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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

Essex Property Trust, Inc. (ESS) Q4 2011 Earnings Conference Call February 2, 2012 2:30 PM ET

Operator

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 for 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.

Michael Schall – President and Chief Executive Officer

Thank 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.

There are significant number of potential development deals that are being actively marketed by other developers and owners, but are not underway largely due to lack of financing, many of them don’t underwrite to acceptable return. 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 continued 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’s financial health is also significantly better given huge cost reductions implemented by Governor Brown. The annual budget deficit a couple of years ago, in California was approximately $26 billion. It is 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 and income tax on high income families and $0.50 sales tax increase. Other proposals are also targeting the ballot in November, including the 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 Brown proposed tax increase is most likely to be included on the ballot in November and thus Prop 13 will likely not be changed.

I would now like to turn the call over to Erik. Thank you.

Erik Alexander – Senior Vice President and Divisional Manager

Thank you, Mike. It is 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 continue 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 seasonably slow period. And that result with 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 remained low, move-outs due to affordability are in check and home buying is still not a major factor driving turnover.

New multifamily housing supply remains very low and largely concentrated in the few areas of our portfolio. Our 2012 delivery expectations are detailed on page S15 on the supplemental package. Based on the existing pipeline, total housing deliveries are expected to peak in 2014, where housing deliveries as a percentage of existing stock 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 product, 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 costs and are optimistic about the prospects for 2012.

As I said earlier, we believe the fundamental 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 rate were lower than the peak of the third quarter, but we still recorded a 2% gain over expiring rate.

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 we’re the highest during December as they approached capacity – as we approached capacity. In January, the average new rental rate for all transactions was $1,460 matching our peak month of August in 2011.

So, despite a seasonally slow our demand period, we have seen good results in the first month of the year and believe rent growth should be healthy throughout 2012. In January, our loss to lease for the same-store portfolio is 3%, but with offer 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 activities 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 ranged 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 gaining cost 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 deal with the most recent to achieve occupancy above 95% as we stabilized the residential unit 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 a 66 unit infill development at our Woodland Commons property in Bellevue. 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 trends were down slightly 1% on a sequential basis but average property rent grew 7.8% over the fourth quarter of 2010. Depending on the submarket we are still within 3% to 6% of the previous peak in 2008 and up 18.5% from the drop. At the end of December, occupancy was 97.3% among stabilized assets with the 4.1% net availability. As of January 30, occupancy remained unchanged at 97.3 with the 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 is reported that 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 that 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 submarket location we are now at prior peak level to 3.5% above the peak and up 19% from the bottom.

At the end of December, occupancy was 97.5% with the 3.8% net availability. As of January 30, the 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 led 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 submarket for 2012. This is highlighted on S-15 of the supplement along with all of our submarket job forecast.

Another strong sign of expansion for the region is the central capital flows reached an all-time high during 2011 with $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 lease. San Jose alone took down more than a 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 submarket location we have reached rent levels equal to the prior peaks 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% compared with 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 is a transitional reduction of troops due to budget cuts, military housing policies, and a temporary relocation of the USS Ronald Reagan to Washington, but the net effect of troop rotation in the region is expected to be positive for 2012. There is nothing dramatic to note on the job spread in Southern California during the fourth quarter as we saw 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 counties 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 of 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 fourth quarter results and our performance in 2011. As usual, jobs and housing supply are key drivers of our results. We continue to believe that 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 would like to turn the call over to Mike Dance.

Mike Dance – Chief Financial Officer and Executive Vice President

Thanks, Erik. 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 those levels by $1.2 million or $0.03 a share.

As Erik described in his remarks, the leasing of the Via 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 Via has other accounting consequences, concessions in the lease up or the norm even in the strong rental market. However, there is a difference in the accounting for free rent between Essex and our peers and 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 Via reach stabilization on the residential units, we ceased capitalizing interest on the cost of residential units and therefore we have higher interest expense.

