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BRE Properties, Inc. (NYSE:BRE)

Q4 2012 Earnings Call

February 05, 2013, 11:00 am ET

Executives

Connie Moore - President & CEO

John Schissel - EVP & CFO

Scott Reinert - EVP, Operations

Analysts

Eric Wolfe - Citi

Jeff Donnelly - Wells Fargo

Michael Salinsky - RBC Capital Markets

Jana Galan - Bank of America-Merrill Lynch

Andrew Rosivach - Goldman Sachs

Dave Bragg - Zelman & Associates

Karin Ford - KeyBanc

Ross Nussbaum - UBS

Rich Anderson - BMO Capital Markets

Michael Bilerman - Citi

Operator

Good morning. My name is Calla and I will be your conference operator today. At this time, I would like to welcome everyone to the BRE Properties, Inc., Fourth Quarter 2012 Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

I would now like to turn the call over to Ms. Connie Moore, President and Chief Executive Officer. Please go ahead.

Connie Moore

Thank you Calla and good morning everyone. Thank you for joining BRE’s year-end 2012 earnings call.

Before we begin our conversation, I would like to remind listeners that our comments and answers to your questions may include both historical and future references. We do not make statements we do not believe are accurate and fairly represent BRE’s performance and prospects, given everything that we know today. But when we use words like expectation, projections or outlook, we are using forward-looking statements which, by their very nature are subject to risks and uncertainties. We encourage listeners to read BRE’s Form 10-K for a full description of potential risk factors and our 10-Q’s for interim update.

This morning, management’s commentary will cover our financial and operating results for the fourth quarter, an update on our strategic initiatives for 2013 and our financial outlook for 2013. John, Scott and I will provide prepared remarks. Steve Dominiak will be here available during the Q&A session.

Let me start with our results for 2012. Reported FFO per share of $0.61 for the quarter, came in through the high end of the range we provided in conjunction with our third quarter earnings reflecting the timing of our San Diego asset sales which was later than we anticipated.

Annual core FFO totaled $2.39 per share which excludes the $15 million or just under $0.20 per share impairment charge that occurred in the third quarter. Core FFO for 2012 came in near the high-end of the original guidance of $2.30 and $2.40. We provided you back in January of 2012.

2012 was another year of solid operations which are reflected in our overall results. Same-store revenue growth and NOI growth came in at 5.5% and 6.4% respectively. Operations continue to be tailored to region; Northern California and Seattle continue to perform well, but Southern California, Orange County and San Diego in particular continued to lag as the economy recovered more slowly than we had anticipated at the start of the year.

I am proud of what our entire organization accomplished in 2012. We delivered strong NOI growth, completed a roll-out of the third-party revenue management system, without a hiccup. Our development team maintained an intense focus on execution and we strengthened our already strong balance sheet, preserving the flexibility we need to build out the pipeline.

As we discussed in our last call, we are executing on a near-term initiative to align our development program with the size of our balance sheet. This current development commitment spend is through recycling of capital through strategic asset sales. So let me update you on our progress.

On the development front, the final CO was received in late December for Lawrence Station. This project was completed on budget and slightly ahead of schedule and is now 59% occupied and on-track for stabilization in 2013. We commenced construction of Radius; our project in Redwood City ahead of schedule. With regard to our Mission Bay asset, we're in the final stage of executing the GMAX contract and vertical construction is expected to kick-off in the coming months.

With regard to the land holdings, which we no longer plan to develop on balance sheet, process around contributing Pleasanton to a joint-venture and selling the land in Anaheim are going as expected. We will provide updates on our progress throughout the year.

On the disposition front, last year we communicated our plan to sell two sale proceeds to fund our current development commitment and identified $350 million to $400 million of properties for sale, which due to age, market or sub-market do not conform to our strategic goals going forward. In the fourth quarter, we sold two communities in San Diego for growth proceeds of $77 million, bringing our full 2012 dispositions to $115 million, including properties and joint-venture interest. This leaves another $250 million plus or minus to sell and we expect to execute on these dispositions over the next 24 months to match fund our current development commitment.

So for 2013 these are our key initiatives and we look forward to sharing our progress as we move through the year. Beyond this however, we want to provide further clarity regarding our long-term strategic plans. First, we will continue to concentrate our portfolio into our targeted high barrier markets and submarkets in California and Seattle.

Second, we will remain an active developer building on the successful accomplishments of our current pipeline with a development program aligned for our current balance sheet which we target in the range of 10% to 15% of assets. We continue to review opportunities and believe that a successful and evolving development programs is an important tool for an apartment company in our market to create value.

Third, we will continue to fund our current development commitments with proceeds from dispositions. To this end, we have about $250 million of assets, non-core assets identified for sale as we have communicated.

Going forward, we expect to continue to recycle capital in order to improve the return profile of the company. By utilizing strategic dispositions to augment portfolio transition we will cycle out of lower growth markets and assets. Obviously, we are targeting our non-core markets for sale, but more importantly, we are identifying assets within our core markets which due to age or submarkets also do not fit our criteria for long-term growth and return.

We are not putting a specific timeframe on these dispositions, but we’ll consider strategic dispositions as a source of capital based on market conditions, capital needs, pricing and tax implication. While we understand that our strategic plan has near-term implications for funds from operations, we believe a younger portfolio concentrated in a core higher growth target market can produce significantly better growth rate with greater stability supporting greater cash flow growth.

