Good morning. My name is Maggie and I'll be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. (Operator Instructions).
At this time I would now like to turn the call over to Ms. Constance Moore, President and CEO of BRE Properties. Thank you Ms. Moore, you may begin.
Great and thank you, Maggie. Good morning, everyone. Thank you for joining BRE's year-end 2009 earnings call. If you're joining us on the internet today, please feel free to email your questions to email@example.com at any time during this morning's call. Before we begin our conversation, I would like to remind listeners that our comments and answer 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 expectations, projections or outlook we are using forward-looking statements which by their very nature are subject to risks and uncertainty. We encourage all of our listeners to read BRE's Form 10-K for a full description of potential risk factors and our 10-Q for interim updates.
This morning management’s commentary will cover our financial and operating results for the quarter, the current investment environment and our financial position including our outlook for 2010 and other reporting items. Ed Lange, John Schissel and I will provide the prepared commentary. Steve Dominiak is here with us and will be available during the Q&A session.
Core financial and operating results for the quarter and the year were in line with our expectations. Let me highlight some of the key takeaways. Reported FFO per share of $0.29 for the quarter includes the impact of $0.26 per share of non-routine charges and a $0.03 non-cash interest expense associated with our convertible debts. Excluding these items, our core FFO is $0.58 for the quarter and $2.58 for the year.
The $2.58 per share is just above the midpoint of FFO guidance we set in December of 2008. 2009 was all about working the plan we outlined at the start of the year. The theme was to lead with capital preservation and liquidity. We wanted to trim our leverage level and with the focus on risk management, it required a continual assessment of the development program and we would take action where necessary.
We were confident if we worked our plans, the company would be positioned to meet this challenging environment, and exploit new opportunities. Our operating results depicts the cumulative regional and economic contractions experienced during the past 15 months as well as the recent deceleration of job losses.
Market rents are down 9% year-over-year, effective rents are down 11%. We approached 2009 as a beginning of a two-year downward revenue cycle. We believe the majority of the expected declines in market and effective rents occurred in 2009. However, 2010 will still be challenging as we rolldown expiring leases to lower rental rates and burn off the impact of concessions in the rent roll.
Job losses continued to be the single largest factor driving results and operating fundamentals in the apartment space. Job losses nationally and in our core markets continued during the fourth quarter. In our market footprint, non-farming jobs decreased almost 420,000 jobs during 2009.
During the fourth quarter, the reduction totaled 16,000 jobs, a pace that is much lower than experienced throughout the year, and we're hopeful that this is the beginning of a stabilization which will be followed by growth later in 2010.
As noted this morning, ADP reported private sector payroll is down 22,000, the fewest since January of 2008 and while one month doesn’t make a trend, it is moving in the right direction. Also encouraging was the fourth quarter GDP growth of 5.7 announced last Friday. The not so good news is that most of the growth came from temporary factors such as inventories and government stimulus which can't be sustained.
The US consumer was somewhat of a bystander in the fourth quarter as personal consumption grew only at a 2% annual rate. Our view and operating plans are based on renewed job growth and pricing power with the end of 2010, consistent with many economic forecast. We are pleased with our operating cost here as we entered 2010. At 95% occupied we are a 130 basis points higher than we were at the beginning of 2009. We did begin to trend the use of concessions during the fourth quarter and feel like most of the rent levels we have in place are sustainable in most market except perhaps Seattle.
We also like our balance sheet at this position. We've started 2009 with $650 million of debt maturing for 2011. Our debt maturities now totaled only a $113 million over the next 24 months. We raised approximately $800 million of capital in 2009 through secured debt from an equity and property sales.
Our leverage was reduced from 55% to 52% with our enhanced liquidity we need to access to the unsecured debt market and our ATM equity program we are well positioned defensively and ready for opportunity.
The release outlined our guidance for 2010 which reflects the impact of the cumulative job losses that have occurred in our rent well. We enter 2010 with strong occupancy levels and believe that rent stabilization those market ineffective will gradually take place during the first half of the year.
The primary drivers of the decline in FFO for 2010 are not surprising given the economic environment. Same store NOI will be down in a range of 5.5% to 8.5% which equates to $0.23 to $0.36 per share. Ed will provide additional context around this rates in his remark.
The other principle drivers a dilution from our de-leveraging efforts, property sales completed an equity issued in 2009 contribute an additional $0.15 to $0.20 of dilution in 2010. We turn now to our development program and the investment environment. We took an abandonment charge of $12.9 million for three properties we had in to our contract to purchase in 2009.
We abandoned the two sides in Los Angeles County and one side in San Jose. And we continue to communicate throughout 2009, there were sites we controlled but we were negotiating with those sellers and municipalities to improve projected returns. We were successful in getting more favorable terms on certain projects within the pipeline. The concessions obtained on these three sites were insufficient for us to move forward. Two of the sites that we abandoned were fully entitled and as a result the charge was larger than the one we took in 2008.
We believe that a continued review of our development program is a very prudent decision, our focus is only on those sites that will be accretive to our shareholders given current market consideration. We did, however, purchase a land, parcel of land in Sunnyvale during this quarter totaling $15 million after negotiating more favorable term. With this acquisition we now own four land parcels and have two sites under contract to purchase. None of the sites will be in a position to begin construction until late 2010. This junction we believe it is unlikely that we will take any impairment charges on the land owned as we believe development type of these four sites will be accretive.
We remain on track to complete our remaining two communities under construction over the next six months. Belcarra in Bellevue, Washington will deliver its final 93 units this week. Though at Grenada and Santa Clara will deliver its first units in May and will be complete by the summer. We have 60 million left to funds on these few assets. With the completion of the four sites that were under construction at the end of last year and the abandonment of six sites, we have reduced the funding requirements on our development pipeline by 36% in the last 12 months.
We have no assets classified to tell for sale at year end. We will continue to evaluate further sales and the continued use of the ATM equity program put in place in May to manage our balance sheet leverage. We have issued a $105 million till date under the ATM program. Sales cap rates for stabilized core and core plus product referring to product constructed after 1980 are declining in California recent sales have transacted at cap rates below 6% with some recent core assets in the low five.
