Essex Property Trust Inc (ESS) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Essex Property Trust fourth quarter 2011 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

Statements made on this conference call regarding expected operating results and other future events are Forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the Company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer of Essex Property Trust. Thank you, sir, you may begin.

Thank you, Robin, and welcome to our fourth quarter earnings conference call. Mike Dance and Eric Alexander will follow me with brief comments, John Eudy, John Burkart and John Lopez are available for Q & A. I will cover the following topics on the call. First, fourth quarter results and rent growth expectations; second, cap rates and third, update on the State of California. So, on to the first topic.

Last night we reported FFO per share of $1.55 per share, an increase of 18% over the prior year and equal to the high end of our guidance range that was presented last quarter. I'm very pleased with the focused effort in operations to the credit of Eric and his team. Eric will comment on portfolio results later in the call. I'd like to revisit our longer term expectations for rent growth. Last quarter, I commented that we expect approximately 28% market rent growth in our target markets over the next five years. Our 2012 guidance contemplates 7.4% market-rent growth which is consistent with that five year outlook.

The following factors were important in arriving at our market rent estimates. First, we've seen a slow but steady improvement in the State of California and Washington economies since 2010, and we do not see this progress abating. Clearly, we expect the coastal areas of California and Washington to outperform the inland areas have greater unemployment, overhang from foreclosures and related issues. Second, the West Coast was one of the last major US metros to experience economic recovery. Rent fell further than in most markets and thus have greater growth potential before hitting normal resistance such as affordability. Overall, market rents in our portfolio are on average about at the same level as they were in Q3 2008; however, personal and median household incomes in our target markets are higher now than in 2008. We estimate that current rents would need to grow by about 6.1% in our coastal markets to hit the 20 year average rent to median income ratio of 20.2% and rents should grow above that average during improving economic conditions.

Third, technology and social media companies and the proximity to the Pacific Rim provide a different and well positioned engine for job growth. This differentiation was apparent in 2011 and will likely continue into 2012 and beyond. Fourth, rent growth is not just about jobs, but rather the combination of job growth in limited supply of all new housing, both rental and for sale. Historically, we've seen very strong rent growth for several years when these conditions are present as they are today. Fifth, personal and median household income levels typically decline in recessionary times and accelerate during recovery periods. In 2009, personal incomes fell 5.4% in our target markets and have since grown by 10.8%.

Looking at national averages for income growth can be misleading as areas with concentrations of employment in the federal government, energy and tech are the leaders in income growth. economy.com estimates that personal income growth will average 5.5% over the next four years. This income growth is greater than the 3.5% use in our basic assumptions. Finally, population and other demographic considerations continue to support strong rental growth demand. Obviously, the world economy is in a vulnerable state and we expect external shock and additional volatility which could affect our expectations. Still, I suggest that a prolonged slow paced recovery amid low interest rates is a very favorable environment for the industry and the Company.

Second topic, cap rates. Cap rates range from 4.25% for 4.75% for A property in A locations and in the high 4% to low 5% range for B property in A locations. Cap rates increased from there for lesser locations in property quality. Acquisitions still work in this environment due to low interest rates and strong market rent growth expectations. Our preference is finding value-added opportunities, with rents recovering aggressively in many places, market selection and timing is critical to accretive investments. We have seen limited transaction activity as we approach the end of 2011 which is not unusual. As we enter 2012, we expect transaction volumes to increase and have guided to approximately $400 million in acquisitions in 2012.

As you know, development pipelines are rebuilding from negligible levels, and we carefully track new housing. Our construction pipeline now consists of five projects under construction aggregating $423 million, and we will likely add at least two project starts during 2012. There are a significant number of potential development deals that are being actively marketed by other developers and owners but are not underway largely due to the lack of financing. Many of them don't underwrite to acceptable returns. Also, some of the developers that could provide the financing that is needed are approaching their current capacity and thus are being more selective on new deals. It remains to be seen how many of the available sites will actually be started in the near future. Development cap rates based on current market rents continue to be in the mid to high 5% cap rate range and really haven't changed significantly, even though market rents have moved dramatically in some areas.

Third topic, state of California. As a general statement, the California economy has improved significantly in the last two years. The state financial health is also significantly better given huge cost reductions implemented by Governor Brown. The annual budget deficit a couple years ago in California was approximately $26 billion. It has now been trimmed to roughly $5 billion. To close the remaining $5 billion budget shortfall, several tax increase scenarios have been proposed and are in the qualification process for the ballot in November. This includes a proposal that is championed by Governor Brown which proposes a combination of temporary increases in income tax on high income families and a half cent sales tax increase. Other proposals are also targeting the ballot in November, including a proposal for a split role for property taxes which would allow commercial property to be reassessed every three years while leaving the Prop 13 mandated maximum 2% increase in property taxes in place for residential property. We believe that the governor's -- that Governor Brown's proposed tax increase is most likely to be included on the ballot in November and thus Prop 13 will likely not be changed.

I'd now like to turn the call over to Eric. Thank you.

Thank you, Mike. It's my pleasure to be here to report our fourth quarter operating results and share some of our views for 2012. After posting the best sequential scheduled rent gain since 2007 last quarter, we continued to execute our strategy of building occupancy during the fourth quarter. We were successful in gaining 120 basis points of occupancy during the quarter while still achieving modest rent growth during this seasonally slow period. The net result was a 6.5% year-over-year gain in gross revenues for the quarter. I, too, would like to offer my congratulations to the dedicated people of operations that made this happen. Well done, team.