And finally let me comment on Proposition 13, which determines property taxes in California. With the recent election results giving the Democrats the two-third majority in both houses of California, there have increased questions about the likelihood of a change to Prop 13. With the two-thirds of vote by both chambers of the California State Legislator, an amendment or a repeal of Prop 13 can be put on the ballot for the California voters to consider circumventing the normal requirement for a minimum number of voter’s signatures.

However, any proposition submitted to for voter approval still requires a majority of the California voters to approve. At this point, it is impossible to predict how the legislator might suggest changing the law, or how the California voters would ultimately vote; I just wanted to provide you with some clarity around the process.

And with that let me turn the call over to Scott to review our operating results and our outlook.

Scott Reinert

Thank you, Connie. The portfolios performance was in line with our expectations during the fourth quarter generating solid year-over-year same-store revenue growth of 5.6%. We were well positioned entering the fourth quarter with occupancy of 96% and experienced typical seasonal declines through the quarter ending the year with occupancy of 95.3% in December with 30 day availability at 7.2%.

As is typical during the fourth quarter, we found perspective residents somewhat price sensitive as we generated a 50 basis points increase on new leases over the prior resident’s rate. Renewal rates on the other hand continue to be strong increasing more than 4.8% during the quarter. On a combined basis, new lease and renew rents were up 2.5% in the quarter.

Last night, we issued same-store guidance including revenue growth guidance in the range of 3.5% to 4.75%. Our outlook for 2013 revenue growth is predicated on the following considerations. Number one, job and wage growth assumptions for our current and perspective resident base. Number two, the impact of expected new apartment supply in certain of our markets, and three, the impact that is strengthening single family home market may have on each of our markets.

Starting first with Southern California, we expect job growth of 1.2% to 1.7% in 2013, slightly below the level we experienced in 2012. More importantly, the types of jobs being added to Southern California reflect a broad based economy and have not had same impact to the region that the technology sector has had on job and wage growth in the Bay Area in Seattle.

In Southern California new supply as a percentage of stock is expected to be approximately a 0.5% except in Orange County where new supply is expected to represent a little over 1% and mostly on our near-by ranch.

Even with this low level of new supply, there maybe pockets that will have an impact on certain of our communities but broadly we don't believe supply will have a meaningful impact for us in Southern California.

During 2012, we saw an improvement in single family housing in Southern California in both transaction volume and pricing. For the most part, the substantial increases being seen in median home prices in our markets help keep the rent-to-own gap wide.

In Los Angeles and Orange County, we haven't felt the impact of this stronger single family market. However, in San Diego, we saw a meaningful increase in the number of move outs to home purchases in the fourth quarter. While this movement is notable, it more or less represents a return towards historical averages.

Further, we think that a strong single family home market is a net positive in the long run as it implies a healthy economy, a strong job market and higher levels of confidence amongst households and perspective residents.

To summarize for 2013 in Southern California, we expect revenue growth to be 3% to 4.75% in Los Angeles, 2.5% to 4% in Orange County and 2.25% to 3% in San Diego.

In the Bay Area, we expect solid job growth of 1.5% to 2% and expect this market to again be one of the best in the country in 2013. The expected job growth in 2013 while strong represents a slowdown from the 2.5% to 3% [pace] experienced in 2012.

Supply is starting to have an impact in some submarkets of the Bay Area particularly in San Jose where almost 4,000 units are coming online next year and for the following two years as well.

Absorption appears steady, although as expected, the market did increase concession use in the fourth quarter to maintain pace. Bay Area home purchase activity and median home prices are increasing quickly and while generally speaking we don't lose our Bay Area residents to home purchases, we did see an uptick in the fourth quarter to 16% versus an average of 12.4% for the year.

For 2013 in the Bay Area, we expect revenue growth of 5.5% to 6.75%. In Seattle, we expect job growth of 2% and while still robust; it represents a slowdown from the 2.7% pace experienced in 2012.

Supply of 8,000 units is coming online in the Seattle area in 2013. Half of the new supply is concentrated in the downtown area inclusive of the South Lake Union and Queen Anne areas. With the other half spread throughout the Greater Seattle area.

Although, the Seattle metro has seen home purchase volume increased 20% year-over-year, move outs for home purchases were relatively consistent at 15% throughout 2012. We expect Seattle to remain a strong market in 2013 with job and household permission likely to absorb the new product, but we are keeping a close eye on the impact of supply in the near-term. For 2013, we see Seattle revenue growth in the range of 5% to 6.25%.

I would now like to give you a quick update on the portfolio position as we enter 2013. We come out of the holiday seasonal slowdown with strong traffic and leasing activity through January. As of yesterday, the portfolio stands at 95.3% occupied with 6.6% available.

Our January renewals are solid, roughly equivalent to the fourth quarter average and our renewal notices for February and March have gone out in the range of 4% to 5.5%.

Lastly, our lease up at Lawrence Station continues to go well and has 59% occupied, the pace of absorption is on track to meet our 12 months stabilization at rental rates above pro forma.

And with that, I will turn the call over to John.

John Schissel

Thanks, Scott. As we reported, FFO and core FFO for the fourth quarter was $0.61 per share, penny above the high end of the guidance we provided in October of last year. Positive variance reflected the timing of the closing of our dispositions which were completed near the end of the quarter.