The downward pressure on cap rates is being driven by too much capital pursuing too few deals. Non listed REIT's, public REIT's and closed end funds become the primary market participants for core products with private investors following in second place.
Our cap rates fall below the cost of GSE debt. The private investor should become less active. It also appears buyers are making bets on the timing and the magnitude of the recovery in coastal markets.
While our guidance assumes no acquisitions we do plan to pursue acquisition opportunities in 2010 that will allow us to take advantage of the expected recovery and rents in 2011 and 2012. Before handing the call over to Ed, let me just summarize by saying I am sure you would agree that most of us would rather forget the last two years and focus on the future.
We approached 2010 with caution, as we continue to face unprecedented economic times. But with the hopes that the economy will begin to the slow process of recovery. There is still much deleveraging that must occur both for businesses and the consumer which will make the process painful. However, we believe it will also provide opportunities for BRE. As the economy starts to improve, we expect multi family operating fundamentals to turn quickly. We are well positioned to take advantage of the recovery.
Thank you, and let me turn it over to Ed.
Thanks, Connie good morning to all. During the quarter we followed the operating plan that we outlined at the end of the third quarter. And begin to move from a construction strategy to an effective rent program. Market rates were cut almost 4% during the quarter and while at the same time concessions were reduced. The impact was less than 1% reductions to effective rents.
Total occupancy held further 95% during the fourth quarter and ended the year at this level, now this provides us fairly good momentum heading into 2010. In terms of damage and collected by the recession year-over-year market rents are down 9% from peak levels to third quarter of '08, market rents are down about 10.5%, effective rent declines are marginally wider than these points.
For the year, same store revenue declined almost 4%, operating expense growth was held for less then 2%. With an NOI decline of 6.4%, given the overall level of economic contraction specifically this in Seattle, we are pleased with the operating performance.
At the end of first quarter 2009, we introduced an our operating plan that focused on using concessions to build occupancy and set pricing at the early end of a declining rent curve.
Once the employment forecast begin to identify the end of 2010 as the inflection point for a new job growth, we need to call the pivotal way from concessions, 12 month in advance at this point, the objective is pretty clear we have an effective rent posture with no concessions in the system as we entered 2011, which we believe will be the first year of recovery.
The rent cost executed during fourth quarter now more closely aligned market and effective rents. Cash concession will reduce to 12 day's rent from 15 day's rent from the third quarter and its important to note that concession and discounting remains pervasive in all of our operating markets with all forms of operators, with some levels approaching more than three months.
As we entered 2010, the operating plan anticipates rent reductions during the first of the year with affirming at the mid year point. Concessions are to be eliminator in all operating markets except Seattle. The company's guidance uses a fairly wide range with respect to same store net operating income down 5.5% to 8.5%. A high end of the range assumes no recovery for jobs until the end of the year. Continued economic contractions from mid-year, stabilizing fundamentals for the balance. The result of the rent contraction of 5% to 6%, occupancy maintained at or about 95% and a dramatic reduction of concessions.
The lower end takes a weaker environment, essentially another write down for the economy [favoring] further rent cuts of about 0.5 modestly weaker occupancy and the extended use of concessions.
Moving on to market summaries, I'll start south and head north beginning in Santiago. It was about just shy of 4000 units about 23% of our NOI. This region actually continues to perform well on a relative year-over-year relative performance.
Massive job losses are not typical pattern for Santiago. So while other regions are so called have been hard. This important base has remained resilient. During the year job losses were about 3%, which was inline with the US average. It has slowed. The stable employment base and a lack of new supply will support a relatively stable 2010 and begin to point to a recovery probably in the first half of 2011.
During the fourth quarter, occupancy range just shy of 97%, we expect occupancy not to run at that level through 2010, probably run around 95% as we reduced the use of concessions. 30 day available is running about 5% to 6%, renewal activity both level and price remains favorable. We are expecting the Santiago to provide to be relatively stable during the year.
Orange County was about 2500 units or 14% of our NOI. Occupancy ran almost 96% for the quarter, but conditions remained soft. While traffic remains fairly robust and renewal activities on target, unscheduled move outs in first time home purchases have impacted fourth quarter results.
This is ground zero for the [importing] mortgage finance sector. The Orange County was hit very hard. It has shed close to a 120,000 jobs. It went into recession in advance of the broader US. Economy is further along to down cycle. While we are not expecting to see this market stabilize with jobs until mid-year, the pace of contraction has slowed.
Los Angeles, this is about 2100 units or 11% of our net operating income. The LA. economy remains weak, but the pace of contraction has begun to ease. Once its (inaudible) begins to return, the L.A economy is expected to expand mostly in line with the nation. With the current forecast according to this market could return to pre-recession employment levels, sometimes 2012 which implies that sometime between the end of '10 and the end of 2012, we could see and expansion of more than 400,000 jobs.
Occupancies at our properties have improved to more than 95% with a 30 day afford available figure at 6%. We [reaffirmed] up operations in this region. We entered the Inland Empire with 3500 units, 15% of our net operating income remains a challenging region, job losses, housing supply, poor resident credit quality. They all combine a great very, very tough operating fundamentals. Occupancies here though have averaged for us just shy of 95%, but require price reductions to maintain that level of occupancy.
During the fourth quarter, we reduced rents repurchase 3% but we're able to begin to reduce concessions slightly, so as a result effective rents remain flat.
In San Francisco, roughly 2900 units about 19% of our net operating income, job losses in technology, manufacturing and retail further softened the operating conditions during the fourth quarter. Market rents cut were cut 3% during the quarter, we were down more than 6% from peak levels, third quarter of 2008. Occupancy or 30-forward day available remained fairly strong at 95% and 6% respectively.
However job losses have impacted operations in traffic. It is one of the last to go into the recession and may struggle to the tailend of the recession into the recovery. We are actually getting prepared for very tough operating conditions and a tough year for 2010.
Seattle, 3200 units, about 14% of net operating income. This is our most challenged market, both demand and supply problems continue to impact operating conditions. Failed condo projects that have been converted to rentals added anywhere from 6500 to 8000 units to Bellevue in downtown market.
