Associated Estates Realty's (AEC) CEO Jeff Friedman on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Associated Estates (AEC)

Associated Estates Realty Corporation (NYSE:AEC)

Q2 2014 Earnings Conference Call

July 30, 2014 02:00 PM ET

Executives

Jeremy Goldberg -VP of Corporate Finance and IR

Jeff Friedman - President and CEO

Lou Fatica - CFO

John Shannon - SVP of Operations

Jason Friedman - SVP Acquisitions and Development

Analysts

Jeff Donnelly - Wells Fargo

Michael Dorman - Citigroup

Alexander Goldfarb - Sandler O'Neill

Tao - Jeffries

Ryan Meliker - MLV

John Brennan - National Security

Dave Bragg - Green Street Advisors

Buck Horne - Raymond James

Operator

Good afternoon, and welcome to the Associated Estates Second Quarter 2014 Earnings Conference Call. My name is Victoria, and I will be the operator for your call today. At this time, all participants are in listen-only mode. Following prepared remarks by the company, we will conduct a question-and-answer session. (Operator Instructions). Please note this event is being recorded. If we experience any difficulties with the connection of the conference call, please visit associatedestates.com for additional instruction.

Now, I would like to turn the call over to Jeremy Goldberg, Vice President of Corporate Finance and Investor Relations for opening remarks and introductions. Please go ahead.

Jeremy Goldberg

Thank you, Victoria. Good afternoon, everyone. And thank you for joining the Associated Estates second quarter 2014 conference call. I'd like to remind everyone that our call today is being webcast and will be archived on the Associated Estates Web site for 90 days.

Prepared remarks will be presented by Jeff Friedman, our President and Chief Executive Officer, Lou Fatica, our Chief Financial Officer and John Shannon, our Senior Vice President of Operations. Additionally, other members of our management team are available for the Q&A.

Before we begin, we would like to note that certain statements made during this call, including answers we give in response to your questions, will be forward-looking statements that are based on the current expectations and beliefs of management. These forward-looking statements are subject to certain risks and trends that could cause actual results to differ materially from projections. Further information about these risks and trends can be found in our filings with the SEC, and we encourage everyone to review them.

As a reminder, Associated Estates' second quarter earnings release and supplemental financial information are available in the Investor section of our Web site, and they include reconciliations to FFO and other non-GAAP financial measures, which will be discussed on this call.

At this time, I will turn the call over to Jeff.

Jeff Friedman

Thank you, Jeremy. And thanks to everyone for calling in. We're pleased with our second quarter results. Associated Estates had a solid quarter highlighted by great pricing on property sales, steady progress on our developments, exceptionally high occupancy, respectable rent growth that when combined with positive expense controls, resulted in strong portfolio wide margins. We maintained a solid balance sheet and enhanced our financial flexibility. We remain confident that Associated Estates is well-positioned in each of our markets and that we will continue to deliver significant value to our shareholders, specifically for the quarter we met our internal FFO expectations of $0.31. We successfully navigated through a tough start to the year and our fundamentals continue to improve. For example, in July new and renewal same community leases are a 5.5%. We haven't seen a five handle on this number since July of last year. When we factor in our acquisitions where we have 8.3% increases for July, the number goes up to 5.8% which is of the highest increase we've seen for all leases since May of 2013.

Stronger fundamentals combined with our highly accretive fully funded external growth efforts and proven strategy have positioned Associated Estates to generate significant returns. We are confident that by continuing to focus on enhancing operations, making opportunistic dispositions and pursuing accretive growth opportunities while maintaining our investment-grade balance sheet we will continue to be positioned to deliver significant long-term value for our shareholders.

With that, let me turn the call over to Lou.

Lou Fatica

Thank you, Jeff. Same community NOI growth for the quarter was slightly better than projected at 4.5% driven by better than expected operating expenses. Year-to-date same community revenue was up 3%, and expenses were up 2.5% resulting in a 3.3% increase in NOI when comparing the first half of 2014 to the first half of 2013. Average occupancy for the same community portfolio was 96.4% for the first half of the year. The harsh winter and lack of momentum into early spring impacted our traffic and pricing power on new releases in our Midwest and mid-Atlantic portfolio. As a result full year assumptions factor in the rolling of these leases into the balance of the year as well as accelerating rental rate growth in all of our markets for the second half of the year, as supported by current trends. This results in second half portfolio wide same community revenue growth of 2.25% at the midpoint as compared to our year-to-date revenue growth of 3% resulting in full-year projected revenue growth of 2.6%. Our revised same community NOI guidance is 3.2% to 3.9%, a 35 basis point reduction from the midpoint of our previous guidance.