Revenues and expenses were generally in line with expectations. With respect to same-store expenses, the 4.4% increase compared to 2011 includes first year expenses for LRO as well as the impact of property tax refunds received in 2011. Both of which we've discussed on our prior calls. In addition, payroll increased in a couple of regions due to performance achievements being [helped].

Turning to 2013 guidance, we have presented the baseline assumptions supporting our outlook and our earnings release and in Exhibit-B, which is found on pages 23 and 24 of our supplemental. Our expected results in 2013 in the comparative change to 2012 results were driven by two primary factors.

Our outlook for same-store community performance and the impact of dispositions completed both in 2012 and planned for 2013. Scott reviewed our perspective for each region, and as he discussed, we set a revenue growth range of 3.5% to 4.75% for 2013.

Given the trends in our portfolio during the second half of 2012, revenue performance at the low end of the guidance would reflect a more rapid deceleration of rent growth in Seattle and Bay Area and we are currently experiencing as well as continued unevenness in our Southern California markets.

With respect to same-store expenses, our controllable expenses are manageable in the 1% growth area. However, we expect to see increases in several non-controllable line items including property insurance premiums where we will see a 5% to 6% increase, utilities which were favorable in 2012 due in large parts (inaudible) costs which we are forecasting to be up 6% in 2013 and finally, property tax within the Seattle area where (inaudible) are up 16% to 20% on our properties.

On the disposition front, we have discussed previously our intent to recycle capital by selling older non-core communities using proceeds to fund our development commitment. During 2012, we sold a $115 million of properties in joint venture interest spending over half of our development spend for the year.

In 2013, we are forecasting another $190 million to $225 million of development funding requirements. We are also in second year of increased renovation activity with an estimated $35 million to $50 million of redevelopment expenditures planned for this year.

Lastly, we have a modest level of debt maturing in 2013 totaling $71 million. To fund these commitments, we are targeting a $150 million to $250 million of dispositions. Given the higher cap rates associated with non-core communities we are targeting for sale and the fact that reinvestment in this development will take time to reach stabilized return or sales program obviously the drag on near-term results.

All told, our completed 2012 dispositions including the JV interest and planned 2013 dispositions will reduce our NOI by about just under $13 million including the JV interest sales. As a result of timing of these sales, we have a significant impact on our 2013 results and will communicate our progress as the program advances and our visibility improves.

And while we pick up additional capitalized interest in the incremental development spend; we are also losing over $4.5 million of capitalized interest in 2012, primarily from the delivery of Lawrence Station and suspending capitalized interest that are in (inaudible) site which is held for sale.

Our financial position liquidity remained extremely strong and we have significant financial flexibility. At quarter end 2012, debt-to-EBITDA stood had 6.5 times, our secured debt as the percentage of gross assets less than 20% and our earning cumbered asset NOI is approximately simply 74% to total NOI. We have no meaningful term debt maturities in total 2017 and nothing outstanding under our $750 million line of credit.

With that I will turn it back to Connie.

Connie Moore

Thanks, John. Calla, we can open it up now to the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Eric Wolfe with Citi.

Eric Wolfe - Citi

I am trying to understand, I guess close to your remarks that, just a second ago, but how the asset sales are impacting 2013 earnings versus 2014 and then further out? Can you just walk us through when you would expect all the disposition proceeds to be put toward development to be capitalized and how you look at the short-term dilution in the sales in 2013 versus the long-term dilution?

Connie Moore

Eric, this is Connie. Well, I think as we talked about before, you can't perfectly match the timing of the sales with our development advances, so we are going to try to do as much as we can. So again obviously timing for dispositions is too early in the year for us to be very definitive about when we think that will happen, but its really about funding this development pipeline over the next two years, and so as John mentioned you've got a 150 to 250 this year and that will be balanced during the year as our development advances, move forward. So I think its just really timing if they happen later in the year you saw it for example in the fourth quarter we said the delay of selling the two assets in San Diego had a positive impact on our reported funds from operations in the fourth quarter. So the timing of the sales can have an impact if they are earlier, obviously its more of a drag if they are later, it’s less then it has a bigger impact in 2014.

Eric Wolfe - Citi

And maybe thinking about it another way, if you were not to sell the assets this year at all your fund development just through debt and ATM, what impact would that have on your guidance for this year, how much higher would it be.

John Schissel

Well, issuing equity on a nominal basis is less dilutive certainly, but if we issued a blend of equity and debt, it could be $0.05 or so depending on how much equity we use.

Eric Wolfe - Citi

And then for the $200 million of sales it looks like that's being included in your same store growth numbers. So I'm just curious whether there's a big difference in the growth from those assets versus the rest of the portfolio. I'm just trying to get a sense for what those $200 million are going to do this year versus the other call it 95% of your portfolio.

John Schissel

Well, in terms of the disposition this year, we've got a view in terms of some of those assets but we haven't finalized all the assets that will line up. So that mix will change in terms of its impact on same store revenue growth.

Eric Wolfe - Citi

I guess the reason why I ask is because obviously if those assets are say just growing flat this year or growing very nominal amount, it could have like a 25 basis points impact on your growth guidance which obviously a lot of people are focused on. So I'm trying to understand with what you are left with, how it looks.

John Schissel

Sure, Eric, it’s not going to be 25 basis points, I would say 10 to 15.

Operator

We will take our next question from Jeff Donnelly with Wells Fargo.

