Essex Property Trust Earnings Call Nuggets: Santa Barbara Metrics and Public Bids
Essex Property Trust (NYSE:ESS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Santa Barbara Metrics
David Toti – Cantor Fitzgerald: I have a couple of just small detailed questions. Looking at the metrics for Santa Barbara in the quarter, it appears you had pretty good occupancy gain and rent growth was pretty flat. Was that a deliberate effort to build up occupancy and if so, why so aggressive in that particular market?
Erik J. Alexander – SVP, Operations: This is Erik. Yes, it was. Basically, that building is a student-dominated building and so, the leases that you see in the fourth quarter are essentially the leftover from the pre-leasing done during the summer. So, the sooner we get those, the better we are for the rest of the year.
David Toti – Cantor Fitzgerald: So, that just depends on the specifics to that market, not an overall expectation for the portfolio in general?
Erik J. Alexander – SVP, Operations: No, no, absolutely. The total specific to University of Santa Barbara.
David Toti – Cantor Fitzgerald: Going back to NAREIT, you guys were talking about capping or potentially capping rent increases in Northern California that doesn’t seem to have happened, do things continue to improve above expectation in said part?
Erik J. Alexander – SVP, Operations: This is Erik. We actually do cap the rents at the majority of the properties to stabilize the assets including Northern California.
Michael J. Schall – President and CEO: On renewals.
Erik J. Alexander – SVP, Operations: On the renewals and so but again depending on what the resident chooses for a term will dictate what the rent increase for the rate is.
David Toti – Cantor Fitzgerald: Then I suspect you are not going to give us too much detail on the investment that was made. But can we expect more of those going forward. Is there something we will see this year?
Michael J. Schall – President and CEO: This is Mike. I assuming that you are referring to the strategic investment and yes, I really want to prevent this from being a discussion, a lengthy discussion about strategic investments. We do not expect many of them through over time. We’ve not had many of them over our history. But I do maybe want to add one additional thought, which is that we promised the investment community that we will be disciplined throughout that process, starting from the accumulation of the position and essentially the decision and execution of the sale, when these strategic objectives were not considered possible. So from our view that closes the chapter on that discussion, and again I am not going to make a lot of comments about what happened and the blow-by-blow type of stuff, because I just think it would be inappropriate to do so. So I’d like to move on. We have a lot of great things happening. Internally, we need to focus our effort on the things that we can control and that what’s we are doing internally and we’d like the call to sort of follow that same pattern.
David Toti – Cantor Fitzgerald: Just one last quick one. The land parcel that you sold in Palo Alto; what was the thought process there given the ramp-up in development overall?
Michael J. Schall – President and CEO: I didn’t hear the last part of your question; I’m sorry?
David Toti – Cantor Fitzgerald: In the context of rising development agenda, what was the rationale behind them selling that (pick of your) parcel?
Michael J. Schall – President and CEO: It was a great location, obviously, but it was very small. It was only 50 units, and we were offered a price that made sense and we executed on it.
Alexander Goldfarb – Sandler O’Neill: Mike, I appreciate your comments not wanting to make the investment a big part of the call, but just one question because it’s something that you have constantly came up with investors. If you guys were to do this again, how would you weigh just putting out to public, like a public bid? Do you think that would be helpful? Do you think that would accelerate a process? Or, as you look at what happened, you guys are pleased with how it went? It’s sort of a Monday morning quarter-back thing, if you will?
Michael J. Schall – President and CEO: Alex, I think that every situation is a little different and to make any generalized comments about what we might do differently, will depend, I think, on the situation. These things happen once every five years, let’s say, and each scenario is a little bit different. They all have periods of activity perceiving them and then the activity itself, and it really depends. Your strategy is going to depend on that whole sequence of activity. So, I think it would be really difficult to make a generic statement about what might be different in the future. And again, what I’m hoping we don’t do is turn this discussion into about the strategic investments. Again from our perspective we need to focus our efforts on the things that are really important to us and we have a lot going on and we have a lot of opportunity in front of us. So rather than talk about something that is closed chapter in the book we would really rather focus this forward on the things that we are doing and the results and 2013 and all the stuff that’s happening out here.
Alexander Goldfarb – Sandler O’Neill: That segues well into my second question then. You guys have made a number of recent deals including Pacific Electric. Were any of these deals sourced through your mezz portfolio and then as you guys look at making new mezz or financing investments at this stage in the cycle, is your view that those are more loan to own, in the hope that you do get the property or at this point in the cycle most of those are more just getting attractive financing where you assume that you will probably just be paid off in the end?
Michael J. Schall – President and CEO: We did not source that through the mezz portfolio and the purpose of the mezz portfolio both legally and practically is get the rate of return that we expect on the loan or whatever form they might take. Having said that it does lead to a discussion that when you have relationship with the owner and that could lead to a transaction down the road and in a number of cases it has at least led to a negotiation about whether we wanted to acquire the property. In all of those cases part of the sort of strategic aspect of that is to make loans on things that we would like to own that satisfy our broader criteria and therefore we have had some situations where we have been engaged in a discussion about buying a property. But up to this point we have not been able to actually make that acquisition.
Alexander Goldfarb – Sandler O’Neill: The last thing is, as you guys ramp up the renovation program, are there any changes, are there any differences in tenant taste, this time maybe more price sensitive now versus pre-credit prices or are the renovations sort of what we were seeing pre-credit prices as far as like the granite and stainless and all that stuff.
Erik J. Alexander – SVP, Operations: Yeah, I think people want the nice new modern finishes and in a number of these communities, we are also adding the washer and dryer which I think is important, is an enduring feature. So again, modest change in taste, but there doesn’t seem to be any pricing pressure. People want to pay for the nice units in the nice locations.