are still strong, and we provide attractive housing close to major employers in highly desirable locations. The other change in our guidance relates to the expected sensation of development activities on the three developments, which is expected to occur in the second half of 2009. We plan to postpone construction activities on these developments until such time as we are confident in a jobs based economic recovery.

Accordingly, the revised guidance expects an increase to interest expense when we discontinue capitalizing the interest costs, which will decrease by $0.05 our FFO per diluted share. There are no other significant changes to the revised 2009 guidance range.

I would like to take this opportunity to remind our investors as to the strength of our balance sheet and the sources and uses of cash. I believe there may be a misconception about our ability to obtain short-term financing.

During the quarter, we extended our $200 million unsecured bank facility to March 2010, and we have the ability to expand the secure line to $250 million. The bank facility is our only debt with financial covenants, and we are well covered on the required covenants and financial ratios. We are confident that we will successfully negotiate a new bank facility with similar covenants, or enter into a new secure facility with either Fanny or Freddy. We are awaiting the government's results on the stress tests on the banks, and we are evaluating the relative merits of having an unsecured bank facility compared to adding a second secured GSE facility.

Total unused line capacity is over $300 million. And we have unrestricted cash, cash equivalents and marketable securities at March 31, 2009, of $95 million. And we expect to close two new mortgages in the second quarter with proceeds of $60 million. By the end of the second quarter, we expect to have over $450 million in readily-available capital. Additionally, approximately 30% of net operating income is unincumbered and many of these unencumbered assets are eligible for secured debt financing if needed. I would like to point out on S-5, where we buy the debt maturity schedule in 2010 to include the $100 million in exchangeable bonds, since it is likely that the bondholders will exercise the put option that they have in November 20, 2010. The 2010 maturities also includes two loans to a private equity fund with current balances of approximately $130 million, at an average rate of 8%, that are due in October 2010. These two loans are expected to be refinanced with GSE mortgages, and assuming a 7% interest rate, a 130 debt service coverage, and a 10% decline in the collateral's net operating income, we expect to generate $70 million in proceeds from the 2010 refinancing activity. Every indication we have is that Freddy and Fanny will continue to support work force housing by providing attractive financing and multi-family assets. Almost all of our outstanding debt is comprised of 10-year fixed rate mortgages. Accordingly, we believe the Essex capital plan is self-funded as a refinancing and mortgage debt is a source of capital since refinancing proceeds on mortgage debt with 10 years of principal payments and 10 years of net operating income growth will significantly exceed the original mortgages balloon payments. Another example of using mortgage debt as a source of capital is the $10 million of proceeds from the second deed of trust that occurred in the first quarter. The original mortgage was funded in 2005 and in less than four years, we are able to underwrite a second deed of trust and generate $10 million of proceeds that will be repaid in August 2015. Estimated remaining cost on development and construction totaled approximately $113 million, of which there is a construction loan for $60 million on the Seattle development project.

During the first quarter, we decided to limit the construction activity on TASMIN to a retail pad where we have an obligation to the anchor grocery tenant. This tenant will be a great amenity to the residents when the multi-family units are ultimately constructed. We continue to market a limited number of assets that if sold will be, the proceeds will be used opportunistically to redeem or retire Essex unsecured bonds or series G preferred shares. The company's strong balance sheet and access to secure financing enabled management to take advantage of what we believe to a be a compelling long term investment by retiring Essex Property Trust securities. For those joining us late, we have directed the operator to permit each caller to have one and one follow up question on the same topic. If the caller has additional questions, the operator has been asked to put that caller back into the queue to enable more participations and inquires. This concludes my remarks and I will turn the call back to the operator for questions.

(Operator Instructions) Our first question comes from the line of Michael Salinsky, RBC Capital Markets.

Good morning, guys. In your supplemental, you guys provide a breakout of single family house housing. In the past, you've thing conference calls about single family, multi-fame affordability gap. Can you talk about how that is today across your various markets and whether you expect that to start pressuring later in the cycle, given the contraction we see in between single family and multi-family?