Jeff Donnelly - Wells Fargo

Actually if I could just build on Eric’s question concerning asset sales, the question isn't so much about the challenges of timing the sales or matching them with development funding but when specifically do you think you will have those assets on the market and trying to market them for sale and I guess what timing did you assume your guidance for asset sales?

John Schissel

We assume for guidance purposes that we hit the midpoint $200 million mid-year July 1 that is 6% cap rate. So we will have some sales potentially in the first half of the year and some in the back half. But it’s hard to signal with precision in terms of the timing just given how the negotiation process plays out. We are sitting at $62 million of cash at year end. We will use some of that to take out the $40 million of debt that comes due in a couple of weeks. And we will generally try to match the sale of assets with our capital needs on the development side.

Connie Moore

Yes, and we try to be prudent in terms of how we model that for our guidance perspective, but again its really one we don't want to stick with a lot of cash to the extent that we can help and so as we talked about it, its really about capital needs, it’s about pricing and then its about which assets and what makes the most sense. So from purposes of modeling, we just have assumed a mid-year convention but as John said, some could be earlier, which we will be more dilutive but some would be later and they might add a little bit to the bottom line.

Jeff Donnelly - Wells Fargo

And just because it seems like a fairly frothy market on the acquisition side, are the transaction market side for multi-family, particularly in California, is it fair to say there is, I don’t know if it's the right way to phrase but I will call it low risk of having allow these sales put forward early in the year because demand is good and debt is relatively cheap, you are going to try and phase them out for the year?

Connie Moore

When you say low risk, I mean, I think we're going to be prudent again. We're not holding a lot of cash, but I think you would agree that it's a very frothy market as it relates to acquisition.

John Schissel

Yeah, this is John. I mean, we don’t see the market getting away from us, Jeff. That’s what you are --?

Jeff Donnelly - Wells Fargo

No, I guess as you would rephrase it differently meaning that if interest proves very strong, do you see yourself accelerating disposition or increasing the volume you might sell for with more front ended and back ended?

Connie Moore

We will probably not increase the volumes so much again because it's really tied to our development advances and again we're trying to match as well. You know, we have tax considerations, dividend considerations as well. So I mean we could sell it all in the month of January, but that doesn’t do much for us in terms of holding that much cash. And so we're trying to be prudent about recognizing as I mentioned. We understand that this has a dilutive effect on FFO. So we're trying to be prudent about when we sell them, and matching cash needs for the development advances and also being mindful of our tax considerations. As you might expect, some of these asset are some of our oldest assets, assets that we held for the longest period of time, that have significant gains and so we really need to match that in terms of dealing with our dividend.

Jeff Donnelly - Wells Fargo

And then, just one last question, just considering southern California and your outlook, may be I missed some of it. So maybe can you repeat your same store revenue outlook for the various markets there, but what specifically keeps you from being more optimistic because some of your competitors are strikingly more may be optimistic tone on the pace of improvement in southern California and if I am not mistaken, your guidance for the region overall was 2.5% to 3.8%. Revenue growth in 2013 is somewhat of a decline from the 3.8 I think you guys achieved in 2012, which I guess I wouldn’t expect such a notable deceleration given that Southern California has been talked about sort of an improving market.

Connie Moore

I will let Scott speak to the revenue assumptions reach of the market. But as we think about it in the last couple of years at this time each year, we have seen promising trends particularly in Southern California and more specifically in San Diego, and they prove not to materialize during the year. So at this point in our guidance and our discussions we just feel prudent to be cautious about our guidance.

Scott Reinert

So Jeff this is Scoot so to go back over the revenue growth guidance for Southern California I said that Los Angeles would be 3% to 4.75%, Orange County 2.25 to 4; and San Diego 2.25% to 3%. And just in addition as we think about Southern California and look at LA for example, we’ve got some pretty tough comps in LA compared to 2012. We had a couple of really great performers in ‘12 and we are starting to see a little bit of slowdown. We are also taking some units offline for reinvestment and rehab purposes and probably the biggest thing though is we still haven’t seen a catalyst in Southern California to meaningfully drive our job growth there and the pace of the recovery just hasn’t been strong enough for us to see an acceleration there.

Operator

We will take our next question from Michael Salinsky with RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Just to go back to that not sure there is an easy way to ask this, but 2013 wouldn’t seem like it suppose to be a year, you got the LRO ramp up you are rolling in some of the Northern California assets in the same store, you had the guidance significantly blip here at this point. Can you give us a sense of what you are forecasting in terms of impairment growth versus some of the appears there, and also can you quantify what the impact is for redevelopment in the same store numbers given all the one properties in the same store?

Scott Reinert

Let me go through job go through quick, Mike this is Scott. So for San Jose our forecast is 1.8%, San Francisco at 2%, Seattle at 2%, LA is 1.2, San Diego 1.7, and Orange County 1.2.

John Schissel

And Mike on the redevelopment this is John, it’s right now for our purpose we are modeling a net neutral as we take occupancy down. Once we get those units back online we will get a pop in rents for sure, but for this year it’s a net neutral.

Connie Moore

Yeah, because as you might expect on the occupancy the day is vacant on the unit that we put into rehab and significantly longer than just the normal term. So while you ultimately get the increase in the rent following the rehab, you do have an average days vacant that is higher than what we would normally experience. So it would be sort of neutral this year.