The quarter was characterized by good demand in all of our markets and healthy renewal activity throughout most of the portfolio. Current demand is at or above our expectations for this time of the year. By and large, customers continue to report strong satisfaction. Turnover remains low, move outs due to affordability are in check and home buying is still not a major factor driving turnover. New multi-family housing supply remains very low and largely concentrated in a few areas of our portfolio.

Our 2012 delivery expectations are detailed on Page S15 of the supplemental package. Based on the existing pipeline, total housing deliveries are expected to peak at 2014 where housing deliveries as a percentage of existing stocks are expected to be 0.9% in Seattle, 0.6% in Northern California, and 0.4% in Southern California. These estimates are based on total housing construction which includes both rental and for sale products, and are in part based on limited development of for sale homes throughout our coastal market. So, couple these dynamics with a portfolio occupancy in excess of 97%, and we believe we are in good position to push rental rates and are optimistic about the prospects for 2012. As Mike said earlier, we believe the fundamentals to deliver strong results are in place, and we look forward to improving performance throughout the year.

During the quarter, we completed almost 3,500 new lease transactions and signed nearly 3,700 renewals. As expected, during the holiday season, new lease rates were lower than the peak of the third quarter, but we still recorded a 2% gain over expiring rates. Renewal rates continue to be strong and average more than 6%, a 6% gain during the quarter. Average rental rates for new move-ins grew throughout the quarter and were the highest during December as they approached capacity -- as we approached capacity. In January, the average new rental rates for all transactions was $1,460 matching our peak month of August in 2011. So, despite a seasonally slower demand period we have seen good results in the first months of the year and believe rent growth should be healthy throughout 2012. In January, our loss for lease for the same-store portfolio was 3%, but with offered pricing already moving higher in February, I expect economic rents to grow during the first quarter and our loss to lease to be closer to 4% to 5% by the end of the period.

First quarter renewal activity has been good so far with an average rent gain of 4.2% over expiring rates through yesterday, while average renewal offers for March and April range from 3% to 8% across the portfolio. As expected, operating expenses were down during the fourth quarter and under control for the year. Utilities, property taxes and payroll increases will likely increase our expense growth 2% to 3% in 2012. We will continue to be vigilant about containing costs and pursuing initiatives and technologies that help us improve efficiency.

Turning your attention to our lease up activity. Essex was busy in 2011 as we stabilized seven communities during the year. [B] was the most recent to achieve occupancy above 95% as we stabilized the residential units six months ahead of schedule. Reveal in the Warner Center area of Los Angeles continues to lease ahead of plan and is currently 87% occupied and 90% leased. Although the end is near with this 438 unit project we do face a fair number of lease expirations during the next two quarters, so we do not expect stabilization to occur until April. We only planned one new delivery this year, which is the 66 unit in fill development at our Woodland Commons property in Bellvue. This project includes a new leasing office and amenity package for the entire community. Essex will be delivering more than 900 units next year.

Now I will comment on each of our regions, beginning with Seattle. Market rents were down slightly 1% on a sequential basis, but average property rents grew 7.8% over the fourth quarter of 2010. Depending on the sub market, we are still within 3% to 6% of the previous peak in 2008 and up 18.5% from the trough. At the end of December, occupancy was 97.3% among stabilized assets with a 4.1% net availability. As of January 30, occupancy remained unchanged at 97.3% with a 5.2% availability. The job picture continues to be strong in Seattle as we saw 2.7% job growth for 2011 and expect a 1.8% gain in 2012. Boeing added more than 1,800 jobs during the quarter, but more importantly, Boeing announced it will produce the 737 Max in Renton.

Office absorption was modestly positive this quarter, Amazon will occupy the last phase of its main campus in downtown and it is reported they are pursuing an additional 300,000 to 400,000 square feet of office space to satisfy their growing needs. Expansions of eBay, Expedia and Microsoft have also been reported recently.

Turning to Northern California, market rents were down 0.5% sequentially with the average rents growing 9.3% compared to last year's fourth quarter. Based on sub market location, we're now at prior peak levels to 3.5% above the peak and up 19% from the bottom. At the end of December, occupancy was 97.5% with a 3.8% net availability. As of January 30, occupancy inched up to 97.6% with a 4.2% availability. Job growth continues to be solid in Northern California and ended the year up 1.7% and was lead by San Jose, which posted a 3% annual gain. There are no signs of this changing as we call for 2.3% job growth in the sub market for 2012. This is highlighted on S15 of the supplement, along with all of our sub market job forecasts.

Another strong sign of expansion for the region is that venture capital flows reached an all-time high during 2011 with 1 $11.7 billion committed to investment. Absorption of office space and R & D further supports our belief that the region will continue to experience a healthy economy and continued job growth. During the quarter, we saw another 1.9 million square feet of office space leased. San Jose alone took down more than 1 million feet of office and R & D space combined during the period. Finally, in Southern California, market rents were up 0.4% sequentially and average rents moved 3.5% over the same period last year. Based on sub market location, we have reached rent levels equal to the prior peak in San Diego and are within 3% to 6% of our prior peak for the rest of Southern California. At the end of December, Southern California was occupied at 96.7% and had a 5.4% net availability. As of January 30, occupancy stood at 96.3% with a 5.9% availability.