As the development activity started to wind down, we also reduced the allocation of development overhead to the project and that increase 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 solid quarter.

Currently all the active developments are owned by joint venture partners. As now shown on S-14 in our supplemental material we now have higher management fees from development that are earned from our joint venture partners. These fees however are offset by the cost of development employees and their associate overhead. I think it is important to note that when developments are done on balance sheet all the associated costs are capitalized. During 2011, when we started development in the joint venture the overhead cost associated with the third party interest in these ventures have been allocated in 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 every deal of a loss from a taxable REIT subsidiary that resulted in a tax refund of $1.7 million or $0.5 of 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 might now to highlight some of the changes we’ve made to Page S11 in the supplement. We added additional detail on the components to 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 mid volume. The breakdown for the 2012 guidance was roughly $14.6 million income from operations from our operating joint ventures and $12.5 million in preferred equity income. The $12.5 million preferred earnings includes assets with 50% interest in the Park Merced preferred equity investment. Although we can’t disclose specific detail on the Park Merced investment, we have disclosed in FY ‘11 the information needed to forecast our 2012 earnings. The $123 million book value of preferred investment multiplied by the weighted average preferred return of 10.2% approximate the $12.5 million used in our guidance.

We expect interest expense to increase over 2011 as a result of the full effect. The financing activities related to the 2011 investment and the reduction of taxable variable rate exposure of 19% of total debt at the end of 2011 to roughly 6% of total debt at the end of – 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 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 and private placements of unsecured debt or a debut public debt offering.

Our guidance assumes that the majority of our ‘12 guidance or ’12 acquisitions will be done on balance sheet with 40% unsecured debt and 60% common equity from our after market equity program. Once we file our 2011 10-K we plan to increase the size of the existing ATM program.

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

Question-and-Answer Session

Operator

Thank you. We will be now conducting the question-and-answer session (Operator Instruction). Our first question comes from the line of Swaroop Yalla with Morgan Stanley. Please proceed with your question.

Swaroop Yalla – Morgan Stanley

Yes, hi. I’m looking at S-14, same-store NOI growth shows the change of 7.7% slightly different from 7% to 9% guidance which you gave earlier. Just wondering if that is the yield math or there has been some reassessment of conditions in the last two weeks?

Michael Schall

Swaroop, now this is Mike. No, it really wasn’t that, it was just simply rounding off. 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 to some of the ground up budgets and we decided to keep a range of 7% to 9%. So, we could get the appropriate.

Swaroop Yalla – Morgan Stanley

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

Michael Schall

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 involved 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 are 4.5% to 4.75% range and the value-added opportunities are in the 5.25% to 5.5% range. So, over time, we are 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 then finally do the unit terms without drop in occupancies significantly. That process takes several years to play out.

Swaroop Yalla – Morgan Stanley

Got it. And just lastly on from California, you mentioned that this greatest potential to surpass guidance there, just wondering what some markets, I mean, if you can just talk a little about some markets and possibly Los Angeles and Orange County?

Erik Alexander

This is Erik. I think, again, consistent with comments with the low supplies and not just our low availability, but market availability is low. And really all four counties would have a major presence, where we have seen activity, more recently, rents moving up, offered rates being expected, new rents going higher, is that 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 are looking for that to go, to continue in the same direction. San Diego has been pretty consistent with the expectations so far.

Swaroop Yalla – Morgan Stanley

Okay, thank you.

Operator

Our next question comes from the line Jana Galan with Bank of America/Merrill Lynch. Please proceed with your question.

Jana Galan – Bank of America/Merrill Lynch

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

Erik Alexander

We are not, at this point in time, we are – I think I have 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 – it’s just a point of reference or information to us.

Jana Galan – Bank of America/Merrill Lynch

Thank you. And then in regards to you mentioned developers or marketing deals that you felt that they were kind of underwritten. Is it more the underwriting difficulty or you just think that the returns aren't high enough for the risk?