The market’s overall vacancy rate overall is expected to climb to about 9% during 2010. We are 93% occupied, our 30-day forward availability is 8%. Now we are anticipating further cuts to market rents and the continued used of concessions in this market. Seattle was last into the recession with job losses, but actually maybe the first out with job growth returning as early as the third quarter of this year.
However it’s not jobs in this market, it’s supply and the supply from busted condo deals, we believe will continue to pressure operations in this market throughout 2010 and deep into 2011.
Some additional economic data to throw out. I think the release does a good job with focusing on employment and jobs, so mostly focused on homes. For home prices, for the first time since the housing crash began, (inaudible) home prices have experienced year-over-year increases in many of our operating markets.
Los Angeles, Orange County, San Diego, The Bay Area and Denver, all finished the year up anywhere from 3% to 15% from the end of last year. And while Phoenix and the Inland Empire and Seattle were all down, anywhere from 6% to 12%, price adjustments in the fourth quarter indicated a bottom is basically beginning to form.
Moveouts for home purchases during 2009 were 12% as compared with 14% in 2008, however in the fourth quarter of this year we saw a spike where moveout activity climbed to 16%, moveouts for home purchase climbed to 16% during the fourth quarter. Unsold inventory is down in all of our markets except for Seattle.
For the permitting side, multi-family permits have declined anywhere from 70% to 95% year-over-year depending upon the operating market and our footprint. We still have a very healthy rent-to-own gap in most of our operating markets.
Looking at the cost-to-rent versus the cost to own at the medium, there is more than a 70% rent to own gap in Orange County, Bay Area, Seattle still over 50%, San Diego and LA are above 30%. It’s the Inland Empire that remains challenged, the rent to own gap is actually flipped, it’s negative 7%, but that’s been consistent over the last 12 to 15 months.
Finally I will close with an update on our properties that are on lease up. In Anaheim, the apartment Viridian, this is the Platinum Triangle Submarket, I think it’s a sub-market that most people in the call are familiar with.
We are competing with a number of players in this market including Archstone and Avalon and others. We completed the physical lease up at the end of the year that we are now 97% occupied. 30-day forward available is about 6.5%. During the lease up, we averaged 30 units per month since we opened last February, lease up of the asset was almost six months ahead of plan.
Concession to this sub-market range anywhere from a month to almost three months. We are [earning] about six to eight weeks with our concession activity. Taylor 28 is up in Seattle in the South Lake Union area. The property is about two blocks away from the Space Needle. We are currently 94% leased up that property, our leasing velocity is averaging about 22 units a month.
Traffics are off during the fourth quarter as expected following seasonal patterns. General occupancy in the sub market is about 95%. We’ve one property that has begun lease up in the fourth quarter, Belcarra. This is 296 units in Bellevue, Washington. We are currently 47% leased.
Concessions are running about six to ten weeks in the sub market which is also all right. We are able to secure 80 moveins over the last two months, the final 93 units will be delivered to us some time this month. Thanks and I will pass to call on to John.
Thanks Ed. I would like to focus my commentary on three topics. First is a recap of our 2009 performance and I will briefly summarize our financial position at year end and finish with additional detail regarding our 2010 guidance.
In terms of 2009, the $0.58 per share core number for the fourth quarter is at the high end of the range we provided in our November earnings release for Q3 ‘09. As a point of reference we talk in terms of core FFO as a measure of earnings quality and it excludes non-routine and non-cash charges such as APB-14 guidance which relates to the convertible debt.
Our reported $0.29 per share FFO for the quarter includes both the impact of APB-14 and three non-routine charges consisting of $12.9 million or $0.24 a share relating to the abandonment charges for the three development sites Connie referenced, 600,000 relating to severance costs for two officers and 870,000 associated with losses accounting that from the repurchase of $33 million in convertible notes during the quarter. Street estimates were $0.53 for the quarter include the APB-14 noncash interest charge. So on an apples-to-apples basis there are result of $0.55 exceeded estimates by roughly $0.02.
As Connie indicated the balance sheet is well positioned heading into 2010. After the completion of the tenders earlier in 2009 we have no material maturity until the February 2012 convertible put date. The principle amount due on the convert as of year-end is a manageable $371 million after our repurchase of $33 million in bonds in the open market during the quarter and average of 98% at par.
We now see the bonds trading near par in the window for open market purchases appear so close. During the quarter we issued an additional 780,000 shares under the at-the-market equity program the proceeds of approximately $25 million. The existing program has $20 million of remaining capacity. And we've been pleased with the execution under the program we like the flexibility it provides.
Our financial measures at year-end reflect the positive capital results achieved during 2009. leverage on a debt-to-growth asset basis stood right around 52%, unencumbered asset NOI accounted for approximately $50 million of total NOI and our interest coverage for the quarter was 2.8 time.
Debt-to-recurring EBITDA for the quarter was 8.5 times and 8.3 for the year. Our floating rate debt exposure is 15% of total debt or just 8% of gross asset. Unsecured revolving credit facility at $750 million total capacity in the term that ends on September 2012 which is priced at 47.5 basis points of LIBOR. The balance at the end of the quarter was $288 million and that leaves ample undrawn capacity.
Excess debt capacity under our debt covenants exceeds $600 million. Our capital needs is outlined in our guidance exhibit, our minimal for 2010. Plain development advances of $50 million reflects the pause and the downsizing our pipeline as we complete entitlement and predevelopment work on land and before starting construction as in late 2010 or 2011.
Debt maturities for 2010 was $64 million, we have $31 million balance left on a bond issuance that we tendered for in 2009 and $33 million secured debt. I will conclude with some additional detail around guidance. I think it's important to note that our guidance reflects the same store lease approvals as they will be aligned in 2010. So you will see the same store pool increased by 872 units from 19,572 in 2009, 20,444 in 2010. And with that movement we will see $12 million of NOI from the list of assets in 2009.
Moving to the same store pool, it will be impacted by the same down draft that Connie and Ed have talked about. I think Connie get on the key takeaways regarding 2010. Specifically, we are estimating both the decline and same store NOI which impact results by $0.23 to $0.36 and the impact of trimming our leverage levels but through asset sales and new equity issuance in 2009 also puts downward pressure on our result by $0.15 to $0.20 per share.