Based on our year-to-date results and our property by property reforecast for the second half of the year we have reduced the bottom and top end of our FFO per share guidance by a $0.01. Our dispositions remain on track with the sale of one property in Q1 and three properties in Q2. Year-to-date sale proceeds are $172.2 million. The four dispositions which include three properties in Maryland and our national development project were sold at a blended 5.4% market cap rate on trailing 12 months NOI after a 3% management fee and marking to market real estate taxes.

The nominal cap rate without adjustment for taxes and after a 3% management fee were 6%. Unlevered IRRs over their whole period for the four asset sales were better than 17%. Our remaining plan dispositions for the year including two properties in South East Michigan and one property in South East Florida were all projected to occur late this year. In June we closed down the acquisition of Alpha mill a 267 unit property in Charlotte.

Our 2014 acquisition guidance includes Alpha mill and one additional property, 1160 Hammond in Atlanta which we expect to acquire in Q4. Leverage as measured by net debt to undepreciated book value was 41% at quarter-end, with secured debt at 16%. Unencumbered assets accounted for greater than 73% of Q2 NOI and our Q2 fixed charge coverage ratio was 3.2 times. Near term maturities are only 25 million this year and 20 million in 2015. Our total debt at the end of Q2 had a weighted average interest rate of 4% and a weighted average maturity of 5.4 years.

With a reduced spread and extended maturity in our amended term loan our weighted average interest rate goes down to 3.9% and our weighted average debt maturity increases to 5.8 years. Development spend for the year is now projected to be $80 million to $100, a $25 million reduction at the midpoint, this reduction is primarily attributable to the revised timing of our projected spend for the balance of the year.

Before I turn the call over to John, I want to mention how proud we are to have earned investment grade ratings for Moody's, Fitch and S&P. Turning our investment grade ratings has been a strategic focus for quite some time, it gives us tremendous financial flexibility going forward. At this time, I'll turn the call over to John.

John Shannon

Thank you, Lou. For Q2 we finished the quarter at better than 96% physical occupancy with revenue up 2.7% over Q2 2013 and NOI of 4.5%. The revenue growth reflects an 80 basis point increase in occupancy and approximately 1.9% increase in revenue per occupied unit. For the quarter our Raleigh-Durham, Southeast Florida, Atlanta and Dallas properties performed well. While, the Midwest in Mid Atlantic properties are improving from the slow start to the year.

Sequentially, same community revenue was up 1.2% compare to Q1 2014 and physical occupancy was in line with Q1 at 96%. Our total same community revenue growth of 3% for the first half of the year is in line with our internal expectation as a result of a 2.2% increase in revenue per occupied unit and its 80 basis point improve in the occupancy. We are encouraged by the positive momentum in recent same community rent growth as we have gone from rents in April up 2.8% to rents in July up 5.5%.

As a function of accelerating fundamentals we expect solid rent growth from our same community portfolio of 4% for the second half of the year. However, given the compounding impact of the lowered new lease rents in the first half of the year at our Midwest in Virginia properties which account for approximately 70% of our revenue, we anticipate revenue in the second half of the year to be up approximately 2.25%. This 2.25% second half revenue growth coupled with our first half revenue growth of 3% resulted in full year revenue up 2.6% at the midpoint.

Regarding expenses, we had a solid Q2, expenses were flat to Q2, 2013 and sequentially expenses were down 2.6%. Having recently completed our property by property reforecast we now anticipate expense growth for the full year of 1.1% at the midpoint versus our original guidance of 2.25%. The pickup comes from reduced incentive comp accruals, lower real estate tax and insurance costs and savings on better overall pricing through our procurement programs.

Turning to our five stabilized acquisitions that are not part of our same community results which include 1,184 units and account for nearly 13% of our total portfolio NOI, all continue to perform well, and collectively they finished the quarter at 94% physical occupancy.

In addition, to the five acquisitions above, we have one recently acquired property where phase 2 is in lease up. We have three additional community where we have assumed property through management responsibilities. They are in various stages of lease up and we plan to acquire them upon completion of construction for its stabilization. These properties represent an additional 1,293 units. All the rents and preleasing activity are in line with our underwritings.