Michael Schall

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 everyday, but we just don’t buy a lot of the performance. So, John, do you want to comment?

John Eudy

I think that said it Mike. No, just the expectations for – we all believe that rents are going up over the next couple of years quite a bit, but there is a bit spread as on what we think versus what some folks say.

Jana Galan – Bank of America/Merrill Lynch

Okay, thank you.

John Eudy

Price going in.

Jana Galan – Bank of America/Merrill Lynch

Thanks.

Operator

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

Eric Wolfe – Citigroup

Hey guys, thanks.

John Eudy

Hello Eric.

Eric Wolfe – Citigroup

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 was thinking back to 2009 when you were buying multi-family bonds, which obviously turned out to be a great decision. So, I am just curious today from your perspective what’s the most interesting investment opportunities outside of your core business?

Michael Schall

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 just take a step back and you look at the apartment markets particularly in urban California, where you’ve got less than 0.5% to 1% of stock being produced in any one year, that means that by definition the average age of the multifamily 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 I think that is a key focus that we see this year. I think that we have come tremendously long way under John Burkart’s direction in our redevelopment programs in terms. 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. And I think that those opportunities are really pretty exciting.

I also think that the preferred equity investments of the general statement given how low the underlying first mortgages are on a lot of these properties have 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 processing involving careful selection. I think there is still pretty significantly good opportunities out there to choose from.

Eric Wolfe – Citigroup

Great and then you brought up the low, I guess the low cost on GSE data 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% unleverred is where we want to be even though our cost of capital has come down over the last year?

Michael Schall

Our formula for determining whether to buy something or build something really starts with what is the value and the cash flow embedded in the share of stock from the existing portfolio and trying to determine, whether we are making the company better i.e., accretive to NAV, accretive to cash flow. And so we won financial models on the company trying to gauge into 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 then interest rates change and therefore it’s really to be genesis of where the fund and third-party joint ventures come from. If we can find a cheaper cost of capital represented by them and a different risk reward scenario, we’ll go in that direction otherwise we will be acquiring on balance sheet. But that is a iterative process and one that we will be pursuing as we look at each deal this year.

Eric Wolfe – Citigroup

Okay. That’s it from me. Thank you.

Michael Schall

Okay.

Operator

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

Alex Goldfarb – Sandler O'Neill

Good day. As you guys see this tech boom resurge, I mean we heard Boston talk about in their call yesterday you guys have obviously outlined it. Are you seeing this expand to other market 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?

John Lopez

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

Alex Goldfarb – Sandler O'Neill

No, no in your core market, there is a lot of buzz about how the tech boom has really exploded, having maybe I just don’t read the Seattle papers enough or the L.A papers enough. But don’t seem to hear as much buzz coming out of those markets I just curious last tech boom we had Seattle was hot that as well. So, I’m just sort of curious if you’re seeing it in some of your market?

Erik Alexander

Yeah, it’s definitely happening in Seattle. I think if you look at the office space just checking to see what the vacancies in the office space at Downtown Bellevue of draw that building those were taken over. You got Microsoft expanding Downtown. I think the real key is most of the South Lake Union office space that was double last cycle’s buildup with Amazon and so it’s everywhere across the East side to Downtown the tech boom. It isn’t just of East side tech boom in Seattle anymore. It's anywhere they can get Grade A offices.

Alex Goldfarb – Sandler O'Neill

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 not only in Fremont for example. So, I think it is as things become more expensive there is a tendency to push out these different – get a different types of technology and or submarket driven depending upon where each of these technologies are biotech versus software versus other types of things, wouldn't you say that’s true?

Erik Alexander

Yeah after that 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 in biosciences and that is a very big component obviously in Northern California markets, but it is also has a big presence in San Diego, but that is an area where that will be expanding as it go on – if that’s going to be a larger percentage of the expenditures that we see it in the increase in the amount of money spend towards venture capital in those life science areas.