With respect to military presence in San Diego, there's a transitional reduction of troops due to budget cuts, military housing policy and a temporary relocation of the USS Ronald Regan to Washington, but the net effect of troop rotation in the region is expected to be positive for 2012. There's nothing dramatic to note on the jobs front in Southern California during the fourth quarter, as we saw the year-end with a 1% gain over 2010. Greater job creation will be the key to delivering more robust revenue growth in Southern California, but low supply and availability, particularly in Los Angeles and Ventura County, should help us achieve the targeted rent growth in the region for 2012. We believe that Southern California holds the greatest potential to generate results more favorable than planned. Office space absorption saw the strongest quarter 2011 with 1.2 million square feet absorbed. Orange County accounted for half of that leasing activity.

So in conclusion, we are very pleased with the fourth quarter results and our performance in 2011. As usual, jobs and housing supply are key drivers of our results. We continue to believe Essex is located in excellent markets and that there are many positive indicators to suggest we will be able to build on our success during 2012. With that, I'd like to turn the call over to Michael Dance.

Thanks, Eric. Today I'll provide an overview of the fourth quarter financial results and provide some comments on our 2012 guidance. During our third quarter call, we provided 2011 guidance for total net operating income of $307.5 million, and our result exceeded this level by $1.2 million or $0.03 a share. As Eric described in his remarks, the leasing of Villa occurred much faster than our internal projections, demonstrating the strength of the Silicon Valley rental market and contributed to the net higher operating income for the quarter. However, the increase in net operating income from Villa had other accounting consequences. Concessions in a lease up are the norm, even in a strong rental market; however, there's a difference in the accounting for free rent between Essex and our peers in that we do not record rental income during the free rent period.

The accelerated lease up also caused unfavorable variances in our interest expense and G & A expense. Once Villa reached stabilization on the residential units, we ceased capitalizing interest on the cost of the residential units and therefore, we had higher interest expense. As the development activity started to wind down, we also reduced the allocation of development overhead to the project, and that increased our general and administrative expenses. While we had incrementally higher G & A and interest expense this quarter, it should not be lost that overall, we saved $17 million on Villa compared to our original budget, and approximately $5 million of these savings can be attributed to the accelerated lease up. It was the right decision to accelerate lease up of Villa, given the opportunity to do so. Thus, the related increase in interest expense and G & A expense of approximately $400,000 this quarter were attributed to the lease up of Villa and should not detract from our stellar quarter.

Currently all the active developments are owned by joint venture partners. As now shown on S14 in our supplemental materials, we now have higher management fees from developments that are earned from our joint venture partners. These fees, however, are offset by the cost of development employees and their associated overhead. I think it is important to note that when developments are done on balance sheet, all of the associated costs are capitalized. During 2011 when we started developments in the joint venture, the overhead costs associated with the third party interest in these ventures have been allocated to G & A. Beginning in 2012, we will match these expenses to the management fee earnings instead of including them in our G & A expenses. During the quarter, the IRS completed their review of a loss from a taxable re-subsidiary that resulted in a tax refund of $1.7 million, or $0.05 a share. With this increase in income from the tax benefit, we achieved the high end of our range for funds from operations of $5.74 for 2011.

I'd like now to highlight some of the changes we made to page S-11 in the supplement. We added additional details on the components that make up our equity income from co-investments on the income statement. We hope this additional detail will help make modeling this line easier in the future. For 2012, we expect co-investment income to be $27.1 million. The breakdown for the 2012 guidance is roughly $14.6 million in funds from operations from our operating joint ventures and $12.5 million in preferred equity income. The $12.5 million in preferred earnings includes Essex's 50% interest in the Park Merced preferred equity investment. Although we can't disclose specific details on the Park Merced investment, we have disclosed on S11 the information needed to forecast our 2012 earnings. The $123 million book value of preferred investments, multiplied by the weighted average preferred return of 10.2% approximates the $12.5 million used in our guidance.

We expect interest expense to increase over 2011 as a result of the full effect of financing activities related to the 2011 investments and the reduction of taxable variable rate exposure from 19% of total debt at the end of 2011 to roughly 6% of total debt at the end of -- I'm sorry, from 19% at the end of 2010 to roughly 6% of total debt at the end of 2011. We intend to maintain adequate capacity on our unsecured bank line which can be done by either exercising the accordion feature available on the current line or by paying down the line with proceeds from another unsecured bank term loan, similar to the loan closed last month, private placement of unsecured debt or a debut public debt offering. Our guidance assumes that the majority of our 12 acquisitions will be done on balance sheet with 40% unsecured debt and 60% common equity from our at the market equity program. Once we file our 2011 10K, we plan to increase the size of the existing ATM program.

That ends my comments, and I will now turn the call back to the operator for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Swaroop Yalla with Morgan Stanley. Please proceed with your question.

Yes, hi. Looking at S14, same-store NOI growth shows a change of 7.7%, slightly different from 7% to 9% guidance that you gave earlier. Just wondering if that is CEO math or there has been some reassessment of conditions in the last two weeks?

Swaroop, no, this is Mike. No, it really wasn't that. It was just simply rounding our -- we do budgets from September to November and we rely on them, we use a ground up budgeting process and then we decided that the range given where we stood in December was better than the sum of the ground up budgets. And we decided to keep a range of 7% to 9%, so we think that's appropriate.

Great, and the acquisitions which you completed, can you talk about the cap rates there? And also, there seems to be sort of a redevelopment component. Where do you expect yields to come in after you finished some of those?