Regarding our three active development project, Cantabria, 7001 Arlington and Desmond on Wilshire totalling 564 units, construction continues to be on schedule, cost and rents are in line with our performance and the delivery of the first units are as planned. At 358 our 410 unit joint venture project in the SoMa neighbourhood of San Francisco, we have started site work. We are finalizing negotiations and pricing as it relates to a JMP for the balance of the work with the same contractor that is performing the site work.

Overall project costs are running 8% higher than our pro forma with estimated all in cost of $245 million. At the same time, rents have grown faster than we had underwritten and thus are expected to stabilize return on cost is unchanged in the 6.5% to 7% range. In regard to the 950 East Third, our 472 units joint venture in the Art District in downtown LA we're completing the redesign of the project. The new design will better position our property with larger floor plan, less retail, and more amenity space.

We expect city approval of our plan in the next few weeks and assign GMP shortly thereafter. Based on the schedule, we currently expect to start site work this quarter. Regarding our 4.6 acre site in Warner Center in Los Angeles County where we entered into a purchase option in 2012. We are nearly complete with the internal process for the approval to build 397 units. At the time we optional move-in, we had not yet committed to our 358 or our 950 East Third projects.

Given our other current developments in the LA area at this time, we decided to list the Warner Center site for sale with the expectation that we will monetize our in-the-money option. In closing, positive rent growth trends for the second half of the year aggregated with the integration of our acquisition into our same community pool and the lease up of our development properties which will provide huge momentum as we head into 2015.

I will now turn the call back to Jeff.

Jeff Friedman

Thank you, John. I want to thank all of our employees for their hard work and their many contributions to our success. As demonstrated by our second quarter results through the continued execution of our strategy, we are realizing steady growth and harvesting profits. We are driving value by strategically positioning our portfolio with quality assets either through opportunistic dispositions, best in class acquisitions with a successful execution of our fully funded development pipeline.

In addition, we are generating further value through enhanced operations focused on improved efficiency and operational excellence. With the management team that has a proven track record of delivering strong steady returns, we will continue to take advantage of market opportunities to the benefit of our shareholders.

With that, Victoria, we can open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from line of Jana Galan with Bank of America.

Unidentified Analyst

Hi, this is Jane for Jana. Just a quick question on the 25 million of delayed development spending, can you discuss if it's from the wholly owned projects or if it's regarding the JV projects that you discussed?

Lou Fatica

Jane this is Lou. The 25 million relates primarily to our decision to redesign the 950 Third East joint venture project in downtown LA and that will get started with some site work in third quarter -- anticipated to get started in the third quarter and that spend will ramp up from there on now.

Unidentified Analyst

Perfect. Thank you. And you have provided the nominal cap rate for four dispositions year-to-date, I was just wondering what it would have been for those three in second quarter?

Lou Fatica

Sure on a trailing 12 basis, the cap rate would have been 5.7% on a nominal basis.

Operator

Your next question comes from the line of Jeff Donnelly with Wells Fargo.

Jeff Donnelly - Wells Fargo

I guess maybe just a first question for Jeffrey, I know you guys had a shareholder last quarter abreacting for management to explore ways to create value. I was curious since that letter arrived in June have you guys entered in any sort of discussion with van or other firms who might play more strategic role for AEC or is there a specific plan to do so in the future?

Jeff Friedman

Jeff, as you know we have a very active and robust IR program and we make it a priority to talk with all of our shareholders. As a matter of policy we're not going to spend the time discussing the specifics of our discussions with our shareholders.

Jeff Donnelly - Wells Fargo

I guess maybe if I could and just may be switch to guidance and specifically the changes therein from the past, maybe first on the expense side. You know I guess I'm curious because expense growth in the first quarter and second quarter, were a little choppy. What gives you the comfort to lower the expense growth for the full year? Or do you see sort of smoother sailing in your expense experience as you roll over the later part of the year?

John Shannon

Hi, Jeff, it's John. The lower end of the guidance range is really due to the reduction of accruals and projections for incentive compensation as well as already identified savings and repairs and maintenance to our MRO vendors, our suppliers, our contractors as well as in improving turnover profits in completing more work in-house at the properties.

Jeff Donnelly - Wells Fargo

Is the incentive compensation mean for property level people?

John Shannon

Yes, correct.

Jeff Donnelly - Wells Fargo

And on the revenue side, I guess, maybe just sort of a similar question. I think your revenue growth in Q1 and Q2 decelerated a little bit. Is there any concern you have that that trend is going to persistently roll for the year, or kind of come in at the lower end of your revised guidance, or you sort of see that stabilizing?