Alex Goldfarb – Sandler O'Neill

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

Erik Alexander

Yes.

Alex Goldfarb – Sandler O'Neill

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

Erik Alexander

There is a lot being build Downtown relative to what was being build a couple of years ago which was very little. Roughly right now there is about 6,000 units under construction in Seattle, roughly 5,000 that is Downtown, but it’s a very big chunk, its 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 is one of those core areas where there is more workers than housing supply to them and over the last 15, 20 years its 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.

We are seeing people choosing to live Downtown versus commute to the far suburb, which is becoming extremely difficult. So if you look at – I would say that you have to also remember that initial boom was due to a abating of BMRs if you got it in during the year. So what I think you will see is a little less starts this year and so I don’t think that is going to be a reason to think either the Downtown or the total market. In the end, we think it will always gets delivered, it still 1.1% multifamily are less than one on the total residential supply line, so, we are looking at – we are getting job worth of 2%, we expect that to continue for several years.

Alex Goldfarb – Sandler O'Neill

Okay. So, the point is you are not expecting like repeat of what happened in Belvieu, what is…

Michael Schall

I think what happened there was, it was driven by the incredible belief in the condos, you could sell anything in any price market which drilled, I would think way more than half of the deliveries that we saw and convert to apartment that’s not going to happen this time.

Alex Goldfarb – Sandler O'Neill

Okay.

Mike Dance

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

Alex Goldfarb – Sandler O'Neill

Right, right, okay. And then just on the JV front just given the prospect of rates staying low through 14, pension funds they were 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?

John Burkart

Hey, Alex, this is John Burkart. Absolutely that is the case, we’ve obviously long-term relationships, great relationships in the pension fund, private equity world, but we are getting calls certainly from people, they talked for a long time and many new calls interested investors as going through invest in West Coast multifamily.

Alex Goldfarb – Sandler O'Neill

Okay. Thank you.

Michael Schall

Thanks Alex.

Operator

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

Gautam Garg – Credit Suisse

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 that could have on the Bay Area of rental market, is there anything you can talk about with regards to the fact the Google IPO had on the markets around 2004 and 2005 time period?

John Lopez

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

Gautam Garg – Credit Suisse

Right, okay.

John Lopez

Yeah, I think it’s more an indirect effect we know that it will just be a less alternative for people who are getting job from the future to buy.

Gautam Garg – Credit Suisse

Makes sense. And another question if I remember correctly I think on your last call you mentioned something about additional vacancies you do student rentals which a lot of the students moved out of your apartment unit went to 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?

Erik Alexander

Yeah, this is Erik. I commented on that. I mean there is really three properties that are dominated by students, two in Santa Barbara and the small one in the Santa Cruz, one in Santa Cruz fully occupied during the fourth quarter and we made good progress actually in Santa Barbara by doing bed rentals and respectively the occupancy there is about 90%.

The – our outlook is better frankly we had two windows of demand one actually starts in February goes for a couple of 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 through a positive sign for us and in fact if I think we were still able to get rentals during a very good timeline it's difficult to do, so we’re changing the approach a little bit now that we exchange some success with the bad rentals and so we look to be fully occupied before the semester starts in the fall.

Gautam Garg – Credit Suisse

Sounds good.

Erik Alexander

And that similar rent probably a little bit higher, I think we called for 3% increase on the rent based on the fact that we don’t think there is any new supply threat facing us this year.

Gautam Garg – Credit Suisse

That sounds okay. Thank you so much.

Operator

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

Ross Nussbaum – UBS

Hey, its Ross Nussbaum here with Derek Bower, I got a question regarding Prop 13, if I look at your same-store pool and if I am looking at the numbers right, in California you guys stayed somewhere around $29 million worth of real estate taxes in 2011, if did you have to take a guesstimate as to if you’re effectively mark-to-market that number, what do you think the tax number might be?