Yes, there's been a sure drop in prices all across all of our markets, probably from 25% to 45%. lowest in Seattle, highest in Southern California. Where the affortabilities are running at is now about where they ran in the mid-90s before they went up in prices. So as it stands now, and we are seeing price declines sort of slow, is that we haven't gotten to the point where it's much more attractive to buy a home, and still is a good environment if we had the fundamentals to move rents. And Mike and I direct you to then schedule of the residential supply schedule. And that's been updated for and to the best we can, as of the fourth quarter of 2008 prices per market. And if generally, affordability index of under a 100% means its less affordable if it's more than 100%, it's more affordable. And all of our markets, the affordability is still quite low. Ventura County is bumping up about 97%, so it's basically the most affordable market we're in. But the prices are still generally in the $300,000 to $500,000 range for our West Coast markets.

As a follow up then, as it receipts to that, you gave assumptions as to when you think the Seattle market will start to improve, and Northern California. Are you assuming that the single family housing market has to stabilized before that? And move out trends pick up to a normal level, or can we have a sustained level in multi-family without necessarily a clearing being reached in the single family market?

That's another good question. Our argue is, if you look at the percentage of stock that's been produced in the single family area, there's just not enough of it. And clearly we're going through a period of time where people are being foreclosed, have to move out, and then a renter will sometimes come into those areas. And we think that that is a relatively short term phenomenon. As to the coastal markets, if you go more inland in California, we think that's a much longer term issue, primarily because they just built way, way, way to many homes in the inland areas, and those are the areas that typically, values have dropped more than 50%. So the amount of sort of pain felt in California is different as to the locations, and we continue to believe that the coastal markets will, on the single family size, there's just not very much availability, and therefore recovery is sort of imminent, as soon as the market stabilizes in terms of values.

Great, thanks. I'll jump back in the queue.

Your next question comes from the line of Jay Haberman, Goldman Sachs.

Hey, guys, good morning. Question in terms of outlook. Obviously, the forecast for job losses in your market , this would seem to match what happened in the '01 down turn. And Keith, on the last -- the prior call, you mad mentioned, obviously, you expected conditions to further deteriorate into 2010. I mean, do you still think that would be the case, and as part of that, you talked about rents maybe been down sort of 9% to 12%. That where they stand today, or where you think that is sort of toward the end of the

Well, it's for the year. What we're looking at in that projection is for the year, but, if you look at -- in fact, you don't necessarily have to just look at us. I mean, (inaudible) is producing some rent forecasts as to where they think rents are down today. And I think the projections there are in the 5% to 8%, depending on the particular market. So, we're experiencing, again, given specific properties, on releasing anywhere from, it's across the board. Depending on when the last lease was done. All of our leases aren't at market, so we aren't necessarily experiencing the same kind of market reduction in he our in place leases that the market lease reductions would necessarily suggest, And as Mike said in his comments earlier, we think that the gain to lease across our entire portfolio is just over 7%, so I think that gets it in perspective for you.

Can you give us a little more color on what you're seeing perhaps right now in terms of trends? And also you talked about this (inaudible) process of obviously adjusting rents, but can you talk about how quickly the traffic changes as a result of the changes in rents?