John Shannon

Jeff, again this is John. We did get off to a slow start, but we really are pretty excited about the momentum that we are seeing right now. We continue to be at 96% occupancy, April volume leases for the same-store community were up 2.8%, in May that went to 3.8% and then in June it went to 5.5%, and here in July we are at 5.5% as well. When I had said to hit our guidance range with the midpoint of our revenue at 2.6%, we'll need to do 4% rent growth for the balance of the year. We feel comfortable with the way the numbers are trending now and the acceleration that we're seeing. We are slightly ahead of that. But we are projecting to do 4% all in for the portfolio.

Operator

Your next question comes from the line of Nick Joseph with Citigroup.

Michael Dorman - Citigroup

It's Michael Dorman here with Nick. Jeff, maybe if I can start with you, coming at NAV when the stock popped on the letter that you received, both you and your son progressed to sell about 30,000 shares of stock and I recognize people can sell stock whenever they want, but I'm just curious in terms of the timing especially with your vocal comments during NAV that the stock is at a big discount to NAV, why would you be selling stock?

Jeff Friedman

Michael, I have great confidence in the company and our team. A large portion of my net worth is invested in the company. I do sell shares from time to time.

Michael Dorman - Citigroup

It just seems like an odd timing to want to liquidate holdings when at the time you would've gotten an activist letter saying that the stock was undervalued, would seemed that there will be other ways to monetize it, you thought the value was there waiting some time to sell. This means your stake in the company is about 1%. So I don't know what, yes, I would assume that there is a lot net-net worth outside of that.

Jeff Friedman

Yes, is there another question?

Michael Dorman - Citigroup

So I guess that's the response is it, it was part of large part of your net worth therefore and it was a good time to sell the shares, irregardless of whether they traded at discount NAV or not?

Jeff Friedman

I have great confidence in the company and our team and we are very excited about the result of the second quarter, the outlook for the balance of the year and we are hopeful that we can spend our time talking about that today. Maybe we can take the next question.

Operator

Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Alexander Goldfarb - Sandler O'Neill

First, just want to clarify; did you say part of the expense reduction in guidance is reduced incentives at the property level? Do we hear that correctly?

John Shannon

Yes. I mean everyone would -- Alex, again it's John. Everyone within the organization has certain NOI bonus calculations for their incentive compensation, we would hope that we progress better than we have guided to and we hope to pay out a 100% of that incentive compensation but at this point we do not think that we're going to hit at 100% of the communities.

Alexander Goldfarb - Sandler O'Neill

But I would think just from a motivation standpoint, I mean we live in a bonus incentive world, so we're all cognizant of that, but I would just think from a motivation standpoint that half way through the year maybe a little premature, maybe people would -- things would be better in the back half.

Jeff Friedman

We motivate our side employees in many different ways, the incentive compensation is one component, we feel so our base pay at close to the 75th percentile is at the high end of the industry. We train our people, we provide a lot of resource to the teams in the field and we think that we have great leadership at the regional and VP level and that's how we really are able to drive results and motivate the folks.

John Shannon

Alex, this is John. Let me just add one thing to that, part of the side level incentive compensation is also based on quarterly results, there's also a piece of that that relates to the annual budget and so if a property doesn't make the quarterly results that they are measured by then there is an adjustment to the bonus approval because those don't get paid. There remains an opportunity at the site level and at the regional level for folks to earn based on how they end up for the year. So in terms of incenting them to the extent there's a correlation between pay and performance, which we all would like to think that there is, even though it's not the number one factor there is still is something there based on accomplishing the full year objectives. But to the extent they don't make it for the quarter then by reducing that amount pulling that back it doesn't get paid.

Alexander Goldfarb - Sandler O'Neill

Okay. And then let me ask on the revenue side at the beginning of the call, you guys made the point that, the first half of the year, it was at your expectations and yet in contrast appears, you guys have lowered your outlook and if we look at the rent growth in the first quarter versus rent growth in the second quarter on a year-over-year basis, the pace of rent growth has slowed obviously Midwest, Mid Atlantic driving that. So how is it that things were -- how was that the first half year met your expectations but then you're cutting your guidance, your revenue guidance.