At the end of the year with a total of $55.9 million roughly $56 million of shares and equivalents outstanding and when compared against our average share count in 2009 this represents a $2.4 million share increase. Other items that are influenced in our guidance, we do receive the benefit incremental NOI at the reminder of our list of assets which we estimated will range from $45 million.
Additional cash flow however, mitigated by increased levels of interest expense associated with those assets running through the income statement as they roll out development in our place and to service. That interest is reflected in our guidance levels that provided. G&A expenses increase in primarily due to a return to a normalized [level].
I think it's important to note that our G&A in 2008 ran at $20.6 million, and at the end of 2008 we estimated the G&A in 2009, would range between $20 million and $22 million. So the increase is not as meaningful as it might appear. It relates to a couple of item. First, 2009 stock-based comp expense was lower than previous year with management performance based awards granted in 2005 investing this February did not hit certain performance target level.
Consequently, we saw a credit of $1.5 million spread out through '09 against previously established accruals. In addition to that increase, it also reflects the fact that we have the full compliment of officers in the (inaudible) with the breaking out of the CFO role from Ed's duty to COO. A full burden of that is about 600,000. We've also built in a higher level of anticipated pursue cost in 2010 as well as the general contingency due to the always unanticipated insurance and legal matters.
Our new acquisitions are dispositions to our assuming [guidance]. We're actively pursuing new investments as Connie mentioned and will also consider dispositions on an assets-specific based, and accounting announcements that will effect our reported FFO in 2010 to the adoption of FAS 141(NYSE:R), which provides accounting guidance around business combination that has been effective since January 2009.
BRE like many industries was not active with acquisitions in 2009. Acquisitions of individual operating assets were treated as business combination and all cost associated with the acquisition will be expensed. No transactional expenses related to completed acquisitions are [assumed] in our G&A guidance. So we will adjust our guidance as we complete acquisition. Connie that completes my comments
Thank you, John Maggie we are ready for questions.
(Operator Instruction). Your first question comes from the line of Dustin Pizzo with UBS
Ross Nussbaum - UBS
Hi its Ross Nussbaum with Dustin Pizzo, I think my biggest question I just wanted to clarify the NOI impact from the same store NOI guidance you are suggesting is $0.23 to $0.36 it seems larger than what we would have expected.
I think it just reflects when we move up some of that lease up NOI and aggregate it with the NOI that we saw on the same store pool in 2009, and then you stay on the downside case plus those numbers.
Ross Nussbaum - UBS
And is there is when we think about if I just take your 2009 same store NOI number it just seems as if I start thinking about down 7% take a mid point of the guidance it would imply a number that might be slightly better than where the guidance is, I am just wondering if there is any conservatives and that’s built into low end of guidance here?
Certainly on the low end as Ed indicated I personally not ready to declare all clear and so we definitely built in some conservatism on the low end.
Thank you. Next question comes from the line of Swaroop Yalla with Morgan Stanley.
Swaroop Yalla - Morgan Stanley
My first question is vis-à-vis development pipeline, are you also looking at [Bassett] condo deals or other similar districts assets in California as you look at acquisitions?
I’ll Steve answer that.
There are those type of opportunities in the market place today which we certainly look at. Like Connie's counties comment that the acquisitions we are pursuing clearly need to be accretive in '11 and '12 giving anticipated improvement in the link curve. But we are looking at those types of opportunity.
Swaroop Yalla - Morgan Stanley
Okay, and just follow-up, you mentioned San Diego as a market which is seeing stabilization. What are the primary factors for that residentially? And do you see that this is a sustainable trend?
Well I think as I mentioned , job loss in San Diego during 2009 was roughly 3% was inline with the US numbers. Last time San Diego saw job losses of this magnitude was in 1992 when it was down 2.5%. So then San Diego is in subject to the type of wide volatility of job losses that we have seen in other operating regions and our foot print or another foot prints of the country.
So, you've got to relatively stable employment base, obviously that’s supported by the military, it’s the largest employer in the region and employees more the 40,000 people. We also got a fairly healthy health care sector that supports that economy the biotech companies, the biotech center that’s north of San Diego provide a relatively stable employment base, so you combine, you have got a relatively stable employment base. You don’t have a new supply, San Diego experienced this kind of build up well in advance of the other regions in the country that are built up housing, so that single family housing that was built in the (inaudible) list of sub markets south of downtown and the condominiums that were built in or around the Metro area have been at this point in time largely absorbed. That is the only submarket left that has an abundance of condos, there is all would be downtown, but that doesn’t affect our operating markets, we ring the city.
So that you combine those factors and you get a relatively stable environment. Now our occupancy was high at the end of the year. It ran high during most of the year. We’ve got very good operating team down there. We’ve got a good operating plan. But obviously that’s being supported a little bit by the concessions that we are using. Now concessions are in the market, we are using them as well. We are going to basically ease off concessions in 2010. We believe this is going to have an impact on occupancy but we think we can still run that portfolio during 2010 you know with modest levels of market rate reductions 3% or less, run occupancy at or above 95% and relative to other markets that we are in right now in the West Coast that would be the definition of relatively stable.
Thank you. Next question comes from the line of Jay Habermann with Goldman Sachs.
Jay Habermann - Goldman Sachs
Connie you mentioned at the outset of the call that buyers seem to making bets on the timing and magnitude of the recovery and then at the end of the call as mentioned you guys will be actively pursuing new investments, can you help us think about sort of how you'll look at the market today given that cap rates are so low. Are you going to look more at replacement costs and I guess as well, can you help us think about sort of the magnitude of the recovery that you would anticipate.
Well I think and I'll let Steve jump in as well, I think its really a combination of a couple of things, first of all we do anticipate a recovery certainly a strong recovery may be in ’12 and ’13 as it relates to rents, and ’11 will certainly start to see some movements but I wouldn’t necessarily say that 11 will be strong. And we do some proprietary regression work here that we are very comfortable with as we think about the markets that we are in. So as we look at acquisitions I think of the couple of things and first of all there's no question if there is a lot of [dollar] chasing multi family. No secret but all the demographics are ahead of us and we have got this wave of Gen Y coming into the rental pool over the next several years and they are five years older than they were in the last recession. So there is a lot of that (inaudible) up. So when an asset is widely marketed there are a number of [bidders] driving up the place, driving down the cap rate.