I mean traffic in general is down a bit. I think that there is a lot more shopping of properties, so in other words maybe the traffic used to shop three properties now is shopping 10 properties. A lot for information available, via electronic media, which I think is the fundamental difference between now and 10 years ago. So sort of the dynamics have changed, but we're talking about housing. It's basic human need. We're not producing a whole heck of a lot of it. In the short term we tend tend to have a little too much of it, but as Keith said in his comments, the days a little time will go by, and we'll have another shortage again. So I don't think it's changed all that much. Certainly the rate of the shock, my view is there was sort of a shock in the markets from December to January, and things adjusted very, very rapidly primarily because people just weren't renting, And then they started renting, and I think that things began a process of stabilization which I think has gotten progressively better through throughout the quarter. So, are people still very price sensitive? Yes, they are, and sure shopping hard and using the electronic media to their advantage. But having said that again, these are very diverse big markets, lots of people that need a house. I speculate that most aren't going to live with their parents for more than a year or two, or whatever. Probably less than that. And they need housing, and they're going to rent. And having more affordable housing in a certain way helps us, and as people become more attracted to that as an option. So, I think that things progress positively through without the quarter, I think that the rate of decline started out very aggressive at the beginning, and moderated at the end. And I think we're pretty well positioned for the future. Having said that, we still lost. And actually the think I would disarray with, I think the dynamics are so much different from the 2001 period, because 2001 was a period of essentially an emmence amount of money being thrown at these dot com companies that had never made a dollar. And then they all blew up. So maybe the numbers from that perspective look similar as relates to Seattle and Northern California. I think the dynamics are different in that this is truly national, It affects every part of America. It affects every industry as far as I can tell. And so it's much more, it's just everywhere. It's not specific to any one or two or three regional areas or one or two or three segments of the economy.

Okay. Thank you.

Your next question comes from the line of Rob Stevenson, Fox-Pitt Kevin.

Thank you. Good afternoon, guys. Just sort of curious as to going forward. You had talked about use some of substantial asset sales to buy back some securities. What sort of magnitude are we looking at there?

Well, we're going to go at it in an opportunistic way. As I mentioned, we have several properties listed. I think the total of five or six properties are all rather small properties, so the amount is not greater than $100 million. However, the ability to count on a sale in today's market is not perfect. So, I would guess that get some portion of that maybe half of it or a third of it sold. And, at the time, we're going to look at what's the most beneficial to us. Somebody had asked earlier, not on the call, but, in an e-mail, about why we bought back common stocking. And the reality is, we would love to buy more G back, but there's not that much in the marketplace that we can get at the prices we like. And if we can buy our common at -- and when we did that, we didn't look at it as a mechanism to support the price, we looked at it as from an accretion standpoint. If we can sell our assets at 6% or 6.5% cap and buy back our stock at an FFO yield of 8% or better, I mean we would also do that. So, we're gotten if look at this, and look at all the opportunities we have, use our balance sheet wisely, and try and create additional value for our shareholders.

Okay. Thanks, guys.

Your next question comes from the line of David Todi from Citi.

Hi, guys. A lot of attention has been paid to the impact of the economic environment on your development pipeline. Could you maybe spend little time talking us through the impact of the redevelopment pipeline? How it has changed your yield expectations? if you actually -- if this avenue become more attractive in this environment, you might direct more dollars? Just some color around that would be great.

Yes, I'll make a few comments about that. For the most part, we have curtailed our redevelopment pipeline a bit here. Capital cost, obviously, has increased dramatically. And that would normally require bigger spreads, or bigger returns on our redevelopment pipeline, which we don't think are achievable in this marketplace. Primarily because as we commented before, rents tend to compress during difficult economic types, and therefore if anything, we're getting a hair less return, not more return consistent with our cost of capital. So our view is that we are adopting a little bit different redevelopment plan, which is restricting. We canceled a couple of redevelopment projects. We have phased out the ones that we have, so that we do piece by piece. We monitor them in terms of rents actually achieved on redevelopment communities. We monitor them much closer than we did, so it's a somewhat different environment. We view that as something that we will -- when we see the light on the -- in terms of the markets improving again, we will accelerate them sort of consistent with what John Eudy said about the development pipeline.

Okay. And into then just to follow up on that, could you talk maybe a little bit about your intention to cut back on CapEx spending, maintenance capex? What percentage of repair and maintenance can you scale back in terms of seeking margin maintenance?

Yes, I -- I don't -- we don't -- there's a couple of offsetting forces there. Obviously, we will put off some of the things that are more voluntary. Obviously, we're very concerned about life safety and asset preservation issues. And the sort of further benefit is that there are a lot of hungry contractors out there looking for things to do, so if we can -- if we can complete some of the capex work more cheaply given the environment, we may actually accelerate some of the capex work. So I would sa, net net we're not likely to change it a whole lot. I think that sort of its composition will change, but if you look at the total what we may cut back and defer will be offset by what we choose to do more currently, just because we can get it done a lot cheaper. And the net of those two is probably to have it remain about the same. I think, again, it will have some long-term benefits, but I think it will be about the same.