Scott Reinert

Mike, this is Scott again with regard to comparisons with some of our peers, in the way we think about is no two portfolios are exactly the same within each market or even the sub markets, and we look at the case of the Bay Area, the East Bay is different than the peninsula or even in the city. So when we think about Seattle and the Bay area for example, the rate of growth there has been very, very strong and we don't believe that that's sustainable a little long term and we actually are seeing some evidence of declaration there.

With regard to LRO, we haven't even completed our first full year and when we are doing our budgets we are only five months into the completed roll-out. So we will be celebrating our one year anniversary in July, but we felt that it was prudent not to be overly optimistic in our 2013 guidance relative to LRO and so we think there is upside for additional lift because of it. Yeah, but that's probably more likely in the second half of the year.

Michael Salinsky - RBC Capital Markets

And just another follow-up, can you go through your market rent forecast for ’13, what you are expecting in terms of market rent growth?

Scott Reinert

So rent growth being a blend of new and renewal increases by region for Seattle 3% to 4.5%, for the Bay area 5.5% to 7%, Orange County, 3% to 4%, Los Angeles 3.5% to 5%, and San Diego 2% to 3%.

Michael Salinsky - RBC Capital Markets

And your in-place portfolio loss to lease currently?

Scott Reinert

Hold on one second…

Connie Moore

While he is looking for that, as you know that's more, under revenue management Mike, that's a more difficult number because it changes so often so….

Scott Reinert

Mike, this is Scott, it’s about 2% right now.

Operator

We will take our next question from Jana Galan with Bank of America-Merrill Lynch.

Jana Galan - Bank of America-Merrill Lynch

Do you think longer-term of maintaining a development pipeline that’s maybe 10% to 15% of your asset base, will your plan be to continue funding with asset disposition proceeds or would you consider an equity partner or preferred issuance or some other avenues of funding that pipeline?

Connie Moore

Well, I will let John talk about some of the capital attributes, but I think as we are looking at, I mean as you know we are going to be, we are considering putting plus (inaudible) with joint venture and so that that certainly gives us another alternative, so right now with our current development pipeline other than selling Park Viridian and putting Pleasanton into joint venture we can fund it all through asset sales. So as we begin to back fill the development pipeline and we will, you will start to see probably later on in this year adding assets that would start in ’15, ’16 and ’17. How we fund those will really be dependent on how we think about the balance sheet at the time that you want to talk about.

John Schissel

Jana, I would agree we have all capital alternatives that are disposed on, it just depends upon that cost to capital, how we think about the balance sheet at the time it will be evolving. There is no doubt that over the next 12 to 18 months as we build out this pipeline and then start backfilling, we will be taking a hard look at sources of capital whether we should issue equity depending on where our stock is; we think about JV partners and access to their capital and also the portfolio refinement needs that we have, so I would say its all the above.

Operator

And we will take our next question from Andrew Rosivach with Goldman Sachs.

Andrew Rosivach - Goldman Sachs

I wanted to ask about how your incentives work. For 2012, you gave guidance of $230 million to $240 million, you came in at $239 million. How does that work in terms of your compensation in meeting a base budget of guidance for the year?

Connie Moore

Well, compensation is multifaceted here at BRE, so yes obviously we provided guidance of $230 million to $240 million. We came in at $239 million, compensating any one with asset quality of that $239 million and determines whether or not there should be any adjustments. Also, as you know, we had in 2012 we had 20% on a relative basis both in terms of the RMS and our peers as you might imagine, since you know the tail of tape. That turned out to be a big goosey for the executive. So compensation is something that our Board takes very seriously and, I can share with you that after your quick note last night, know, if we provide guidance at where we are today, the midpoint of $240 million and for some reason, we decided to goose that, our returns by paying out the preferred, that would not positively impact the executive. That is not the way we play the game around here, Andrew.

Andrew Rosivach - Goldman Sachs

Yeah, thanks for that, because obviously, I want to highlight this. We're going to get the proxy coming up in March and I think the sentiment out there is to get the comp aligned with shareholder return, which unfortunately, isn’t what's coming out the last 12 months or on a longer-term basis?

Connie Moore

Well, if you look at it on a longer-term basis, the executives has clearly been impacted by the stock performance and they were clearly impacted by 20% of their bonus; last year, were impacted by the stock performance and quite frankly, the committee is more focused on relative performance on a long-term basis than on a short-term basis because that’s what we can control and so what we're focused on is controlling those things in terms of executing on our business strategy, share price will do what's it going to do and the investors and our executives will benefit long-term from what happens to the stock price based on what we're doing.

Operator

We will take our next question from Dave Bragg with Zelman & Associates.

Dave Bragg - Zelman & Associates

Connie, in 2011 and 2012, if I remember correctly, BRE cut same-store revenue growth guidance, I think that BRE was only a partner REIT to do so and that’s not they did cause some frustration. So how did that experience play into your thought process for 2013 and the outlook?

Connie Moore

Well, I think as I said earlier, the beginning of over the last few years, it’s a beginning of the year there were positive signs that did materialized and so we feel we are being prudent with our guidance right now. So I think that’s the way we looked at it. We want to make sure that as we go through the year to the extent that things get better, we will tell you like we see it, but right now we are giving you the best information that we can given where our portfolio is, given the experience that we had both on new and renewals in each one of our markets and how we are reading the [T leads].