You know, I think the average cap rate of the properties that we acquired in 2011 is somewhere around 5%. As you point out, a number of them involve some kind of repositioning which will increase the yields from there. The newer properties, consistent with what I said in my prepared comments, are lower than that. They're in the 4.5% and 4.75% range and the value-added opportunities are in the 5.25% to 5.5% range so over time, we're not in any tremendous hurry to complete these redevelopments, in some cases, it will take several years by the time we complete the exterior renovation and then the upgrade of the leasing office and amenities and finally, do the unit turns without dropping occupancy significantly. That process takes several years to play out.

Got it and just lastly on Southern California, you mentioned the greatest potential to suppress guidance there. Just wondering what sub markets, if you can just talk a little bit about sub markets and possibly Los Angeles and Orange County?

This is Erik. I think again, consistent with the comments is that with the low supply and not just our low availability, but market availability is low in really, all four counties where we have a major presence where we've seen activity, more recently rents moving up, offer rates being accepted, new rents going higher, is in Los Angeles in particular. Some parts of Orange County and Ventura has been actually strong over the last couple of months, and so we're looking for that to go -- to continue in the same direction. San Diego has been pretty much consistent with expectations so far.

Great. Thank you.

Our next question comes from the line of Jana Gallon with Banc of America Merrill Lynch. Please proceed with your question.

Hi, thank you. I was curious in your guidance for acquisitions in 2012. Are you looking at any opportunities outside of your current markets?

We are not, at this point in time. We are -- I think I've commented on prior calls that we are adding some East Coast Markets to our market research process, but we do not expect to make any changes in our geography in the foreseeable future. So for now, it's just a point of reference, or information to us.

Thank you, and then in regards to -- you mentioned developers were marketing deals but you felt that they were kind of underwritten to -- is it more the underwriting is faulty or you just think that the returns aren't high enough for the risk?

Well if you think CEO math is in question, developer math, I think, is much more so. So, developer math, and John Eudy is here. He lives with this every day, but we just don't buy a lot of the pro forma. So John, do you want to comment?

I think that says it, Mike.

CEO math, you comment on CEO math? (laughter)

No, it's just the expectations of where we all believe that rents are going up over the next couple years quite a bit, but there's a big spread ask on what we think versus what some folks say.

I see, thank you.

On the land price going in.

Thanks.

Our next question comes from the line of Eric Wolfe with Citigroup. Please proceed with your question.

Hi, guys, thanks.

Hello, Eric.

You've always been very good about finding, I guess what I'd call interesting investment opportunities to supplement your core earnings growth. I guess I always think back to 2009 when you were buying multi-family bonds, which obviously turned out to be a great decision. So, I'm just curious today from your perspective what's the most interesting investment opportunities outside of your core business?

It's a great question, Eric, and I don't think I have a simple answer. I think that finding well located properties that are -- that we can add value to continues to be the best overall return. And I say that because in many cases, if you take a step back and you look at the apartment markets in, it's -- particularly in urban California where you've got less than a 0.5% to 1% of stock being produced in any one year, that means that by definition the average age of the multi-family stock is more than 20 years old.

Well, there are repositioning opportunities within that 80% to 90% of the marketplace that I think are really pretty interesting. And so that is a key focus that we see this year. I think that we have come a tremendously long way under John Burkart's direction in our redevelopment programs in terms of, we've now done a lot of full scale redevelopments and we've been able to do them cost effectively and adding value along the way. I think that those opportunities are really pretty exciting. I also think that the preferred equity investments as a general statement, given how low the underlying first mortgages are on a lot of these properties, Fannie, Freddie, debt in the high 3% range for 10 year financing creates a lot of cash flow in these transactions, which is perfect for these preferred equity investments. So, I think it will be a process involving careful selection, but I think there is still pretty significantly good opportunities out there to choose from.

Great, and you brought up the low, I guess the low cost on GSE debt, and I guess just thinking about where interest rates are today versus also how well your stock has done over the last year, I mean, does having that low cost of capital change your investment hurdles at all? Or are you still sort of staying firm and saying 8% to 10% unlevered is where we want to be, even though our cost of capital has come down over the last year.

You now, our formula for determining whether to buy something or build something really starts with what is the value and the cash flow embedded in a share of stock from the existing portfolio and trying to determine whether we're making the Company better, i.e. accretive to NAV, accretive to cash flow. And so we have -- we've run financial models on the Company trying to gauge each of the key components, and what we're trying to do is accrete to the shareholder interest. So, it changes almost daily, obviously, as the stock price changes and interest rates change. And therefore, it's really the genesis of where the fund and third party joint ventures come from. If we can find a cheaper cost of capital represented by them in a different risk reward scenario, we'll go in that direction, otherwise we will be acquiring on balance sheet. But that is an iterative process and one that we will be pursuing as we look at each deal this year.

Okay, that's it for me, thank you.

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill. Please proceed with your question.

Good day. As you guys see this tech boom resurge, I mean, we heard Boston talk about it in their call yesterday, you guys have obviously outlined it. Are you seeing this expand to other markets outside of San Francisco and the Peninsula Valley? And what I mean is, expand in a meaningful way where you think there are other parts of the West Coast that could really get traction out of this.

This is John Lopez, Alex. Are you meaning outside of the core markets we currently operate in, or just --?

No, no, in your core markets, but just -- there's a lot of buzz about how the tech boom really exploded. Having -- maybe I just don't read the Seattle papers enough or the LA papers enough, but don't seem to hear as much buzz coming out of those markets, so just curious. Last tech boom we had, Seattle was a hotbed as well, so I'm just sort of curious if you're seeing it in some of your other markets.