And two what's going on, is there something going on specifically in your Midwest markets and Mid-Atlantic that caused things to slow down because reading the press and certainly travelling to the Midwest and travelling to the Mid Atlantic, the Midwest is booming I mean, the Michigan is doing well, Ohio is doing well so it's just surprising that your fundamentals there would have slowed and the mid-Atlantic has been admired the way it has been, in arguably the anecdotes from meeting with various folks in the DC areas are that things staring to get a little bit better. So the comments were just a little bit at odds from what we're hearing from the field. So if you could just help us understand?

John Shannon

Sure, Alex. This is John. I think I mirror your comments. The fundamentals in the Midwest are solid when we talked about the first quarter of the year, the inclement weather did have a huge impact on the traffic and our properties and we made the decision to really create price for volume or price for occupancy, so we did see a softening in the rent. And as you know that compounding for quarter after quarter won't burn off until the first quarter of 2015, so we effectively live with that.

However, the encouraging thing is in the Midwest all leases for the second quarter are up 6.3% that's coming from April at 4.7, 5.1 in May and then we had a huge June at 8.4 and in July we're at 7. So we're again as I said slightly ahead of what we needed to do as an all in portfolio of 4%. We think the second half out of the Midwest will drive 4.5 to 5% rent growth.

So we're very encouraged with what we're seeing. We're actually excited about it and couldn't agree more that the fundamentals are improving in our solid. As it relates to the Mid Atlantic again we got off to a little bit of a slow start, I think that the new supply certainly has an impact on that, but we too are seeing an improvement in the Mid Atlantic markets where, it was a first part of the year or the first quarter, we were down 2% and then we for the second quarter we're up 1.2 and again our reforecast we're looking at rent growth for the second half of the year out of the Mid Atlantic at 1.5% to 2%. So we are seeing improving conditions. And we're also seeing high occupancy in all of our markets where we think we're going to stay at that 96% physical occupancy for the balance of the year.

Alexander Goldfarb - Sandler O'Neill

Okay. And then just lastly, one, pleased to hear that you're going to sell the Warner option ppresumably that's really transferable, so happy to hear that you are going to exit that. Just given the rockiness of the core portfolio it had this year, any thought to slowing down the West Coast expansion, or maybe even selling off other development sites out there, maybe you can click whatever profit margin you've already made and land values going up. Do you focus on the core portfolio which is where the bulk of your earnings obviously are being driven?

Jeff Friedman

Hi, Alex, Jeff. We're very excited about the value creation and the opportunity to continue contributing to our bottom line from our development platform. The deals that we currently have underway and in the pipeline will be hugely accretive and so there is no plans at this time to change those plans. We look at each one of these by themselves and we calculate the investment opportunity and the contribution to the bottom line. And as John said in his prepared remarks, with regard to this specific parcel, this was a time when our folks in the field saw opportunity. They created tremendous value from the time they put this under our control in 2012 until today. We take advantage of that and reinvest those dollars either in the deals we currently have underway. They help pay for some of our other acquisitions or to pay out dividends.

Operator

Your next question comes from the line of Tao with Jeffries.

Tao - Jeffries

I just wanted to follow-up on Alex's question in regards to the purchase option. If you could just give us a little bit more color on what went to that decision at the end of the day?

Jeff Friedman

Tao, Jeff again. Again, the price that we negotiated was a 2012 price on a site that was un-entitled and the purchase was subject to entitlements. We've taken it through the entitlement process and based on what's happened in the market, in the greater LA market, there is significant embedded value between the current market value and our purchase amount. And so that's what we were talking about. We listed the property and we expect to sell it, and as I said reinvest those dollars.

Tao - Jeffries

Okay, that's helpful. And then in regards to guidance again, just a bit of a drill down, Jeff if you could just either from the Midwest, I think people kind of get what's going on with the mid-Atlantic properties, but from a perspective of the Midwest, can you give us a little bit more color. Which particular market are you kind of seeing underperformance relative to expectations, especially when you look at the back half. I mean is it an Ohio issue, is it a Michigan issue?

John Shannon

Tao, its John. We feel pretty comparable with all of our Midwest markets. Indianapolis, the Michigan sites, the Columbus Cleveland; for the second quarter, they all did better than 4.5%, all in rent growth. So going forward, I don't anticipate one being a drag on the whole portfolio. I think they're going to be steady earners for us.

Tao - Jeffries

But you're still talking about a relative shortfall though it should reduce guidance, then which would have led to the guidance reduction, so something is obviously not meeting your expectation there?