Dave Bragg - Zelman & Associates

Okay. And then in your opening comments in the press release you talked about generating sector within growth in a premium valuation; I think you attributed that to dispositions; is that really the main thing that needs to take place or what else needs to happen to achieve those goals?

Connie Moore

Well, I think it’s a combination of selling slower older assets in both either non-core markets or some of our core markets and in submarkets where we did something that we can get it and I think would be as Scott said, we will be celebrating our one year anniversary in July with LRO and continuing to push that and push operational excellence I think that just given a younger portfolio in our targeted submarkets will clearly be once we’ve repositioned and refined this portfolio should have sector leading growth that’s our expectation.

Operator

We will take our next question from Karin Ford with KeyBanc.

Karin Ford - KeyBanc

If my notes are correct, I think you said in the last call that you were looking to try to size the development pipeline after making some of the moves to about 20% of the asset based, it seems like that number has come down a little bit, so can you just talk about what drove the decision to …?

Connie Moore

Yeah, we have never talked about 20%.

John Schissel

In fact we have said 10% to 15%.

Karin Ford - KeyBanc

10% to 15%, okay. So that hasn't changed?

Connie Moore

That really hasn't changed.

Karin Ford - KeyBanc

Where do yields on current rents stands for the development pipeline today?

Scott Reinert

For all the projects combined current returns are in the mid-five’s and that doesn't include a property management 3.25%, if you were to include that new property management to even mid-five it would drop at about 35 basis points.

Karin Ford - KeyBanc

Okay. And then second question is just on cap rates on the dispositions. You characterized market as being frothy and cap rates, you definitely seen low cap rates in the market, I guess looking at the 6.2 and even the 5.6 on the buyer cap rates for the San Diego sales didn't necessarily seem to reflect that; I was just wondering is that indicative of what the 2013 slug pricing should look like as well?

Scott Reinert

No, I would say that we are selling our lower growth assets and that's going to be consistent with what we expect to see this year.

Connie Moore

Yeah, so I think again as these assets we’ve held, I mean I think the average age would fall over 25 years and again in some of the slowest growth markets and so and again the difference obviously between our cap rate and the buyer’s cap rate is the Prop 13 adjustment, but that’s what you should expect on the assets that we have targeted for sale. The cap rates that we talk about in terms of being frothy in core assets and A assets in coastal location, clearly in the fourth and some cases sub-four. The assets that we are selling would not be characterized as core assets.

Karin Ford - KeyBanc

And then once you get done with the sort of two-year plan on the disposition, will you have any of those slower growth non-core more like 5.5 to 6 cap rates left in the portfolio?

Connie Moore

We will and that's what I mentioned that we will continue to refine the portfolio and so then it’s a matter of how we fill that matching again our capital needs, pricing, timing and making sure that we focus on the dilution as well.

So, when you think about it right now what we are doing is this group of assets that we are selling we have targeted to sell for cash because we are using it to fund the development pipeline. Additional assets maybe sold for cash, they maybe exchanged to buy another asset.

So its not, again it’s really sort of depends as John said we have all forms of capital available to us. So how much of our property sales we use to fund development activities or use it to buy additional assets will be determined, but yes, we will continue to have assets that will be slower growth because we just can't sell it all in a one to two year period again just given tax issue.

Operator

And we will take our next question with Ross Nussbaum with UBS.

Ross Nussbaum - UBS

As you know, there's certainly been a lot of talk over the last couple of quarters about Essex’s strategic common stock investment and whether or not that was in BRE. Now that Essex has announced that they have sold those shares, is there anything new that you can tell the market about what approach Essex may or may not have made to you?

Connie Moore

Well Ross I'm sure that you can appreciate we can't comment on unsubstantiated market speculation so no.

Ross Nussbaum - UBS

Can you then sort of put it in a more theoretical scenario of it? If somebody comes to you and says hello BRE, we are interested in talking to you about a merger or purchase of the company, what process does the board go through in terms of saying, nah we don't want to speak to you or you know what let's see who else is out there and let's put our toe in the water, how does the board approach that thinking?

Connie Moore

Well, I think that's a great question and it’s not just the board at BRE but its really all boards. And I think as we may have talked to you before, this board has a very clear sense of what our business plan it will do and the value that it will create, but every year surrounding our third quarter, we have a strategic retreat with our board where we have an extended meeting where we talk about a number of things.

We talk about our business plan; we talk about our current outlook, our longer-term outlook. We talk about what we think this platform can do, what are the challenges, what are the threats to it. We always turn and we look at other opportunities for us to expand, other companies, both public and private that we would like to consider.

But we always turn the mirror on ourselves and say what do we look like to others? And the board has a very clear understanding of what BRE is worth and what it can do. We've done that for 10 years since I have been here and because I think it’s important that the board be informed.

This is a board that is not fearful of acquisitions of the type that you are talking about. I think, obviously our Chairman, Bud Lyons, he was also the lead director at Prologis, clearly understands M&A. Chris McGurk who is the Vice Chairman of MGM Studios and worked with Kirk Kerkorian and sold that company to Sony, Dennis Singleton worked at Spieker.

So we have a board that is very comfortable with having conversations about M&A whether it would be a merger, whether it would be a sale of the company or whether it would be operating the company as an independent. I think as you know, many people on the executive team have had a lot of experience with M&A.

So we go through it and we try to be very informed and so again, we're a public company. We're technically for sale everyday but not on the (inaudible) and we have an understanding of what this company is worth and if somebody wants to pay us the value of this company. We're all yours.