Great. Thank you.

You have a question from Mark Tensky, BMO Capital Markets.

It's Rich Anderson here for Mark. Hi, guys, one of the items that you mentioned here was that Biotech Industry being a source of strength in San Francisco. I guess I was wondering what gives you confidence in that. I wonder about DC funding for the business. And is it possible that that could be an area next in line to start to contribute more to the job loss picture?

Well, the point on that was that we think that, you certainly Venture Capital is down. The news is it's the lowest level in 12 years. We're looking more towards, it will probably limit job losses because its less general driven by the short term changes in consumer demands and more in long term Research and Development. And we also feel that as everything else when the market recovers, we feel that Venture Capital will tick up, and there's to doubt where that Venture Capital will be going, and we believe as it always does to go into our markets, particularly San Francisco.

And I think it was a relative equation we were talking about that about there which is San Francisco is a little better because of health care and biotech, more than those who had a manufacturing orientation. It was san absolute, San Francisco still is projected to lose jobs, just not quite at the same right rate as Oakland and Silicon Valley.

Okay. And then just as my follow up. In terms of diversification, is -- and maybe this is a big picture question for Keith. Obviously, you guys took a shot at Baltimore a couple of years ago. Do you feel now, A, that's the market for REIT will look to -- I mean to consolidate? And does a company like yours, where you're specifically focused on the West Coast? Do you look at the picture now and say, boy, maybe there will be a great opportunity to not only acquire assets, but to acquire platform and to diversify into an equally strong market, but it's diversified nonetheless away from the West Coast. Do you think that's something that starts to happen somewhere down the road?

Well, I guess what I would tell you is our process for making those kinds of decisions. And that is when we did that, a few years back, we looked at the markets that that portfolio was across, and it was across DC, Northern Virginia, Baltimore, and we looked at the growth rates in those markets. And generally the rental growth rates in those markets were basically as good as Northern California and better than Southern California, and so we saw it as something that was going to be potentially accretive to our growth rate. And the process we would employ looking forward is if we were to and some additional markets as a result of what's going on in the economy today, we would do the same thing. We could look at the growth rates in those various markets, and, if we felt there was a place where we could create some acreacion towards our growth rate, and we could execute a transaction from an NAV standpoint that made some sense to us, we would look at it. I will tell you as of this moment, we are not looking at anything, but that would be the process, and this down turn is young, and who knows what will come of it.

Could turn around quickly though.

It could. And I do think, I said earlier, I think that it's,, from an acquisition standpoint, I think it's early in the game. Do I think that once we sort of hit that capitulation point, I think it will go quickly, and I think the window will probably close quickly. And I think there will be an opportunity for six or nine months, and I think it will be over. And I think cap rates will probably gravitate back down to maybe not where they were, but certainly closer to current levels. So I think there will be that opportunity, but I don't think it will be long lived.

Got it. Thank you.

You have a question from Andrew McCulloch, Green Street Advisors.

Good morning, my question is on leverage, and it's for Mike. What do you see as sort of the quote unquote right or target long-term leverage level for Essex?

We've consistently kind of used 50% as the gross asset value. I think with the volatility of the stock markets, stock price for that. So I think worry comfortable with that 50%. Not to to say that we might consider going above it if the right opportunity existed. But I think, we are very comfortable with the 50% level. Again, we're focused on the equity and want to make sure we can continue to maintain and when things get better, grow the dividend again, so --

Would that 50% change be if Fanny and Freddy went away, or the availability of capital shrunk meaningfully?

Yes, I think it, part of the 50% is the attractiveness of the Freddy and Fanny financing, yes.

All right. Thanks.

You have a question from Paula Hoshkin, Robert W. Baird.