Mike Dance

Hi, Ross, this is Mike Dance. Yes, about $20 million probably $22 million to $24 million.

Ross Nussbaum – UBS

I am sorry it would be another.

Mike Dance

Yes.

Ross Nussbaum – UBS

24

Mike Dance

Yes.

Ross Nussbaum – UBS

So almost double that you got, but.

Mike Dance

Right.

Michael Schall

That’s correct.

Ross Nussbaum – UBS

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

Michael Schall

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

Ross Nussbaum – UBS

Makes sense. Yep. Thanks very much.

Michael Schall

Okay.

Operator

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

David Harris – Imperial Capital

Well hello guys, thank you for allowing my guest appearance.

Michael Schall

Hello, well welcome back David.

David Harris – Imperial Capital

I have a couple of old chessnuts to throw at you or at least to kick around as this with either rate of rental increases particularly experiencing in Northern California, are we anywhere close to a political response in terms of the rent cap?

Michael Schall

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 by eliminating our to one renewal option to 15% increase largely because of the 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 continued to monitor it closely, it’s important to us, and so far so good.

David Harris – Imperial Capital

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

Michael Schall

It’s one of those subjects and issues that is the pretty well-received by the people. So, it’s everywhere…

David Harris – Imperial Capital

Okay.

Michael Schall

And so I wouldn’t limit it to any one market.

David Harris – Imperial Capital

And I think it was on a couple of calls ago, you made reference to the social network, obviously for 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, I mean, e-mailing one another, Facebooking one another with regard to chatter about rent increases?

Erik Alexander

There is some of that. And it actually works against us. And for us as we have a lot of the times can monitor all the activity you can see, but what people are talking about or you hear because somebody comes in to the office and we deal with it case-by-case. Thankfully I think we do a good job of providing service and housing and often times we have plenty of defenders which is the best thing. We don’t have to get involved in it at all. We have the other tenants talk to me about how great their experience is at Essex and a lot of people that are in touch with the competitive market. They will 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.

David Harris – Imperial Capital

Okay. On another subject, it was good to see property sale will be only $7.4 million could you give me the total of how many properties you sold last year?

Erik Alexander

Two.

David Harris – Imperial Capital

Two, for how much Mike.

Michael Schall

I think one was low 20 millions and the other was…

Erik Alexander

15.7, yeah.

Michael Schall

So, low 20 million.

David Harris – Imperial Capital

Okay. And any idea what you might do this year, I don’t think unless I have missed it, you have not included as a specific reference point in your guidance?

Michael Schall

I would say $50 million to $100 million.

David Harris – Imperial Capital

$50 million to $100 million. And if you will be upper end of that, would that mean that perhaps you did a little less ATM issuance?

Michael Schall

That’s correct.

David Harris – Imperial Capital

Okay. So, we could see the two being as intangible one off or more?

John Burkart

This is John Burkart. We are pretty opportunistic about our sales. We have actually a very good portfolio overall. So, we are ending up recruiting 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 if you are an owner/operator at what was probably low 2s in actual cap and an 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 it keeps for those opportunities.

David Harris – Imperial Capital

Okay. And could we assume that will be more second half of the year rather than front end of the year?

John Burkart

We actively market properties, so it will be when do the opportunities come up?

David Harris – Imperial Capital

But nothing imminent?

John Burkart

Yeah.

David Harris – Imperial Capital

Okay, alright great. Thank you, guys.

Operator

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

Rich Anderson – BMO Capital Markets

Thank you and thank you for friending me.

Michael Schall

Always a pleasure.

Rich Anderson – BMO Capital Markets

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

Michael Schall

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

Rich Anderson – BMO Capital Markets

Well, I mean, if I were to just take out, say add more cost to the NOI line item and then CapEx, I mean, in that range?

Michael Schall

Yeah, if you’re just saying, yes.