Ross Nussbaum - UBS

Appreciate that. My follow-up is regarding LRO. Can you give us some quantifiable sense at this point of how you think LRO has been working and how much upside might still be up on the table?

Scott Reinert

Ross, this is Scott. I think LRO has been working very well. Our execution and the rollout has been very, very good. The team we got in place there has done an excellent job. Our people in the field have received it and they worked well with it. There are a number of elements of it that we really like. I like the stability. It's providing for us on the occupancy side. It does a better job of helping us balance our occupancy as supply and demand changes.

I like that the stability gives us in our renewal pricing and our people feel a lot more confident being able to provide the large range of choices to our existing residents and prospects. So, we think it's a very good thing. At this point, only six months into the rollout, I think it's still a little bit difficult to access exactly what that has meant. You can’t prove a negative. We can’t do it over again to see exactly what it would have been without it. So it's little bit difficult, but certainly there are some things that we like we've been doing, more short-term leases in the past. We wouldn’t have done a two month or three month lease like we did a lot of them in Seattle for example during the third quarter of this year and we have seen some great premiums of that. So I think by and large it’s very good, but as I said, we will get to our one year anniversary in July and reassess and if there is up side we think it’s in the second half of the year.

Operator

We will take our next question from Rich Anderson from BMO Capital Markets.

Rich Anderson - BMO Capital Markets

So I wanted to ask the goal being to achieve a premium valuation over some period of time. I am just curious why do you think BRE should earn that? When I go through the numbers, Seattle rank growth way below [Essex], job growth way below Essex, Bay Area is not sustainable in terms of its growth and then you are talking about $200 million of dispositions that is 3% of your $6 billion total market capitalization, it’s hard to imagine that’s really going to put a dent in “creating value”. So why do you think that you deserve a premium valuation when you consider all those factors?

Connie Moore

Well I think overtime again we are running this for the long-term and we are going to be adding $870 million of great new assets that will stabilize in the mid sixes and I think that as we continue to shift older assets and redeploy it into this development pipeline, I think we are going to create some significant value in this and we reduce the age of the portfolio and get back into more of our targeted markets. I think time will tell and we are pretty comfortable with what we are doing and we feel very comfortable with the development pipeline and it will create value for this company.

Rich Anderson - BMO Capital Markets

How do you explain being so far below your nearest peer there in terms of your expectations, is it a combination of conservative not only somewhat sandbagging but a very conservative outlook that you just shell shocked about missing or is that really what you see?

Connie Moore

Well, we don't use the word conservative here.

Rich Anderson - BMO Capital Markets

Okay.

Connie Moore

We feel we are being prudent but I can't speak to what our peers are thinking about their guidance and their markets and their individual properties as you know its very submarket specific, and its very property specific and I think as Scott mentioned, we had some specifically we got some tough comps, we had a pretty good Los Angeles and this year we will have some top comps in the back half, so we understand the BRE’s portfolio and that's really all we can talk to.

Rich Anderson - BMO Capital Markets

Okay, and then the last question as you talked about, if somebody extends you the right price and you know, you are all ears, what is the right price? I mean not that you are going to answer that question but what do you think the right cap rate is on a portfolio West Coast high barrier entry portfolio of multi-family assets, is it close to four, what is the number we should be thinking about is, this is what the company is really worth?

Connie Moore

I think cap rates are pretty widely understood in the marketplace and no, I am not going to answer that question.

Rich Anderson - BMO Capital Markets

Come on, thank you.

Operator

We will take our next question from Eric Wolfe with Citi.

Michael Bilerman - Citi

Good morning, it's actually Michael Bilerman. I guess it’s really a two part process right, there is getting a fair value for the assets you own and the company as it stands today. And the second part is your view that eventually once everything you said and done, you should trade then other premium. I guess how are you and especially the board thinking about the time of just getting to their value for [today] right, if the stock is trading it at $47 high fives implied cap rate, that seems to be a discount and I think everyone we can talk about cap rates, but that would seem to a be a discount for what you own today, putting aside the view towards the future that you want to trade at a premium. How much time are you going to give and how much time is the Board going to give for that gap to be narrowed?

Connie Moore

Well I think that's the right question Michael, and I think that we are very clear about when this development pipeline starts to come in. I mean clearly our Lawrence station is as we've talked about is been fully delivered, Aviara we’ll start leasing March 1st, Solstice will start delivering in September and Wilshire La Brea, I think start delivering sometime in the fourth quarter. So we will start to see the benefits of this development pipeline and I think that just given the execution we will begin to prove that we are building them on time and on budget so that rents that exceeded our original expectations that will be creating value. So we understand that ’13 is really a transition year for BRE and we meaning the management and the Board are perfectly willing to wait for this year to sort of see how we pull out, what happens with the development pipeline and we understand that its going to take time.

Investors will ultimately recognize that yes today trading at a cap rate, the implied cap rate that we are trading at adds significant value to the underlying real estate. I can't control the stock price, but we can control what we do, we can control what we are going to execute, we can control the operations and having operational excellence, that's all we can control. I have been told before that selling assets shouldn't matter because it doesn't impact your NAV. Clearly impacting our price today and we understand that and we understand that the dilution is something that was from the property sale. Even though we feel like we've been very clear from our third quarter call in conversations that we've had, that we've made it clear that we were going to sell assets for cash, it would be dilutive and that was to fund the development pipeline. So we will put on $870 million of new developments in great locations with great top line growth and we will close the gap.