Lou Fatica

Tao, this is Lou. I think as we said on our -- and alluded on our first quarter call, we were trending towards the low end of our NOI guidance at the time and the lower end of our FFO guidance as a result of the impact of the harsh winter to both our leasing activity and the momentum there as well as the impact of those expenses which were the same community, where about 450,000 in the quarter. We talked about that on our first quarter call, that say we were going to revisit this based on how we progress through the second quarter and the completion of our property by property re-forecast. I think not a lot has changed from when we were on the call back in April.

Operator

Your next question from the line of Ryan Meliker with MLV.

Ryan Meliker - MLV

Just one question, I was hoping, you guys can answer, most of my other ones have already been asked. I was just wondering, you guys obviously did a good job this quarter controlling expenses. You have a historical track record for running high margins particularly in Middle America where you know institutions of your size and scale are I would say less prevalent certainly less prevalent on the public side of things, have you guys ever thought about the idea of doing some type of -- launching some type of asset management program similar to a Blackstone deal with LivCor, have you been in discussions with maybe partners that potentially own a lot of real estate that would like to utilize your expertise on operations to potentially leverage you, generate higher return and you guys get a nice squeeze on that?

Jeff Friedman

Hi, Ryan. This is Jeff. We've been in that business. We understand that business. We have decided that the margins associated with pure fee management that's property management business don't justify the management time, so we have made a concerted effort not to be third part fee managers. The asset management side of that is a bit different and that business as we all know is changing significantly. As we drill down into the multifamily space, we think that there is tremendous value in the quality of our management team and our operating platform as it relates to the rental apartment business.

And we are in regular discussions with the number of potential partners talking about ways to for us to benefit, that's in the form of joint ventures, it's in the way of benefiting from that operating platform. The concept of being an asset manager as a business or in co-investing, we've also been in that business and determined that given the perception of the potential for conflicts that would be when a public company was looking at something for its own account versus when it was looking at something in the form of a joint venture was too much of a conflict and we have made a conscious effort to not pursue that business.

Ryan Meliker - MLV

Okay that's makes sense but then in terms of the pure asset management fee business as opposed to the joint ventures. How big you think that business could be for a company your size, would you need to really beef up your scale at the corporate level to support, I guess a fee stream large enough to justify entrance into that business or do you already have the scale in place that's very leverageable to being able to asset manage several dozen or even hundreds of additional multifamily properties?

Jeff Friedman

Again, we would not be interested in a straight fee management. We would look upon the opportunity similar to the way we look at the joint venture, the joint venture that we're in, in San Francisco, the joint venture that we're in, in the Art district in downtown LA, and other opportunities that we have on-going dialogue with other joint venture partners. Keep in mind that it does add a bit of complexity to the description of the business. One of the things that maybe you mentioned in the past others had is the simplicity of the Associated Estates business. Those kinds of joint ventures and partnerships do add a bit of complexity.

Operator

Your next question comes from the line of John Brennan with National Security.

John Brennan - National Security

Just quickly on the 358 project, you had mentioned $245 million in an all in total, so will that be 50/50 to you and the JV partner or is that going to be a fee share? You guys didn't really clarify in that statement.

Jeff Friedman

That's the all in project cost, so our cost is half of that.

John Brennan - National Security

And then, also, on the Warner sale, some of the appreciation there -- some was from real estate appreciation; some was from the added value. How long on average in California does it take to bring a land parcel through entitlement? When do you guys pick that up so we can think about it -- kind of the acquisition disposition time frame?

Jason Friedman

John, this is Jason. In California, it really varies by city, some cities it takes longer than others. In San Francisco for example our 358 project took about seven years to get through the full entitlements. In Warner Center, it took us about two years as we put the property under auction in 2012 and then the city adopted a new specific plan and we knew that was coming down the pipes. So we got in early in the process, so I would say two years is on the low end and sometime upwards of five or six years in Southern California.

John Brennan - National Security

Okay. And then lastly, if I may, on the development pipeline and thinking about how you guys finance incremental construction, is there a percentage of incremental quarterly construction costs that you will put on the revolver or that you pay out of just internally generated cash each quarter?

Lou Fatica

John, this is Lou. Some of that is dictated by the joint venture structures and our deals obviously we have more flexibility in looking at that. But our focus is overall corporate leverage to be in the 40% to 45% range.

John Brennan - National Security

And that's net debt to cap?