Rich Anderson – BMO Capital Markets

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

Michael Schall

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.

Rich Anderson – BMO Capital Markets

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 multifamily housing as commercial property. Is there any risk of that it could be – they could further bifurcate residential in to single family and then the multifamily business that you guys run?

Michael Schall

It’s another good question and if you look at the history of Prop 13. It has been challenged in every conceivable fashion from the course to the initiative process, to the legislature; it’s been attacked hundred different ways with a hundred different approaches. So, it’s difficult to say 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’re 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 proposal served, they’re going to pick, whatever they think is going to be the path of least resistance. After this point after what is been 30 years of Prop 13 its been tried a lot of different times and a lot of different ways, actually 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.

Rich Anderson – BMO Capital Markets

Okay and then the last question, as you mentioned kind of the intelligent gathering in the East Coast to recovery. But 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 price our way?

Michael Schall

Well you will recall that we’re in a bidding process.

Rich Anderson – BMO Capital Markets

Town and Country?

Michael Schall

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

Rich Anderson – BMO Capital Markets

Okay sounds good. Thank you.

Michael Schall

Thank you.

Operator

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

Paula Poskon – Robert W. Baird

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?

Mike Dance

Acquisitions we’re looking $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 a $1 million.

Paula Poskon – Robert W. Baird

And on the dispositions Mike, is it more market, submarket dynamics or the age of the properties that a CapEx might be needed. What’s driving your selection process?

Michael Schall

You had that’s all of them, it’s a variety of decisions, where we evaluate the portfolio and look for situations that we think we can improve the portfolio by selling the assets sometimes it relates to long-term rent growth, sometimes CapEx, a variety of items in here.

Paula Poskon – Robert W. Baird

Okay thanks. And then also for Mike Dance, I’m sorry Mike, I just think I just missed some of this in your commentary and your prepared remarks. What drove the cost savings on via relative to budget? I know you still obviously with some of it was attributable to the earlier than expected lease up. Is there any other major contributors?

Mike Dance

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

Paula Poskon – Robert W. Baird

And was that on product cost, labor cost and mix of everything?

Mike Dance

I will let John answer that.

John Eudy

Combination of things, it was acceleration to the job we got done six months ahead of schedule. So, general conditions were less. It was that the buyout occurred in declining market at the time the buyout was done on the material side as well as the labor side.

Paula Poskon – Robert W. Baird

And then finally, just a question on the development process, are you seeing you 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 per office development and requesting in the budget to add staff for the planning commissions. Are you seeing any challenges in that way?

Erik Alexander

There are issues. All of the cities had some form of staff reduction 2, 2.5 years ago. We hadn’t added much to staff. So, there is some friction there, yes.

Paula Poskon – Robert W. Baird

Thanks very much. That’s all I have.

Operator

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

Michael Salinsky – RBC Capital Markets

Good afternoon guys. Mike, I want to go back to the disposition topic. You talked a little bit on prior call about wanting to grow the size of the company too much. And it sounds like you are looking at many of the acquisitions on balance sheet. Yet the disposition plans fairly small. Can you give us an update as to where you stand on that front and whether it's more just a cycle timing or is there a plan to grow the portfolio at this point?

Michael Schall

Yeah, it’s a little bit of each of those things. That 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 world’s and so we’re trying to time our activity so that we maximize value. 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 dispositions 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.

Michael Salinsky – RBC Capital Markets

And 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 would you call kind of Class B type assets in terms of what you’re seeing on rents in the Southern California markets. And also I’m just curious if there is any markets, where you’re starting as you are pushing pricing aggressively, if you’re seeing any doubling up starting to emerge?

Erik Alexander

Hi this is Erik. We haven’t seen or heard a lot about any of the double ups, if we go to the second part of your question with respect to As and Bs I think all of the property types that performed well in the stronger markets. So, certainly in the Bay Area and the Pacific Northwest, they performed equally as well. There is probably a little bit of difference in Southern California between the new condos quality stuff and some of the B products we’ve seen they go up and down a little bit. So, I think the greatest potential is, with some of those As and gone down Orange County and so forth we expect greater performance out of those may be this year, but its pretty close.