Michael Bilerman - Citi

I would say, I wouldn't achieve all the stock price decline to the asset sales. I think the same store guidance and sort of your views on the marketplace clearly a lot of the questions on this call have sort of, I think that's a bigger driver and clearly asset sales are dilutive and at some point you will reinvest those proceeds. But I don't think that's driving as much of it as really the same store outlook.

Connie Moore

I would agree with you, but I can assure you that while again we are sitting here on February 5 and we are being prudent with our guidance, we will get all that there is to get out there. So I'm confident that our operating teams particularly I'm using LRO these days we will get everything that's out there. You are right we are working prudently.

Michael Bilerman - Citi

Right, I guess is it your and the Board’s view that the discount on the stock is tied to the uncertainty on the development and when that comes in like that's what I guess they are gaining comfort that will wait a year that as those developments come in and you lease them up people will remove discount on our stock that's your sense.

Connie Moore

That is my sense. My sense is when we deliver $870 million on time and on budget and at least right in excess of what we under wrote that disconnect will be gone.

Michael Bilerman - Citi

And just peeling back a little bit on the development. So you have about $5.5 million of NOI from the lease up coming in 2013 from Lawrence Station in Aviara starting, what for those two, what does that annualize at the end of the year. So as we start to think about the drag of those developments coming online in ’13 what does that impact ’14.

Connie Moore

We've talked about Lawrence Station stabilizing in the mid 60s and it will stabilize in ‘13. So you will have a full stabilize asset in ‘14. Aviara also stabilize in 2013. So it will be fully stabilize in ‘14. I think the stabilize yield on that is high five am I correct Steve? So it’s high five. So both of those will be fully stabilize in operational in ‘14. Solstice obviously will not be, it will probably be stable by the end of ‘14 and then Wilshire La Brea, obviously is a much larger asset. So we won't stabilize until ‘15.

Michael Bilerman - Citi

Right, and then just in terms of going back to Andrew’s question on the compensation. So at least for ‘11, 50% of the comp was due to FFO and hitting those FFO targets or above. As we think about 2013, the asset sale program depending on when you sell those assets obviously will have an impact on FFO, and obviously the development spend is as you capitalize interest, it will have an impact. It sounds like from your comment on the preferred that those will be excluded from, ultimately measuring the FFO at the end of 13 relative to that target in the Board’s process on half of the bonus.

Connie Moore

Right, every conversation that we have, that I have with the compensation committee is basically looking at how we got there. So let me just give you an example, when I say that brand new compensation committee members when they are trying to understand that I say. You know, if we had budget and we assume LIBOR, was it going to be 2% and LIBOR came down to 50 basis points. Did we do anything to earn that? No. Vice versa, if we assume that it was 50 bps then it went up to 2%. Did we do anything to be harm by that? So there are subjective adjustments at the end of every year to sort of say what is the quality of the FFO. But we clearly work on performance. This is a company and an executive team that understands that they get paid for performance and when they perform they don’t get paid.

Michael Bilerman - Citi

And just last question more near-term heading into the first quarter. So the guidance us 54 to 58 sort of implies a $0.03 to $0.07 drop from the fourth quarter and in the press release you talked about the sales that occurred in the fourth quarter the sales that are budgeted, some G&A and operating expense increases. I guess from the sales perspective, if you embedded effectively the $0.02 drag in the first quarter if I could you just assumed mid-year convention for 200 million of asset sales. So if those sales we don’t read any press releases in the next couple of weeks then arguably that guidance would be coming up?

John Schissel

Well, we gave a range, if you don’t see any press releases in the next couple of weeks we would trend towards the higher end.

Michael Bilerman - Citi

And then is there anything particular, on the G&A would seem as you did 5.7 million in fourth quarter, the annualized number in your guidance is 5.9 million that doesn’t seem to be that big of a difference unless is there something first quarter related to comp that they should be meaningfully higher?

John Schissel

There is a whole bunch of stuff Michael, comps included, because when bonuses are paid there is tax payouts there. We have a lot of regional activities as we kick off the air which we don’t have throughout the rest of the organization and then we have higher level of legal claims that we are working through on some matters.

Michael Bilerman - Citi

So that five, seven goes up by like a $1 million?

John Schissel

Probably half.

Michael Bilerman - Citi

Okay and then is there anything like cap interest you are at 5.6 million with a delivery in the fourth quarter and then I am not sure what your development spend is in the first quarter. How does cap interest trend quarter-to-quarter?

John Schissel

Well, its trending up as we spend, so if you just say $200 million to $210 million will probably be heavier on the spend middle part of the year, so it will trend up and as we deliver some assets, it will trend off. But in the first half it will trend up.

Michael Bilerman - Citi

But you had more on station that should mark from this relative to the fourth quarter, did some of that come down?

John Schissel

Right. Well, that's what I said, at the end of the year it’s about 1 million at most net different just spread it out.

Operator

This conclude today's question-and-answer session. I would like to turn the conference back over to Ms. Connie Moore.

Connie Moore

Great, thank you. Thanks all for participating today. I know it was an interesting call for you and an interesting call for us. So we look forward to talking to you soon and have a great day, thanks.

Operator

And this concludes today's conference. Thank you for your participation.

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