Lou Fatica

I'm sorry. I didn't catch that last part?

John Brennan - National Security

That 40% to 45% ranged leverage is net debt correct?

Lou Fatica

Net debt to undepreciated book, I mean that's just one of the leverage to look at. There's a number of leverage metrics that we're focused on but from a just a net debt to undepredicated book it would be in the 40% to 45% range.

Operator

Your next question comes from the line of Dave Bragg with Green Street Advisors.

Dave Bragg - Green Street Advisors

Can you talk about the landscape for incremental external growth activity beyond what you have discussed here today?

Lou Fatica

Hi, Dave. That really is a very lofty question. And obviously depending on where one believes we are in a cycle of would drive a number of answers, specifically for associated states we are excited about how we timed the opportunities that we have both from the development perspective as well as the acquisitions and the specific submarkets that we purchased them in. So at this point in the cycle we expect to benefit from improving fundamentals, increased household formation, job growth, the impact that those things have on the rents we can charge and the occupancy and the value we create as a result of the prices we paid for the properties we are buying and bought. And the cost in the developments that are underway.

Now as we get a little bit further into this part of the cycle for us that's out a year, so and we then evaluate the landscape, the questions becomes how much longer of a runway we have with these improving fundamentals. Looking at it today, our estimate for 2015 and '16, although we're not giving guidance is that we would expect 2015 revenue particularly to be better than 2014.

And looking at it today we would expect 2016 to be pretty similar to 2015, that's how the fundamentals are shaping up to the extent that it would weaken that would impact what choice we have.

And just one last thing, for those of us with a strong balance sheet the dislocation in the real estate market particularly the apartment business whether it be in land prices if they come down drastically or in peoples' perspective of value because cap rates gap up that creates a tremendous opportunity to once again be able to buy properties at low prices and be able to benefit from the next part of the cycle in the upside.

Dave Bragg - Green Street Advisors

Okay. Thanks for that. And as it relates to your conversations with new investors perhaps over the last year or so, has that altered your thinking in terms of the interplay between your -- these investment opportunities and your cost to capital?

Lou Fatica

Well, we are very focused on our cost to capital and how we use their precious capital that we have and so nothing has really changed with regard to that focus, our fully funded acquisitions and development plan really speaks to itself and the accretion that we will deliver from selling the properties to fund those current acquisitions and our development will be hugely accretive, but beyond that I would go back to the same answer I said before as we get further into the cycle and for us as we continue to execute on the plan that's currently underway, we'll know more about that. And obviously a lot will have to do with ultimately the impact that all of this things have on our goal of narrowing the gap between our stock price and the NAV.

Operator

Your next question comes from the line of Buck Horne with Raymond James.

Buck Horne - Raymond James

I had a quick question on SG&A. The guidance for the full year -- I believe it is still targeting around $19 million. If you look at the first half of the year, you are right around kind of a $10 million run rate; and if you look at the back half of last year, you are also kind of on a $10 million run rate. I'm kind of curious; what do you think -- or is there something specific in the SG&A line item that leads you to believe you will be able to cut about $1 million out of that for the back half of this year?

Lou Fatica

Hey Buck, it's Lou. Part of that is, we had investing of incentive compensation accruals that occur in the first quarter that drive the expense upward. It's also our projections as to what we expect related to our on-going legal costs associated with our Desmond litigation and we expect that to tail off a bit in the second half of this year. At this point we are comfortable with the run rate.

Buck Horne - Raymond James

Okay that's helpful. And just quickly going back to the 358 project. You mentioned that your estimated project cost had jumped on you by as much as 8%. I just kind of wondered, could you be a little bit more specific? What's going on there? Do you think there's a risk that project costs could continue to creep higher on you? And when do you think you will be able to get that project started? And what kind of completion dates are you looking at now?

Jason Friedman

Buck, its Jason. The increase as John said in his prepared remarks is about 8% over our pro forma. That's primarily due to increase in construction cost that we have seen in San Francisco, both on a material and labour basis. But we've been working with the same general contractor who currently is on-site doing the site work and we are close to signing a GMP with that same contractor. So we feel very good about where the numbers are now. The plans are just about complete, and so if we are able to sign the contract this quarter, as we plan and continue the construction, we expect it to be fine. At the same the market has continued to improve; rents are up, and so therefore the returns have stayed the same.

Buck Horne - Raymond James

And you're estimated start and your completion dates for that, that project, any rough idea?