It's definitely happening in Seattle. I think if you look at the office space, just check on, see the vacancies and the office space of downtown Bellvue, after all that building, those were taken over. You've got Microsoft expanding downtown. I think the real key is most of the South Lake Union office space that was built in the last cycle filled up with Amazon, and so it's everywhere across the east side to downtown, the tech boom. It isn't just east side tech boom in Seattle anymore. It's anywhere they can get grade A office space.

I think, John, you would agree that certain other parts of the Bay Area, biotech is in certain areas, for example, and even pushing up outside of Silicon Valley into Alameda County we have Tesla and Solyndra, definitely, in Fremont for example. So, I think it is -- as things become more expensive, there is a tendency to push out these different -- the different types of technology and it's more sub market driven depending upon where each of these technologies are, biotech versus software, versus other types of things, wouldn't you say that's true?

Yes, because I would add-on to that that I think what you might want to look at this time, Alex, that maybe other than the last tech boom was the emergence of the health and biosciences. And that is a very big component, obviously, in our Northern California market, but it also has a big presence in San Diego. So, I think that is an area where that will be expanding as we go on, I think that's going to be a larger percentage of the expenditures. And we see it in the increase in the amount of money spent towards venture capital in those life science areas.

Okay, so you would expect to see then the same sort of rent surge?

Yes.

Okay, and then specifically on Seattle, there's some talk that in South Lake Union especially, there's a concern about potential oversupply. Is that a concern for you guys?

You know, there's a lot being built downtown relative to what was being built a couple years ago, which was very little. Roughly right now, there's about 6,000 units under construction, Seattle, roughly 5,000 of that is downtown. But it's a very big chunk, it's about 40% of the overall metropolitan area, and if you look at the number of jobs versus housing units that are available to live downtown, it's in one of those core areas where there's more workers than housing supply for them. And over the last 15, 20 years, there's just been more of a push for the higher income people getting jobs downtown because it's more of the tech and more of the healthcare is going downtown. You're seeing people choosing to live downtown versus commute to the far suburbs, which is becoming extremely difficult. So, if you look at -- I would say that you have to also remember that that initial boom was due to an abating of BMRs if you got them in during the year. So, like what I think you'll see is a little less starts this year, and so I don't think that is going to be a reason to sink either the downtown or the total market. In the end, we think when all this gets delivered, it's still 1.1% multi-family and less than 1% on the total residential supply line. So, we're looking at -- we're getting job growth north of 2%. We expect that to continue for several years in Seattle.

Okay, so the point is, you're not expecting like a repeat of what happened in Bellvue with your --?

No, because I think what happened there is it was driven by the incredible belief in the condo, you could sell anything at any price market which drove, I would think, way more than half the deliveries that we saw then convert to apartments. That's not going to happen this cycle.

Okay.

Not to mention that 2.5% to 3% job growth in Seattle became minus 10% in 2008. That had a small impact.

Right, right, okay, and then just on the JV front. Just given the prospect of rates staying low through '14, pension funds still trying to catch up, are you getting more calls from pension funds who want to partner with you to try and solve their long term return hurdles?

Yes, Alex, this is John Burkart. Yes, absolutely that is the case. We have obviously long term relationships, great relationships in the pension fund, private equity world, but we are getting calls certainly from people like I've talked to for a long time and many new calls, interested investors that want to invest in West Coast multi-family.

Okay, thank you.

Thanks, Alex.

Our next question comes from the line of [Gautin Garg] with Credit Suisse. Please proceed with your question.

Hi, guys. Obviously, the Facebook IPO is going to pump a lot of capital into the system. I'm just trying to gauge -- better gauge the impact it could have on the payer rental market. Is there anything that you can talk about with regards to the fact that Google IPO had on the markets around 2004 and '05 time period?

Well, it's very difficult, again, this is John Lopez. It's very difficult to pair out across the entire MSA the impact of the Google money, that it had on the housing market. I mean, I think what it will probably do is it will solidify the single family market on the peninsula much quicker than you'll see it in the multi-family, a big change. But then again, that will then trickle down to a solid, solid single family prices shooting up is only good for our multi-family side.

Right, okay.

So, I think it's more of an indirect effect that it will just be less alternative for people who are getting jobs in the future to buy.

Makes sense. And another question, if I remember correctly, I think on your last call, you mentioned something about additional vacancy due to student rentals which are, a lot of students moved out of your apartment units into an on campus option. What percentage of the portfolio does it represent now, and is there any outlook you have on that front for 2012?

This is Erik. I commented on that. There's really three properties that are dominated by students, two in Santa Barbara and a small one in Santa Cruz. The one in Santa Cruz, fully occupied during the fourth quarter, and we've made good progress actually in Santa Barbara by doing bed rentals and effectively, the occupancy there is about 90%. The our outlook is better, frankly. We have two windows of demand, one actually starts in February, it goes for a couple months and then the other one towards the end of the summer before the semester starts. And we've already seen in Santa Barbara a big uptick in interest phone calls and visits, including from freshmen that are already looking for housing for next year, so it's a real positive sign for us and the fact that I think we were still able to get rentals during a period of time when it's difficult to do. So, we're changing the approach a little bit now that we have seen some success with the bed rentals, and so we look to be fully occupied before the semester starts in the fall.

Sounds good.

And at similar rents, probably a little bit higher, I think we called for a few percent increase on the rents there, based on the fact that we don't think there's any new supply threat facing us this year.

That sounds good guys, thank you so much.

Our next question comes from the line of Derek Bower with UBS. Please proceed with your question.

