Essex Property Trust, Inc. ( ESS) Q4 2011 Earnings Conference Call February 2, 2012 14:30 ET Executives Michael Schall – President and Chief Executive Officer Erik Alexander – Senior Vice President and Divisional Manager Mike Dance – Chief Financial Officer and Executive Vice President Analysts Swaroop Yalla – Morgan Stanley Jana Galan – Bank of America/Merrill Lynch Eric Wolfe – Citigroup Alex Goldfarb – Sandler O'Neill Gautam Garg – Credit Suisse Ross Nussbaum – UBS David Harris – Imperial Capital Rich Anderson – BMO Capital Markets Paula Poskon – Robert W. Baird Michael Salinsky – RBC Capital Markets Dave Bragg – Zelman & Associates Tayo Okusanya – Jefferies Presentation Operator
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Michael Schall – President and Chief Executive OfficerThank you, (Robin) and welcome to our fourth quarter earnings conference call. Mike Dance and Erik 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 time, 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 am 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 have 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 in California and Washington to outperform as the inland areas have greater unemployment overhang from foreclosures and related issues. Second, the West Coast was one of the last major U.S. metros to experience economic recovery. Rents 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% that are close to 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 provided 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 and limited supply of all new housing both rental and for sale. Historically, we have 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 declined 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 assumption. 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 expectation. Still I suggest that a prolonged slow pace recovery amid low interest rate is the very favorable environment for the industry and the company. Second topic cap rates, cap rates range from 4.25% to 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 rate 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 investment.
We have seen limited transaction activity as we approach the end of 2011, which was 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.Read the rest of this transcript for free on seekingalpha.com