Essex Property Trust's (ESS) CEO Michael Schall on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Essex Property (ESS)

Essex Property Trust (NYSE:ESS)

Q2 2014 Earnings Call

August 07, 2014 1:00 pm ET

Executives

Michael J. Schall - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Pricing Committee

Erik J. Alexander - Senior Vice President of Property Operations

Michael T. Dance - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

John D. Eudy - Executive Vice President of Development

John F. Burkart - Executive Vice President of Asset Management

Analysts

Nicholas Yulico - UBS Investment Bank, Research Division

Nicholas Joseph - Citigroup Inc, Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Jana Galan - BofA Merrill Lynch, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

George Hoglund - Jefferies LLC, Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Operator

Greetings, and welcome to the Essex Property Trust, Inc. Second Quarter 2014 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC.

It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust.

Thank you. Mr. Schall, you may begin.

Michael J. Schall

Thank you. I'd like to start by welcoming you to our Second Quarter Earnings Call. Mike Dance and Erik Alexander will follow me with comments. John Eudy and John Burkart are also in attendance for Q&A.

I'll cover the following topics on the call: first, second quarter results; second, an update on the merger with BRE; and third, the status of key priorities. So on to the first topic.

Yesterday, we were pleased to report an exceptional quarter driven by an undersupplied housing environment emanating from the robust economies on the West Coast. Our reported 7.2% same-property revenue growth matched Q3 2012 and Q1 2014 for the highest revenue growth rate achieved since the Great Recession. Southern California continued the expected steady-but-slow improvement in its revenue growth rate, which exceeded 5% quarter-over-quarter for the first time since the Great Recession. Northern California and Seattle continued to perform at the expected high level.

Our market update on Page S-15 of the supplement reflects a nominal increase in total housing supply from last quarter, still representing about 0.7% of the total stock of rental and for-sale housing in our target market. It is notable that the for-sale housing construction remains at very muted levels, while apartment supplies continue to gradually increase. Our 2014 job forecast improved from last quarter, with an increase of 35,100 jobs in 2014, moving our job growth forecast to 2.6%. While all areas continue to perform well, Microsoft's recently announced layoffs and growing apartment supply in Seattle will cause us to be more cautious in the Puget Sound region. Overall, the forecasted 2.6% job growth, with total 2014 housing supply increasing by 0.7%, indicates a shortage of housing that is apparent in our results.

Now on to the second topic, the merger update. It has now been 4 months since the closing of the BRE merger, and I can report that much has been accomplished, and that we still have plenty of heavy lifting ahead of us. To the E-team members listening today, please accept my sincere thanks and appreciation for your incredible efforts, dedication and skill as we become a stronger and more capable organization.

I am pleased to report that the management transition at the properties has proceeded well, and included a recent realignment of portfolio assignments based on geography rather than premerger ownership. Major systems integration to one platform is underway, beginning with HRIS and other systems. The conversion of the property operations and accounting platforms is the most important part of the systems integration, and it has been the subject of extensive planning and coordination. While both BRE and Essex use Yardi for property management and accounting, a host of specialized subsystems support the Yardi platform. At this point, we expect Yardi and related subsystems to be merged on a phased basis, beginning in Q4.

Considerable effort has been invested in our long-term strategic vision. We are truly a unique company, with clusters of properties located in or near the best apartment markets on the West Coast. In Downtown LA and North San Jose, for example, we have more than 14 properties within 5 miles of each other, requiring new approaches to service delivery, while providing opportunities for improvements in leasing, pricing, staff effectiveness, customer relations and marketing. This part of the integration planning will be a multiyear phased effort that we're excited to pursue.

And finally, third topic, update on near-term priorities. Last quarter, I commented on the need to remain focused on our most important priorities. Following is a brief update on the short-term, mid-term priorities outlined last quarter.

The first priority was to reduce the growth differential between the BRE and Essex portfolios, while taking advantage of the strength of the 2014 peak leasing season. In Q1 2014, Essex generated quarter-over-quarter revenue growth to 7.2% versus 5.6% for BRE, for a 1.6% differential. In the second quarter, that differential was reduced to about 0.5%, comprised mostly of 1.2% higher scheduled rent for Essex compared to BRE, offset by BRE's approximately 0.7% improvement in occupancy relative to Essex. BRE's higher turnover, shorter lease durations and lower financial occupancy make us believe that further improvements will be achieved in the coming quarters.

The second priority was to vigorously pursue integration of systems and processes, which remains a key management focus. My previous comments have already addressed this topic. And finally, the third priority was to ramp up investment activity, given relatively stable apartment cap rates at a time of declining capital costs, with debt rates declining and Essex stock hitting all-time highs. To avoid resource problems, our senior executive team meets every Monday morning, discussing issues and opportunities, including how investment activity might impact other priorities, especially merger integration. We came to the conclusion that we have capacity for a few larger acquisitions, mostly focused on Northern California. So far this year, we have acquired $217 million in apartments. We currently have $385 million in non-contingent acquisitions in process, which we expect to close in the third quarter. Therefore, we expect to exceed our acquisition guidance of $300 million to $400 million in 2014.