Michael Salinsky – RBC Capital Markets

And the same is true in Seattle?

Erik Alexander

The same is definitely true in Seattle. We have a couple of properties out there, performing of As, performed very well and the Bs 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 the malls are moving together, where you have maybe more modest growth in Southern California maybe there is a little bit more movement in the Bs at that time. But again when things tightened up in the submarkets we’ve seen nice jump in the A products. So I think when you start to see more consistent overall market performance, the economy and the job situation improves. I think we’re going to see the As maybe moving a little faster.

Michael Salinsky – RBC Capital Markets

Okay, then final question, two- part. 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?

Michael Schall

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 high 4 to low 5 range. We think those unlevered IRRs and 8.25 to mid 9 range depending on what we’re looking at. I think that does it, right.

Michael Salinsky – RBC Capital Markets

Development?

Michael Schall

Development, on the development side, yeah the comment that I made was the development cap rates based on today, market rents in place today are in the mid 5s really not all that different from the year ago. The difference obviously is that in some cases rents have moved 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 something that John Eudy and I talk about a lot.

Mike Salinsky – RBC Capital Markets

And then finally just dividend?

Michael Schall

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

Mike Salinsky – RBC Capital Markets

Okay. Thank you much.

Operator

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

Dave Bragg – Zelman & Associates

Hey, good afternoon. Couple of quick ones. Moving out to buy homes during the quarter, I've heard the portfolio and any movements regionally worth noting?

Erik Alexander

No, region is really, this is Erik, worth noting. It’s in the portfolio wise it’s in that 9% to 12% range, which is consistent with sort of the long-term activity. It has 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.

Dave Bragg – Zelman & Associates

Okay. And other question is I know that 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 entering the space, could you just talk about this from a multifamily 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?

Michael Schall

Yeah, Dave we – 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 sometime ago. The issue for us is the most of that is not in the markets that we are in. 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 are 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 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 dealer to, but we just don’t see it as a long-term annual business and that’s why we have at this time in point its data on the sideline. There is just – there is no way that I see that in carriers where single-family homes and median price homes it's in $400,000 to $500,000 range to make that work from a single family rental standpoint. So, that is the question we continue to look at it and but at this point in time we are not seeing the fantastic opportunity.

Dave Bragg – Zelman & Associates

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

Michael Schall

Yeah. I mean, again I think well even within our footprint. So, if you say okay, the three County Bay Area, the counties surrounding the bay, the areas that we are going to 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 all renters will not want to rent in and not want to live in. So, I am sure there are some areas where that will work and just not areas that we own property and I’ll give you some examples. Maybe Hayward have some areas where within the – within Alameda County that where you could find housing in expenses 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 very specific reason why it’s there and why it’s a good investment. That aside, we just don’t see, we don’t see it as major competition. I know that it actually you went to Skyline and you were – you noted that 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 there 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 are sensitive to it, I assure you, we just don’t see it as being a major detraction from our operation.

Dave Bragg – Zelman & Associates

Sure. I will 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.

Michael Schall

Very good.

Operator

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

Tayo Okusanya – Jefferies

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

Erik Alexander

This is Erik. We haven’t seen any unique changes in product demands. Some of the, if you might imagine, smaller ones that are in studios and the value propositions for peoples, almost don't matter what's submarket driven end and larger floor plans and three bedrooms are popular with families and tend to not always could tend to follow a pattern of school enrollment. So, I can’t say that anything unique is popping up.

Tayo Okusanya – Jefferies

Okay, thank you.

Erik Alexander

Thank you.

Operator

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.

Michael Schall – President and Chief Executive Officer

Yeah, in closing, I would 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.

Operator

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

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