Thank you. What is your inclination to resume land banking for more distant projects? Future projects?

You mean if we can steal land and bank it and take advantage of it?

Yes

We're out there, We've got several acquisition people still culling the market. We are looking at a few opportunistic plays that are -- I would consider much below their intrinsic near to mid--term values. But you still can't start the development on today's rents. The interesting thing about land sellers is generally in our core markets good locations, unless there's some pressure from a bank, or other area, they tend to own them free and clear, or close to it, in many cases, and they just wait out the market. So we're not seeing the number that you would think that we would see it as big discounts. But there may be a financial institution that has reasons or pressures dump something quick, and we would be standing ready to do it if it made long term sense.

Thank you.

Thank you. (Operator Instructions) Your next question comes from Michael Salinsky, RBC Capital Markets.

Yes. One of your peers had mentioned that the rate of decline on new leases had basically relative to January and currently had held. Yet your comments seem to suggest that you're seeing rental rates erode a little bit more. Can you break that out by market, maybe, a little bit? And, also, can you just touch upon what you're seeing from trends from January relative to April across the portfolio?

I think we're starting to split hairs here, Mike. I would say that the dynamics are fairly similar throughout the marketplaces. And I would agree that, and I think I said this, that the rate of decline was very dramatic in December or January. And throughout the quarter, it abated somewhat. So I think that a -- so I don't think it was a steep decline and then it was flat throughout the quarter. I think it was a steep decline and then a slowing number thereafter. So, we have a couple of, I think, pretty important metrics out there. One is the sort of gain to lease, which is as of March 31st, it stood at 7.1%, of scheduled rent. We have 10% to 12% rent reductions, , forecast for our portfolio in a supplement. So, that sort of indicates that it's probably not over, not completely over, in terms of its impact,. But certainly the rate of most of the rent losses, you know, at the market level, has

Okay. Then just a follow-up. On the transactional front, I know you said it's way too early to jump in right now, but we are expecting to see distress levels rise. And we have seen so far, specifically in Southern California, distress levels pick up. Is anything at this point looking at all attract or do you think it's wise just to completely wait on the sidelines for quite as rents are going to pull back in considerably further?

Well, I mean, we're out there, we've got three or four acquisition people that are out in the marketplace, and looking at transactions. We have seen a couple of deals that theoretically were close to 7 caps for decent property and decent markets. But, again if you -- all you need is, 5% additional rent drop, that 7% becomes 6.25% So,it's a combination of several things. One is if we have some additional rent pull back, unless you can build it into the price upfront, which means you're going to need better than 7 cap. Or I think the other thing is, just from the standpoint of stress in the marketplace, we -- and again, we went through this in the 90s, early 90s with the RTC days, the best coastal markets didn't really see a lot of trouble or a lot of foreclosures, but there were some. And we expect that we will see some opportunities where there is some over leverage in the marketplace, and operators can't refinance and so we might be able to take some advantage. We've actually -- just got a call recently from a private operator whose got institutional partners who need cash, and they're willing to basically take cents on the dollar on their equity, but the problem is they were so highly leveraged when you will be at the underlying debt,he debt is greater than the value of the property. So, we are starting to see it, but somehow the stars and the moon aren't lining for lot of acquisitions early, right now. And I do think we are going to see things continue to come in our direction over the next three to six months.

Okay. Thank you.

Your next question comes from the line of Steve Swett, KDW.

Thanks. Mike Dance, your comments on the guidance and the changes referred to the increase in interest because of the decrease in capitalized interest, I think. What was the capitalized interest in Q1, and where does it drop to by the end of the year?

I think it stays at the Q1 level for the first three quarters, and then it probably gets cut in half in the fourth quarter.

All right. What was that level?

I think it was $3.2 million.

$3.2 million

Okay. Thanks.

Thank you. There are no other questions at this time. I would like to hand the call to Keith Guericke for closing remarks.

Thank you. Thanks for joining us. I hope this was informative. We have confidence in these markets, and we're hopeful to have all of you on the call next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.