Jason Friedman

We have already started the site work as planned in March last quarter. So no change to our expected delivery dates and completion dates. We intend to stay on schedule.

Operator

You can have a follow-up question from the line of Jeff Donnelly with Wells Fargo.

Jeff Donnelly - Wells Fargo

Actually, I forgot to ask earlier -- I have had a few REIT investors ask about your willingness to list -- I think it's the 4% limitation on ownership, just to make it easier for the larger REIT investment platforms to make an investment that's sort of proportionate to the benchmark in their assets under management. I know in the past, Jeff, that there was once a structural reason for that limitation. But I don't think it persists anymore, at least at the 4% level. Have you given any consideration to lifting that or raising that up?

Jeff Friedman

Jeff, corporate governance is very important to us. The limitation that's in our articles of incorporation has not in the last 20 years been an impediment for anyone that has wanted to increase above the 4%. But that's certainly something that the Board could consider in terms of amending the articles of incorporation.

Jeff Donnelly - Wells Fargo

I guess, I just suggested, maybe you do it proactively rather than asking. You're making people request permission; if you do it proactively it might be beneficial for you guys?

Jeff Friedman

Okay. Thank you.

Operator

You have a follow-up question from the line of Nick Joseph with Citigroup.

Michael Dorman - Citigroup

Michael Dorman again, just at the end of your opening comments, correct me if I am wrong. I think you said you will look at all market opportunities for the benefit of shareholders? Was that correct?

Jeff Friedman

Let's see.

Michael Dorman - Citigroup

It was right before we went to questions. I got market opportunities to the benefit of our shareholders. I think you said explore or look at.

Jeff Friedman

We will continue to take advantage of market opportunities to the benefit of our shareholders.

Michael Dorman - Citigroup

So what were you trying to get at in that? What sort of market opportunities are you referencing? Are you talking about operations? Are you talking about development? Or are you talking about potential private market interest in your stock, given the discount to NAV which you referenced?

Jeff Friedman

I'm talking about all of the above. We are always focused on ways to maximize shareholder value and that's what we do; every decision that we make. We believe the best way to maximize long-term shareholder value is to continue to execute on our strategic plan, improving our margins, repositioning our portfolio, continuing to improve the balance sheet and creating and delivering value from our development platform.

Michael Dorman - Citigroup

Right. As you think about the Board today, seven members, four of the Board members have been there on average over 20 years. Two are about 10, and one was added 2 1/2 years ago. Do you feel that the Board needs to be refreshed at all, or to add new perspectives, different opinions in terms of narrowing this gap to NAV? Do you think that you can benefit from that at all?

Jeff Friedman

Five of the seven board members are independent board members all I'll include myself in that high character individuals they are the millionaire with our business and we're always interested in things that we can do to improve the Company, the nominating corporate governance committee is responsible for nominating and vetting directors and we're always open to potential candidates.

Michael Dorman - Citigroup

And then lastly, when was this whole reforecast done on a property basis? Because I guess I'm -- and we have touched on it a little bit on this call about the same-store guidance coming down, which is different than pretty much all of your peers, which have been increasing the guidance ranges. And I sort of hear you that the first quarter was weak, and you sort of talked a little bit about the slow start, though I would say first-quarter results -- that you still had some very positive commentary in terms of outlook. We certainly headed into NAREIT where I would say that you and the team were pretty bulled up and optimistic. To have a 63 basis point decline in the midpoint of revenue guidance seems material that, if it was all 1Q, we would have expected that to have been known or should have been highlighted to the Street earlier.

Jeff Friedman

Michael this is John, we completed our reforecast at the end of June and when we did the reforecast we did know that we have to that softness in the first quarter we thought that we would be able to grow out of that faster than we were able to and we thought that we could be even higher occupied going into the second quarter and into the third quarter, but we think that at this point that the 96% occupancy is absolutely full and as I said before where we got -- Q1 was slow the second quarter we got a little bit slower start then we thought, we were at all in rents up at that 2.8% we thought we were going to get stronger growth that that. So the 4% going forward we feel very comfortable with.

Operator

Thank you. That concludes today's Q&A session. I'd like to turn the call back over to Jeff Friedman for any closing remarks.

Jeff Friedman

Thanks again for your interest and associated the states to those of you who were still on the queue that had a question didn't get a chance to ask it we'll follow up with you offline. That concludes our call.

Operator

Again, thank you for your participation. These conclude today's call. You may now disconnect.

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