Essex Property Trust held its earnings conference call Feb. 2 to discuss fourth-quarter 2011 financials and what to expect in 2012. While the quarter wasn’t a home run, the Palo Alto, Calif.–based company did exceed most analysts' expectations. The real estate investment trust (REIT) closed out the fourth quarter ahead of estimates with higher revenue and lower operating expenses than in 2010. Essex managed to exceed the 2011 guidance it provided during the third quarter by $1.2 million. Funds from operations for the quarter totaled $55.5 million, compared with $43 million during the fourth quarter of 2010.
Essex’s net operating income (NOI) was up from the third quarter in each of its West Coast markets. Northern California properties led the pack, with a 7.8 percent increase in NOI. And both the Southern California and Seattle metro regions saw 5.5 percent NOI growth. The company’s same-property portfolio also grew, by 7.6 percent.
“The same-property NOI growth rate in the fourth quarter was among the strongest in the last decade, supported by strong execution by the operations team and improving multifamily fundamentals driven by recovering national and local economies,” said Essex CEO Michael Schall during the call.
The increase in rental rates in the fourth quarter for Essex properties is noteworthy, especially in Northern California and the Seattle metro region. The two markets ended the year with 9.3 percent and 7.8 percent increases year-over-year, respectively.
One reason for the spike in rental rates is the abundance of tech companies—including Microsoft, Amazon, eBay, Expedia, and Boeing—triggering rate hikes with their plans for adding new jobs and expanding infrastructure. During the call, Essex’s senior vice president and divisional manager, Erik Alexander, expressed his optimism that this was just the beginning of a surge in demand for West Coast properties.
“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,” Alexander said.
In the company’s portfolio, cap rates ranged from 4.25 percent to 4.75 percent for A properties in A locations and in the high–4 percent to low–5 percent range for B properties in A locations. And although Essex had low transaction volume in the fourth quarter, Schall assured investors that 2012 will bring $400 million in new acquisitions.
“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,” Schall said.
As for the company’s plans moving forward in 2012, Essex is looking to invest $30 million to $40 million in redevelopment properties. A 10 percent return is expected on these properties on average. In addition to the five communities Essex currently has under construction, two new communities are anticipated to break ground in 2012, at a total cost of approximately $150 million. Additionally, co-investment income is expected to be $27.1 million this year. Of that, operations from joint ventures will make up $14.6 million, and $12.5 million will come from preferred equity income.