That concludes my comments. Thank you for joining the call. I'll now turn the call over to Erik.

Erik J. Alexander

Okay, thank you, Mike.

We're very pleased with our results this quarter, especially when coupled with the progress Essex has made in integration items. The focus on property fundamentals by operations in the corporate teams has been superb, and we applaud those efforts. The changes in management that Mike was talking about provided us with some important insights on integration items. Our regional leadership team has been able to share a fresh perspective on existing systems and processes from both companies. This has led to valuable recommendations on system strengths and challenges, and as a result, we have been able to accelerate some of those decisions.

We've not changed our overall timeline for integration, but we have been able to better organize some of the components because of feedback provided by our internal customers. Most notably, we will be migrating to a single revenue management system ahead of schedule, which will allow us to better attack opportunities to lower turnover, increase occupancy and improve our daily pricing review. These changes will also allow us to enhance our customer experience and improve satisfaction and retention.

So as expected, leasing activity continued to accelerate throughout the second quarter for the entire portfolio. With respect to performance of the Essex portfolio, strong occupancy positions reported in May allowed for solid scheduled rent growth beyond our initial expectations for the second quarter. In fact, the sequential growth in scheduled rent for the second quarter was 2.1%, which is the largest second quarter gain since before the Great Recession. July's scheduled rent gains were also impressive and should set us up for a solid third quarter.

Strong markets certainly fueled our revenue growth, as economic rent levels in the Essex portfolio were up 8.3% year-over-year. Higher market rents helped push our renewal pricing, which contributed to our stronger-than-expected revenue growth, as residents renewed their leases at a rate 6.3% higher than their old rate. Looking forward, we expect renewal activity to continue to support strong revenue results, as offered rates for August and September are in the mid-6% range.

As of yesterday, physical occupancy in the Essex same-store portfolio was 96%, with a net-to-lease of 6.3%. We expect to lower our net availability to 6% by the end of the third quarter, and sustain occupancy above 96%.

Turning now to the BRE portfolio. The real story has been the rapid gain that we made in occupancy during the quarter, having increased physical occupancy by nearly 100 basis points by the end of May, and holding that level through June. This translates to a 76 basis point gain in financial occupancy compared to the first quarter of this year, and a 92% improvement -- 92 basis point gain over the second quarter of last year.

I'm confident that we are in the right path, as the BRE portfolio was occupied at 96.1%, with a net availability of just 5.5% earlier this week. However, given BRE's higher turnover during the second and third quarter, we expect it will take a couple more quarters to truly close the gap in financial occupancy with the Essex portfolio, and a full year to bring turnover rates more in line with our expectations. We also have evidence that we are making meaningful strides in this area, as the annualized turnover for the second quarter was slightly lower than the turnover ratio recorded last year. This, despite facing 7% more expirations.

Furthermore, through a modified renewal strategy, we have been able to extend the lease terms residents are willing to accept to 11.5 months in June and July. This is about 5 weeks longer than historical average over the past 18 months, and should represent a structural change in the expiration profile and turnover results next year. Reducing turnover is an important part of our goal for achieving parity in occupancy with the Essex portfolio, and gaining pricing power to drive better revenue results.

So now a quick rundown of the new development lease-up activity, which continues to demonstrate strength of demand in both Northern and Southern California.

Epic continued to lease apartments at a rapid pace during the second quarter, and stabilized in June, nearly 2 months ahead of plan. We accelerated leasing activity at Solstice, occupied an average of 38 apartments per month during the period, and stabilized the property.

Radius opened at the beginning of June with very limited pre-leasing activity, and has already achieved an absorption rate greater than 40 leases per month. Mosso, which many of you have seen, is leasing very well, despite its under-construction condition, and has inked 111 leases to date. This result is a testament to the strength of the San Francisco market, and things should only improve for us as we begin to deliver a very nice complement of amenities.

In Southern California, Avery stabilized according to plan, and is nearly 100% leased, while Wilshire La Brea continues to lease at a rate of 35 to 40 apartments per month. And the collaboration with a half a dozen of our nearby communities, including Huxley and Dylan, has proven to be beneficial. Huxley is now stabilized. And Dylan will officially open next week, and we expect this property to lease as well, if not better, than Huxley given its preferred location. I'll provide leasing results next quarter, along with comments about Park 20 and Emming [ph].