Hey, it's Ross Nussbaum here with Derek Bower. I've got a question regarding Prop 13. If I look at your same-store pool and if I'm looking at the numbers right, in California you guys paid somewhere around $29 million worth of real estate taxes in 2011. If you had to take a guesstimate as to if you effectively marked to market that number, what do you think the tax number might be?

Hi, Ross. It's Mike Dance. It's the low $20 million, probably, $22 million to $24 million.

I'm sorry, it would be another $22 million to $24 million?

Yes.

So, almost double what you got, not quite, but?

Right. That's correct.

And when you guys talked earlier about market cap rates, I just want to make sure we're definitionally correct. Those are basically on, if I will, marked to market tax numbers, so that's what the buyer effectively is paying?

Exactly. We have a definition that we've used for many years for cap rate, and I realize it can be different from what others use. Ours is a standardized 95% occupancy, market rents today, a normal management fee, pre-capital. Pre-CapEx.

Makes sense. Thanks very much.

Our next question comes from the line of David Harris with Imperial Capital. Please proceed with your question.

Oh, hello, guys. Thank you for allowing my guest appearance.

(Laughter) Hello, welcome back, David.

I have a couple of old chestnuts to throw at you or to kick around. Is this -- with the rate of rental increases, particularly that you're experiencing in Northern California, are we anywhere close to a political response in terms of rent cap?

It's a good question David, and I can't -- I don't know with certainty what exactly is going to happen within the political scheme. We have maintained a process of limiting our renewals to one renewal option to a 15% increase, largely because of the, you know, some of the issues that have cropped up in the past as it relates to that issue. And so far I don't know of any organized activity that is pushing on the rent control front, but we continue to monitor it closely. It's important to us and so far so good.

And we experienced this last time, was it more of a Northern California phenomenon or Southern, or was it just up and down?

You know, it's one of those subjects and issues that is pretty well received by the people so it's everywhere, and so I wouldn't limit it to any one market.

And I think it was on a couple calls ago, you made reference to the social network, obviously apropos Facebook and others sort of adding another dimension to tenants' understanding of what's happening in the marketplace. How is that playing out in terms of sort of the tenants sort of e-mailing one another, Facebooking one another with regard to chatter about rent increases?

There's some of that, and it actually works against us and for us. We have a lot of the times can monitor all of the activity and you can see with what people are talking about or you hear it because somebody comes into the office and you know, we deal with it case-by-case. Thankfully, we do a good job of providing service and housing and oftentimes, we have plenty of defenders, which is the best thing, we don't have to get involved in it. And all, we have other tenants talking about how great their experience is at Essex, and a lot of people that are in touch with the competitive market and you'd say, we'll tell you, hey, you think that's bad, you should go see X, Y, Z, and how much their rent is. Nobody likes getting an increase, but you're still way better off here than there.

Okay, on another subject, it was good to see a property sale, albeit only $7.4 million. Could you give me the total of how many properties you sold last year?

Two.

Two, for how much, Mike?

I think one was low $20 million and the other was (multiple speakers), so low $20 million.

Okay, and any idea what you might do this year? You're not -- I don't think, unless I've missed it, you've not included it as a specific reference point in your guidance?

I would say $50 million to $100 million.

And if you were at the upper end of that, would that mean that perhaps you did a little less ATM issuance?

That's correct.

Okay, so we could see the two being as interchangeable. Why not sell more?

This is John Burkart. We're pretty opportunist about our sales. We have actually a very good portfolio overall, so we're cleaning up or pruning a few things here and there, but the execution is very opportunistic. So, if the situation is right on the small office buildings with an absolute excellent execution by the team involved so as to an owner and operator at what was probably low 2s in an actual cap and economic cap of about 4.25, assuming 20% office vacancy like the market currently has. So, that type of stuff will be all day long and just keep looking for those opportunities.

Okay, and can we assume that would be more second half of the year rather than front end of the year?

Well, we actively market properties, so it will be as the opportunities come up.

But nothing imminent?

No.

Okay. All right, great. Thank you, guys.

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

Thank you, and thank you for friending me.

Hey, Rich. (laughter) Always a pleasure.

So, to Ross Nussbaum's question and the NAV -- or the property tax impact from Prop 13, if I'm doing this math correctly, would that be $13 a share of value roughly to your NAV?

You mean, at a -- at the current multiple, if you just do the straight line on the multiple?

Well, I mean, if I were to just take out -- add more cost to the NOI line item and then cap that. I mean, in that range.

Yes, if you were just saying -- yes.

Something like that, I mean, depending on the cap rate I use it would change, but -- obviously.

You know, I guess the one comment I'd make, Rich, is that if you're using trailing NOI, remember properties trade on a current market, not a trailing basis. And I'd argue that that number probably offsets pretty much the Prop 13 NAV impact.

Okay, okay, fair enough. And on the Prop 13 comments that you made at the beginning of the call, what is the risk that they might view multi-family housing as commercial property? Is there any risk to that, it could further bifurcate residential into single family and then the multi-family business that you guys run.

It's another good question and if you look at the history of Prop 13 its been challenged in every conceivable fashion from the courts to the initiative process to the legislature. It's been attacked 100 different ways with 100 different approaches, so it's difficult to say, oh, gee, this approach, the one you're suggesting is going to be the one that prevails. It's a political process, Rich, and as you know, they are pretty hard to predict. I will tell you that largely, this is a matter of dollars.