I think a lot of that has to do as I mentioned function of the GSE debt as well. So as we look at acquisitions and replacement cost is one measure and I think it’s a very important measure, you've got to make sure that we make sure that when we look at the percentage of replacement cost, if that replacement cost and artificial replacement cost because someone paid too much for the lands and they built it in the first place. So we look at all of those factors as we think about it, there is no question as we look it out where we want to buy in out costal California market and what we think that shape of the recovery might look like and what we are certainly pricing that in as we think about that. Steve do you want to add anything.
No not anything here.
Jay Habermann - Goldman Sachs
I guess at today's cap rate are you a buyer and what you are seeing in 5% and 6%
Today's cap rate for the right property in the right market where we can get a concentration next to our existing asset through a buyer.
Jay Habermann - Goldman Sachs
And then just one follow-up with regard to sort of comment about new development until late next year how much do you see market rents having to recover before you would anticipate moving forward with some of your existing land?
We often said and we said that nothing was in a position to start construction until late this year. So that would be this year as opposed to late 2011. So again we are looking at the combination of where rents go and again from the time we start to the time that we deliver the first units is generally 24 months to 30 months. So again we'll building in that rent curve in terms of those assumptions but we're really looking at deals that we want to start to be accretive and we are looking at those in sort of 7.5% to 8%.
And I think over that time you will see continued declines in commodity prices on the construction side of our development cost.
Jay Habermann - Goldman Sachs
Does that basically mean that you need to see rents move up at least 15% to 20% before you think about that commencing those projects.
No, I think the rent curve will be following, one that’s probably that you could find out there in most of the resources. I think as the rent recovery follows the pattern that we have modeled internally which is consistent with what we have seen from the likes of [Reese or Whitton or PPR] that would suggest that in most of our markets once we get after 2004 we will see an excess of 6% market rent growth and I think it follows that recovery curve becomes more visible.
So I think its just as we have said during 2009 that we believe that the pipeline and the pipeline that remains today is viable, one that’s probably that will start combination of reduced labor and building material cost that are continuing to go our way. And if that recovery curve continues to firm up along the lines that it is. I think you will be hearing us saying the pipelines are gone.
Thank you. Next question comes from the line of David Toti with Citigroup.
David Toti - Citigroup
Good morning everyone. Michael Bilerman is here with me as well. And my first question is sort of piggybacks on that issue around concession and occupancy. I would have expected if you thought there was some visibility into pricing stability in the second half, you'd start to let off on occupancy and anticipation of capturing may be from (inaudible) rates. Can you just walk us through the stronger occupancy in the quarter and is that a negative signal and if not what is that time lag between when you let occupancy drop and when you anticipate rent recovery?
No. I don't think it's a negative signal. I think it's an outstanding question. I think what we've showed, I mean if you look at, some of the data in the third quarter, we were in the third quarter and fourth quarter when we had interim occupancy, we had, we were up and we were touching in excess of 96% occupancy during the last three, four months of the year. We ended the year with 95%. We were running in excess of 96% occupancy deep into the fourth quarter. And I would say if we continued with the concession strategy that we're using there's probably a good chance that we could be sporting 96%, 97% occupancy throughout 2010.
That type of traffic is there. Our traffic levels were in. 10% to 15% above '08 level, so we've got traffic we can lease into. We could drive occupancy higher, it's a question of where do you want it to be and our view is that if we can be in a position at the end of 2010, we've got to put ourselves in position with the recovery, but we've also got to position ourselves to defend against any type of stumbles that may occur on the road to recovery. So that our view is that if we can maintain our occupancy levels, (inaudible) maintains right about 95% occupancy, you might see the average lease term tweaking a bit.
We typically run about a 10 month average lease term, that's currently running closer to 12. I think as we lease during the year, you might see that average lease term tweaking a bit, so that we'll have plenty of inventory to lease into once jobs recover. And I think one added point. There maybe an inflection point that occurs with jobs at the end of '10, early '11 but it's not as if we've got to prepare for a fairly muted or modest recovery where it just not going to basically jump immediately to staggering pricing power. We have to grow our way into what I think something that Connie alluded to that many economists are talking about is that, we may have statistical economic recovery going on around us but from a human standpoint, the human side equation is still in recession how that results in pricing power, how it recovers pricing power we've got to protect against. I hope that helps.
David Toti - Citigroup
Yeah it's very helpful. And my follow-up question, it has to do with expenses you guys are predicting fairly modest increases for the year I mean they have been lumpy from quarter-to-quarter and I am just wondering where there might be challenges on controlling expenses or conversely, does is 150% increase look likely to be conservative?
You are going to say short of sustainable
David Toti - Citigroup
Sustainable conservative price
I could be trailed off at the end.
(inaudible) by that Question David.
I think the answer is our business the expenses are lumpy and that something that we have to explain each quarter that, each quarter the sequential changes or the quarter numbers don’t use and provide the total picture in fact I think the picture around operating expenses and the apartment business for the public platforms really don’t start to materialize until you get 6 and 9 month numbers under your belt during the year. So I think across the year we came in less than 2% we are not feeling any particular pressure on any of the major expense categories, major ones. I mean we are not the major expense categories for our platform and now it has probably all platforms of the country or your repair maintenance turn over line, pay roll, and property taxes they all run about 20% to 25% on the number you are looking at between those three numbers that’s two thirds of your operating expenses, we are not feeling particular pressure there. Obviously we start the year with an estimate that includes we have got fully staffed at all properties, fully staffed in all regions.
So, I’m not going to take pressure on a payroll side and then once you get beyond that, our marketing costs have been terrific year-over-year, we haven’t really seen our marketing cost but we have reallocated marketing cost over the last three years from print to all internet, kept our marketing cost stable and increased our traffic 10% to 15% over 2011, good kudos for marketing, we have done a great job there. And then utilities are probably the only one that we have got to watch for, its not a huge number in the overall expense category it runs about $8 million to $10 million on a $100 million expense line. However, water is not getting cheaper in San Diego, that’s 4000 units down there. Water in Southern California is a big driver of utility cost, so that if there is one line that we feel that we maybe expose the pressure not just intend to going forward is what to do about that utility line.