It's a matter of dollars supporting the path of least resistance to get tax increases in California and for the most part, whatever the donors, which are likely the state employee unions that are providing the big dollars to get most of these proposals through, they are going to pick whatever they think is going to be the path of least resistance. Up to this point, after, what has it been, 30 years of Prop 13? Its been tried a lot of different times and a lot of different ways. That has not been, obviously, the path of least resistance because taxes have gone up here many times over that period of time. So, it was why it was labeled the third rail of California politics, and I don't believe that anything has changed that.

Okay, and then the last question is you mentioned kind of the intelligence gathering in the East Coast or however you put it, I don't remember exactly, but how long have you been kind of just staying knowledgeable on the East Coast? Is that always been the case, or did you just kind of start keeping your eye on the prize out our way?

Well, you'll recall that we're in a bidding process --

Town and Country.

Yes, Town and Country, and so we've had some level of market research, but we have just increased the intensity of that, so that it is similar to what we do on the West Coast in terms of a market timing model, trying to understand the supply/demand relationships and hopefully, looking for imbalances. And we believe that rents have great growth potential here on the West Coast, which is why we wouldn't make that shift at this point in time. It's really -- we think we have about the best locations that there are in the nation, and we don't want to dilute that presence. But the whole purpose of the market research that we do is to try to identify entry points and get the timing right, so that's what we're looking for.

Okay, sounds good. Thank you.

Thank you.

Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your question.

Thanks very much. To follow-up on David's earlier question, what is the range of acquisition and disposition volume that is underlying your FFO guidance range for the year?

Acquisitions, we're looking at $400 million to $500 million and dispositions between $50 million and $100 million. What we're targeting is kind of a net accretion of about $1 million.

And on the dispositions, Mike, is it more market/sub market dynamics or the age of the properties or the CapEx that might be needed? What's kind of driving your selection process?

You hit kind of all of them. It's a variety of decisions. We evaluate the portfolio and look for situations that we think we can improve the portfolio by selling the assets, because sometimes it relates to long term rent growth, sometimes CapEx, a variety of items in there.

Okay, thanks, and then also for Mike Dance. I'm sorry, Mike. I just think I just missed some of this in your commentary in your prepared remarks on what drove the cost savings on Villa relative to budget? I know you said obviously it was -- some of it was attributable to the earlier than expected lease up. Was there any other major contributors?

$5.5 million of that was reduced interest expense, property tax expense, capitalized overhead, all of the stock costs. All of the other costs were hard cost savings.

And was that on, you know, product cost, labor cost, a mix of everything?

I'll let John answer that.

A combination of things. It was acceleration, the job that got done six months ahead of schedule, so general conditions were less. It was the buyout occurred in declining market, both on at the time the buyout was done on the materials side as well as the labor side.

And then finally, just a question on the development process. Are you seeing any delays in getting things permitted or approved, given the workload that some municipalities are having overloaded? I just read today that San Jose is trying to take some action to lower fee construction taxes in the city to spur office development and adding -- requesting in the budget to add staff to the planning commissions? Are you seeing challenges that way?

There are issues, all of the cities had some form of staff reduction in 2, 2.5 years ago. They haven't added much to staff, so there is some friction there, yes.

Thanks very much, that's all I have.

Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Good afternoon, guys. Mike, I want to go back to the disposition topic. You talked a little bit on a prior call about not wanting to grow the size of the Company too much, and it sounds like you're looking at many of the acquisitions kind of on balance sheet, yet the disposition plan's fairly small. Can you kind of talk about -- give us an update as to where you stand on that front and whether it's more of just a cycle timing? Or is there a plan to grow the portfolio at this point.

Yes, it's a little bit of each of those things. It is cycle timing and when you're getting big rent growth and amid low cap rates, you're trying to get to the best of both worlds, and so we're trying to time our activity so that we maximize value. So, we hesitate to try to focus on a specific amount of dispositions in any one year because it can change over time. We have a choice of funding our acquisitions with disposition proceeds, for example, or a combination of stock and debt or joint venture equity. So, we look at it holistically and we try to find the best approach to maximize value, so it can change over time.

Okay, that's helpful. A question on operations. Can you bifurcate within the portfolio kind of the performance of some of the newer class A properties you've bought, some of the condos relative to some of your -- what you'd call kind of class B type assets in terms of what you're seeing on rents in the Southern California markets. And also, just curious if there's any markets where you're starting, as you're pushing pricing aggressively, if you're seeing any doubling ups starting to emerge.

Hi, this is Erik. We haven't seen or heard a lot about any of the double ups to go, to the second part of your question. With respect to A's and B's, there is -- all -- I think all of the property types have performed well in the stronger markets so certainly, the Bay Area and the Pacific Northwest, they perform equally as well. There's probably a little bit of difference in Southern California between the new condo quality stuff and some of the B products. We've seen it go up and down a little bit, so I think the greatest potential is with some of those A's in Glendale and Orange County and so forth. We expect greater performance out of those maybe this year, but it's pretty close.

And the same is true in Seattle?

Well, same is definitely true in Seattle. We have a couple of the properties up there, the A's perform very well and the B's have as well. So, I think certainly when you have the strong market conditions like you have in Seattle in the Bay Area, they all move. We see them all moving together where you have maybe more modest growth in Southern California, maybe there's a little bit more movement in the B's at that time. But again, when things tighten up in the sub markets, we've seen nice jumps in the A products. So, I think when you start to see more consistent overall market performance or the economy and the job situation improves, I think we're going to see the A's maybe move a little faster.