David Toti - Citigroup
Great, thanks for the detail.
Thank you. Next question comes from the line of Karin Ford with KeyBanc.
Karin Ford - KeyBanc
Hi, good morning. Just a question on potential new investments in acquisitions. Given sort of the pattern that you are seeing of potential recovery and the timing between your different markets. Can you talk about what your preference and your strategy would be between your different markets for new investments going forward?
Well I think that we continue to focus on our Costal California markets, I think we would like to improve and increase our way in Northern California so that’s where it goes, but again as a monthly be California and again we have it right around here strength and concentration you'd like to identify assets that are close to where we got existing assets to get efficiencies to tell about efficiencies in driving performance. But it's really looking at California market.
Karin Ford - KeyBanc
Okay, great. And second question is you’ve given us a lot of detail on your view on the jobs texture and it seems fairly complicated I guess at this point but did the December MSA job report that came out yesterday which showed California actually looking like it did a little bit better than a lot of other markets in the nation, did that give you any specific calls for optimism or do you think December and one month can make a trend.
That’s kind of what I said I think we are starting to see no question the numbers are getting better we still have very high unemployment here in California and its something that as Ed said will continue to put pressure on and that we want to protect against it the event that it doesn’t improve through the year. So we are watching it very closely and good news is obviously good to read but we’ve got to make sure that it becomes sustainable.
Next question comes from the line of Dave Bragg with ISI Group.
Dave Bragg - ISI Group
Actually a follow up to that question, just looking to get a little more specific Ed can you quantify for us the level of job growth that you’ve assumed in your revenue growth guidance at both the high end and the low end of the range.
I think we are following the data that’s out there from economy.com so that we’ve got some modest, we’ve got about 2% job contraction at the high end and obviously more at the low end but we wouldn’t be surprised to see another 1.5% to 2% in jobs come out of our markets in the first half of the year.
Dave Bragg - ISI Group
Got it and assuming that we see that perhaps as the base case from where we stand today, in what quarter would same store NOI to turn positive.
I think it’s a little early to be talking about that. I think we were asked that in the last couple of quarters, so I think our answer was it all depends if you get some job, there is job recovery, if this follow us past recessions, we should see some appear to stabilize fundamentals at or around the mid-point of this year. If we get job growth at the beginning of 2011, once we start to get something that begins to look like a half a point to a point of job growth, we can begin to foot trends, and so you start talking about year-over-year revenue growth numbers probably pretty deep in '011 plus you have a ten months rent roll.
The ten months rent roll, it takes with all to push the rents through the system, so it's going to take a while to translate that into, and I think in that markets that we operate and our supply constraint, we can run a fairly high level of occupancy, so that the recovery to our markets is that we're going to renew our jobs, we get renew our pricing power. We increase the market rents, concessions vaporize and it takes however, long your average lease term is, that's how long it's going to take it to push through to get to revenue growth.
Unlike other markets where there is weak occupancy or per see of movement in occupancy from the high 80s up to the mid 90s, it's going to take a little bit longer for us to push it through.
Dave Bragg - ISI Group
That helps, thank you.
Next question comes from the line of Michelle Ko with Bank of America.
Michelle Ko - Bank of America
I was just wondering if you could tell me which markets do you expect job growth to come back first and when? And if you can break it down specifically by market if maybe you could talk probably about Southern California versus Northern California?
That was pretty lucky. Wal-Mart was running a special on crystal balls over the weekend, and I've got that plugged in. I think the economic research is indicating that Seattle may in fact; our view is only as good as the economic resource that we're looking at both local sources and national sources like yourself, but I think we are all seeing the same thing that the large employers up in Seattle are following Microsoft or heavy participants in global GDP. There may be an opportunity for the new job growth from the large employers in Seattle and it's when I say relatively small, its millions of fixed jobs up in Seattle. So that you get Microsoft emboldening to light off a few jobs you could see some percentage growth numbers that could if you believe the economy.com numbers could come in as early as the third quarter.
So, Seattle could be last into the recession from a jobs standpoint in first half.
Michelle Ko - Bank of America
Do you have any comments I guess on the California markets?
Well, again I think the resource that we are seeing is the same that you are seeing where most of that is pointing to job growth recovering either fourth quarter 2010 or first quarter of '11. So that there is some thought that San Francisco and the Bay area might see some job recovery earlier, it hasn’t had the type of job losses that Southern California has incurred. But there is still job losses and technology may be the leader out of recession for the Bay area with the level of job loss in this recession it is much less than it was last recession. So the expectations of Bay area could come back a little earlier than Southern California.
I think [wild card] and the whole mix probably not going to go market-by-market I think. But I think the wild card and whole mix is what's going to happen with Orange County. We have already talked about San Diego with some of the earlier questions. We have seen with Orange County it was first in that beat up the expectation is that, its going to shed about a 121,000 to 125,000 jobs were already down, a 118,000 to 119,000 jobs we're referring to were pretty close to end of the job loss cycle in Orange County. Job losses over the last couple of quarters that were running about 15,000 jobs, so point to the level that the contraction has decelerated.
Connie has spoken off on this cause about the fact that Orange County has been reprised, and the focus up to this point has been on the massive losses in the mortgage finance sector, but the same time, the Orange County has a very robust healthcare industry that’s headquartered there. Medical devices, medical services, cancer treatment, those are big employment centers, big job centers for Orange County and in the last 90 days, we've seen some biotech companies coming into Orange County take off the space and indicate that they are going to start to hire.
Orange County fails in comparison to San Diego, Boston, San Francisco as hubs for biotech, but we've talked about the fact that at some point where both from a geographic standpoint and it's got a very highly educated workforce that it's a very attractive place for companies or other services to move into. We've no idea right now which service is going to lead that charge in the Orange County.