Okay, and then final question, a two parter. I apologize if I missed this. Mike, you usually go through cap rates. Could you give us the update on those and IRR targets for acquisitions versus development and then also, thinking on the dividend at this point?

Sure. I did go through the cap rates. A and A product and A location in the low to mid 4% range, B and A location, sort of the high 4% to low 5% range. We think that those underwrite to unlevered IRRs in the 8.25% to mid 9% range, depending upon what you're -- what we're looking at. I think that does it, right?

Development?

Development, on the development side, yes, the comment that I made was that development cap rates based on today, market rents in place today are in the mid 5%s, really not all that different from a year ago. The difference obviously is that in some cases, rents have moved, you know, a big number 20% or something like that. So, obviously a deal before a 20% rent jump and after is not really the same deal. So, that is where market selection and timing really comes into play, and it's something that John Eudy and I talk about a lot.

Okay, and then finally just a dividend there?

Dividend, we are -- we proposed that to the board. I don't want to guess what the board might say. I'll give you a little bit of a historical precedent, however, and that is to follow the FFO growth rate of the prior year. However, in this case, because we had a of couple years of declining FFO, and we increased the dividend a very small amount, we will play some catch up. So, I'm guessing it will be in the mid, maybe a little bit higher single digit range.

Great. Thank you much.

Our next question comes from the line of Dave Bragg with Zelman & Associates. Please proceed with your questions.

Hi, good afternoon. A couple quick ones. Moved out to buy homes during the quarter outside the portfolio and any movements regionally worth noting?

No regions really, this is Erik, worth noting. It's in the -- portfolio wide, it's in that 9% to 12% range, which is consistent with sort of the long term activity. It had been as high in the 15%, 16% I think for a couple of quarters during the boom, and I think it hit a low in the 8 -- just over 8% range.

Okay, and the other question is I noted the topic of single family rentals has come up in the past as it relates to the expected impact on your portfolio or others from a competitive standpoint, but just given the continued headlines related to institutional capital in terms of space, can you just talk about this from a multi-family operators perspective in terms of the approach that one could take should they decide to do this and what the opportunities could be on the revenue and expense side?

Yes, Dave. You and I have talked about this separately, and there are opportunities to buy portfolios in concert with local operators that are specializing in this type of activity, several of which were actually at your conference some time ago. The issue for us is the -- most of that is not in the markets that we're in. It's the typical market where that's going to make sense is going to be a market where the homes are deeply, deeply discounted. And we're seeing in most of our markets the value of for sale property increasing or being relatively flat and you need a big reduction in price in order to make that work, in our opinion.

You do find those opportunities in the Inland Empire of California, in the Sacramento Valley and in certain other areas, and we have certainly looked at some of those opportunities. We struggle with how to make that a business. There may be a trade there or an opportunity to do a deal or two, but we just don't see it as a long term sustainable business. And that's why we have, at this point, stayed on the sideline. There's just -- there's no way that I see that in areas where single family homes, the median price home is in the $400,000 to $500,000 range to make that work from a single family rental standpoint. So, that is a question. We continue to look at it and -- but at this point in time, we're not seeing the fantastic opportunity.

But Mike, just putting the investment part of it aside and understandable so, given your answer there but just purely from an operational perspective, in terms of revenue and expense synergies between the two businesses in an appropriate market, assuming that there is a concentrated portfolio of both multi-family units and single family, how have you thought about that?

Yes, I mean, again, I think even within our footprint, so if you say, okay, the three county Bay Area, the counties surrounding the Bay, the areas that we're going be able to buy homes that are discounted enough, in order to make that work out on an investment basis are going to be areas that we -- that our renters will not want to rent in and would not want to live in. So, I'm sure there's some areas where that will work. They're just not areas that we own property, and I'll give you some examples.

Maybe Hayward has some areas where, within the -- within Alameda County, you can find housing inexpensive enough to generate a positive cash flow, a significant positive cash flow on the rental transaction. The problem is, we don't really want to be in Hayward. It's not one of our desired locations. We have one property there, it's up in the hills near Cal State East Bay, has a very specific reason why it's there and why it's a good investment. That aside, we just don't see it. We don't see it as major competition. I know that actually you went to Skyline, and were -- you noted you caught them on a very short-term period where they had a lot of move outs, but I think that's an anomaly. I think that they are typically in the 20% to 25% move out range right now to home ownership, and that's the highest end product anywhere. So again, we're sensitive to it, I assure you. We just don't see it as being a major detraction from our operation.

Sure, understood. I'll take it offline. I understand the answer from an economic perspective, but more so was thinking about just purely operational revenue synergies and expense synergies given your platform, but I'll follow-up with you. Thank you.

Very good.

(Operator Instructions) Our next question comes from the line of Omotayo Okusanya from Jefferies. Please proceed with your question.

Yes. I'm just curious across your markets if you've seen any real change in demand for all your products, whether it's one bedroom, the two bedroom or the three bedroom and if you are, what you think is causing that or driving that.

This is Erik. We haven't seen any unique changes in product demand. Some of the, as you might imagine, smaller one bedrooms and studios tend to be value propositions for people,, almost a matter of what sub market you're in. And larger floor plans and three bedrooms are popular with families and tend to, not always, but tend to follow a pattern of school enrollment. So, I can't say that anything unique is popping up.

Okay, thank you.

Thank you.

There are no further questions in the queue at this time. I would like to turn the floor back over to management for closing comments.

Yes, in closing, I'd just like to thank you all for joining us today, and we look forward to continuing the conversation next quarter. Have a good day. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.