But I think what's promising to us is that while we were talking about that two, three quarters ago, we're now seeing economic research that is suggesting the same thing that Orange County couldn't come back pretty well. Something is going to lead to the rebirth of Orange County. The fact that it's been re-priced is something that we've seen in past cycles at different regions in coastal California. The reprising of one of these coastal regions leads to outsize growth on the recovery as new industries come in.
Absolutely, and I think that do not underestimate the power that this could move quickly. As we said when it recovers, it could recover quickly. And I think when you think about our coastal California market even in the bay area down in the Peninsula, there is no question, it's being reprised and in many cases, housing may be not specifically in our coastal California market as most of the housing re-pricing has been done east where we don’t have assets. But from an physical plans office space is very impactful and companies will decide to stay rather than [incubate] companies and then grow outside of California so power of it is very-very strong. And I thing you are seeing it as Ed mentioned to me that technology maybe the first that we’ve seen. With Oracle's acquisition of Sun, Oracle is still saying we are hiring. And so I think that there is some positive news coming out. But again as I said and even Ed echoed in his commentary I think we're being cautious about 2010, if job growth happens faster we will be prepared for it, we will be ready for it, we will be planned for it but we want to make sure that we protects on the downside so that we don’t over anticipate something that maybe just won't happen as none of us anticipated what was going to happen in late 2008 and 2009.
Next question comes from the line of William Acheson with Benchmark
William Acheson - Benchmark
Hey in terms of the Cap rate compression that we have seen and what you have been observing in the market just qualitatively our potential investors number one, adjusting; number two, waiting for a wave of distressed property sales; or number three, starting to think more about development as a reach for yield and looking ahead to the Gen Y demographic growth
I think we talk the development part of that question and the acquisition side there is a large investor pool that is out pursuing the Cap rate are in place today anticipating the forward rent curve.
Yeah I think we have got a situation where you have lot of money chasing it and in some cases I think the money is burning a hole in people's pocket. Clearly, we have the advantages as the apartment industry of having very attractive GSE debt today. And so I think that people are anticipating again and in some cases you hear talk about what prize per pound that we are paying, lets provide those people are anticipating a further erosion in NOY in 2010 but then depending on their view of the world and the rent side and there to be, you could be a slight in 11 or 12 and so I don’t know if there are anticipating bigger prices or not. But I do think that there is a lot of money chasing these deals and again you have just got this way of demands that we know will be coming at some point, and so I think some of those (inaudible) questions. Don’t underestimate the fact that some of this money was burning hole in people's pocket.
William Acheson - Benchmark
Okay and as a follow-up, you mentioned that your traffic was up and one other things that we are seeing at least on the east coast is a lot of people coming in and looking for deals in the first quarter where they normally wouldn’t because they feel that they attract the rent rates aren’t going to be around much longer. You guys seem to be feeling that it would that be an accurate assessment?
I wouldn’t have used that characterization for the western markets. I think I have further same thing and when we basically travel through the East Coast, New York. We are hearing the same think though about Northern New Jersey in New York and they are forming those markets, seen to be forming in advance of the western region and as there is a lot of traffic, there is abundance of traffic in the fourth quarter with first quarter. Having within seasonal patterns. I think while we saw slightly better than seasonal traffic levels in the west coast. I think it would be too early to say that, it was because the traffic was being driven because they are afraid rents are going to be priced out of reach anytime soon.
Thank you. Next question comes from the line of Jeff Donnelley with Wells Fargo.
Jeff Donnelley - Wells Fargo
Ed just building on earlier questions and comments are you able to get a bit more micro and may be talk about trends in some of those key metrics like effective rents, move outs to home purchases or traffic may be at a monthly level as we move from Q3 to January 2010 I guess my thinking is that with several of your markets hitting at an inflection in jobs and housing activity in Q4, I am wondering if you’ve seen any trends either way and your numbers that might be obscure at a more I will call it macro level from the data that we are seeing.
No, I mean if you work both ways and you look at the market there you try to look for you can try to read the feelings too closely and what could be a reflection point its really just sort of a blimp for a month. So I think that across all of our markets we saw an up tick in I think the one metric that stands out is the move out for home purchases in the fourth quarter and I think in all cases when we checked in with our regional managers these are first time home buyers; they were taking advantage of the first home buyers tax credit, so I think the people that were on the fence about whether they were going to buy or not made a decision late in the fourth quarter to go for it. But still, we are talking about a level of move out for home purchases that goes to 16% which is still, that’s at the level that it was at peak levels in '05 - '06 and the first half of '07. So that we didn't do anything in that that would say that we are going to see just a complete rising of, I don’t think that that metric is going to influence what’s going on with the broader metric which is [perplexing] the rent continues to move in our favor, that we are going to get this quarterly or monthly head fakes, but in general [perplexing] to rent is moving in California from 42% to something to back to as [normality] range of 44% to 46% with the number of households that we have in California, that type of movement is going to be meaningful.
So that there was nothing in the monthly numbers that gave us unfortunately, either way, it's not like I consider, okay based off of November's or December numbers for traffic or this or that. We are seeing the sudden firming while early price recovery, but not neither are we see anything that we think should be alarming.
Jeff Donnelley - Wells Fargo
And just as a follow-up. I guess what thought are you guys giving the selling assets into this market even if it means by taking your lumps may be in the Inland Empire to increase that relative rating in Northern California?
We continue to look at any opportunistic sales and we look at those in connection with managing our balance sheet and our leverage and those did sense, the Inland Empire is a target process we've talked about reducing our exposure at some point. So we just have to pick the right time.
Next question comes from the line of Steve Swett with Morgan Keegan.
Steve Swett - Morgan Keegan
Ed I know there were some moving pieces with regard to the effective rents and the concessions, and can you just give me a sense of where market rents are relative to the effective in place rents, and how much of the revenue assumptions for 2010 is say rolling down to that rent, as opposed to further declines in that assumed market rent?
Thanks Steve. Good question; I think what I tried to outline maybe was missed the comment is that at this point market rents, we cut our market rents in the fourth quarter to align them with effective rent. So, I think going forward, as we're talking about, as we go into 2010, as we are talking about market rent and we'll obviously be specific but essentially market rent and effective rents are going to be traveling almost of top of each other. At this point there is only 1% spread between market rents and effective rents. So, that while peak to end of '09, market rents are down 10.5%, effective rents are down 11%.
So just over 0.5 point differential. We expect to see further rent reductions in the first half of 2010. As we do that, we are also going to be reducing the use of concession so that the cash or the transaction level concessions at the point of transaction in 2010 will be less than what we have, last year we hope to eliminate concessions by the midpoint of the year. But you still have to amortize the concessions from '09 through year '010 - '11 you got to amortize over the 2010 period.
So the only two things are going to be moving together, what we are hoping is that at the end of 2010 there'll be no further cash or transaction level concessions going on site except for maybe Seattle may be the interim part a little bit. And that the amortization of the '09 activity will be burned off by the fourth quarter. So you will see I am hoping to be (inaudible) proportion of street rent roll that’s free of concessions by the end of the third quarter if not the fourth quarter of next year.
Steve Swett - Morgan Keegan
Okay and then just a follow-up do you have the stats for the fourth quarter on what your shift the change was on renewal leases as opposed to new leases on move out.
Yeah, I mean our renewal activity just a little bit in the fourth quarter. We averaged about 56% for the year. We were just little bit less than 50% for the fourth quarter but the renewal pricing was still within 2% of the prior lease levels. So, we are still getting very good one new activity and also good renewal pricing.
Thank you. Next comes from the line of Rich Anderson with BMO Capital Markets.
Rich Anderson - BMO Capital Markets
Thanks for keeping it going here. I just want to make sure I understand on the development that if your rent trajectory looking to 2012 results in market rents being up 5% as you kind of think might happen, as you get more visibility on that happening, then you turn the development pipeline on to some degree in advance of that, and you think that that can get you 7.5% stabilized return, is that correct?
The 7.5% would be on any new things today that we were looking and I think when we look at our existing pipeline, we're probably looking closer to 7% - 7.25% on those. I think before looking at new deals today, we'd be looking at 7.5% to 8.5%, that is to be a stabilized term, when we look at the risk that’s been taken out of our pipeline, and our current pipeline is probably closer to 7.25%.
And I guess given where we think acquisition cap rates are, that's the appropriate spread as we look at where. And again what Steve, and his team has been doing in addition to obviously, we disclosed on Sunnyvale, we've been working that solar (inaudible) pretty hard and got a price that we were comfortable with. But we continue to work at these transactions and looking at, not only what it is we are building, but when we are building it and then the cost continue to come down, so I think it's a factor of all of those things that will get us into the 7%.
Rich Anderson - BMO Capital Markets
What the logic I laid out was right. Yours, the 5% market rent increased in 2012?
I think Rich not to be so, we were (inaudible). I think the recovery curve that we are following like most market participants, if you look at our markets we'd suggest that the rent growth that we should experience in 12, 13 and 14 would be pretty well in excess of that.
Yeah I was just going to say 5% is sort of the normal but its again go back and look at the some of the studies that are out there and our expectations are the pretty nice 12 and 13
Rich Anderson - BMO Capital Markets
I just want to make sure I understood. And then just a follow up question then how do you kind resist the urge to kind of over leverage yourself to development once it become such as much of a better business in over the years I mean I think you would agree that you were like maybe a bit too much on development made in the last cycle I mean what is your strategy there as it relates development as a percentage of the total companies asset.
I think one you are correct we got a little out of [feeds] relative to our size and so that you will look at the development pipelines given our current size in sort of the $650 million to $750 million range and we'll have to start on an annualized basis of $250 million to $300 million and that we just need to stick with that.
Thank you next question comes from the line Michael Salinsky with RBC Capital Market
Michael Salinsky - RBC Capital Market
Good morning majority of my questions have been answered just had two quick follow ups with only about 20 million left in the ATM program is the thought to renew that program once its done? And have you contemplated any equity issuance in the guidance for 2010?
Well I think in terms of the program itself, yeah we have been pleased with this execution that’s our vehicle of choice in terms of issuing equity. So when we sell out the remaining capacity under the existing program we would reestablish it. What I would talk about in terms of future equity guidance is that we have mentioned a targeted leverage ratio or a level of 50% and we'll manage towards that, I don’t want to get any more specific than that at this time.
Michael Salinsky - RBC Capital Market
Just to be clear is there any assumption of additional equity issuance in the guidance at this point?
There is some, that’s correct but the majority of the dilution comes from 2009.
Michael Salinsky - RBC Capital Market
Okay, that’s fair. And then just in the past you talked Ed or Connie you talked about acquisition cap rates across the markets, I know its our limited transaction activity I think Connie specifically you mentioned that you were seeing some in the five, if you could just kind of may be by market or by region talk about where you are seeing pricing right now you know that'll be helpful.
I think that Connie's comments are applicable to California, coastal California market that there is no trend above or below that in any specific markets in California. We’ve got in prior quarters about the pricing that we have seen in Seattle which is above that but in the five that's in coastal California market.
Michael Salinsky - RBC Capital Market
And that’s for reselling the quality assets?
That’s for core asset.
But a well located [be asset] in California is going to be in the five not to tell you that, just because it, given the lack of supply and again as we talked about as that never talking about in terms of just the power of the re-pricing and the power of recovery. (inaudible) assets have been get up as well.
(Operator Instructions). Your next question comes from the line of Andrew McCullough for Green Street Advisors.
Andrew McCullough – Green Street Advisors
John on that interest expense guidance, I just want to clarify, is that before after ATB 14.1?
That is after.
Andrew McCullough – Green Street Advisors
And then on the acquisition front, if you guys don’t sell any assets how do you plan to fund any new acquisition opportunities you may see will it be from the line rematch fund with new equity, any color you can provide there be helpful.
Yes Andrew we would plan as I mentioned again, we are targeting a balance sheet leverage of 50%, so any additional acquisitions that we didn’t have sale assets lined up for, we would issue equity to maintain that ratio.
Maggie just one more question then we can call it for this morning.
Thank you madam. Actually no further questions or comments at this time.
Great, everybody was on the same page. Thank you very much and thanks for the call and we'll look forward to talking to you after our first quarter. Thanks.
I would like to thank everyone for joining today’s conference. You may now disconnect.
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