Now for some highlights of each region, starting with Seattle. June unemployment growth at 3% and unemployment below 5%, Seattle continues to perform well above the national average. Amazon continues to grow, by adding over 700,000 square feet of office space in the CBD. Boeing Commercial Airplanes captured $17 billion of net orders during the quarter, and the backlog has now reached a new record high of $377 billion. This represents 5,200 aircraft, and equates to approximately 7 years of production.

Rent growth in Seattle is again led by the east side, with year-over-year rent growth above 9%. Seattle CBD, at 5%, is underperforming the rest of Seattle, as supply continues to impact our properties operating in this market, particularly the A product. Given the concentration of expected deliveries in CBD this year, and a similar number next year, we don't expect to see additional rent growth in this submarket in the near term. However, please keep in mind that the CBD market comprises less than 20% of our total same-store portfolio in Seattle, and less than 4% of the total Essex same-store portfolio.

Now looking at Northern California. Job growth in Northern California was 3.2% for June, with San Jose leading the way at 3.4%. Google recently announced an addition of 300 -- sorry, 336,000-square-foot office in San Francisco. And the Silicon Valley has a year-to-date absorption of 1.3 million square feet of commercial space, with another 3.5 million under construction. Levi's Stadium, home of our San Francisco 49ers, opened this past weekend, and development around the stadium is currently planned for up to 8 million square feet of commercial, retail, hospitality and housing. And in the East Bay, Amazon announced plans for a 574,000-square-foot distribution center. So all of this activity continues to fuel the jobs in the greater Bay Area.

Economic rent levels continue to outperform in all submarkets, with San Jose, San Francisco and Alameda leading the way, with year-over-year growth north of 10%. These markets have had little trouble absorbing new supply thus far in 2014, despite relatively higher deliveries in San Francisco and San Jose than we've seen in prior years. We continue to believe that the demand is comfortably outpacing the supply.

Now finally, in Southern California. Los Angeles, Orange County, San Diego all posted year-over-year job growth in June above 2%, and LA's jobless rate has dropped to 8.1%, compared to 8.7% in March.

Orange County's employment growth was tempered somewhat by layoff announcements from Allergan and Broadcom, while job additions in Los Angeles are coming from education and health, professional business service sectors, with the information sector growing 6%, which is the highest growth post recession. Commercial activity improved during the quarter, as Orange County absorbed 1.1 million square feet of office, and another 500,000 square feet of office projects are under construction within just a few miles of our Hollywood and Mid Wilshire assets. We saw rent growth accelerate in all of our Southern California properties, beginning in April and continuing through July. As of the end of July, year-over-year economic rents were at least 6% higher in Los Angeles, Orange, San Diego and Ventura counties. Modest deliveries and steadily improving jobs picture should help to continue respectable economic rent growth in the broader region.

So beyond the strong markets and healthy outlooks across the entire portfolio, I'm encouraged even more now that I have seen the new Essex team work together to achieve excellent results during a demanding and anxious transition period. I'm eager to work through the balance of the integration in order to realize true team unity and put Essex in a position to deliver top-tier results again next year.

Thank you for your time and support. And I'll now turn the call over to Mike Dance.

Michael T. Dance

Thanks, Erik.

Today, I will provide commentary on our second quarter results, the revisions to our guidance to core funds from operations, review changes to the income statement presentation in the supplement and will close with a few remarks on the balance sheet.

The second quarter exceeded by $0.08 the midpoint of our guidance range for Core FFO per share. This outperformance was predominantly from better-than-forecasted property operations, as we saw strong net operating income growth in all 3 regions and have revised the midpoint of same-property NOI growth to approximately 8%. Our revised full year forecast for revenue growth of 6.6% at the midpoint does not represent decelerating rent growth. It simply reflects the seasonality of our business, with the highest rent growth occurring during the months beginning in March through July.

Please recall that, in 2014, we also have a very difficult second half comparison to the second half of 2013. In the second half of 2013, we achieved greater than 6.5% rent growth compared to the second half of '12. For the second half of '14, the year-over-year rent growth for the same-property BRE legacy portfolio is expected to be slightly better than the year-over-year same-property rent -- revenue growth in Essex portfolio, as a result of the forecasted gains in occupancy at the legacy BRE communities. We expect to achieve similar financial occupancy in the 2 portfolios by the end of the year.

The midpoint of our same-property operating expenses increase remains unchanged at 3.5% for 2014. On our last conference call, we actually forecasted second quarter same-property expenses to increase by 5%, compared to the actual results of 3.1%. This $0.02 per share savings in expenses was due to timing, and we are now forecasting these expenses to occur in the second half of the year.

Moving on to our guidance change. We have increased the full year Core FFO per diluted share by $0.09, to a midpoint of $8.39 per share, resulting in Core FFO growth of nearly 11% for the full year. The guidance change was limited to $0.09, as our original estimate -- as our original guidance, first, we already assumed robust revenue expectations for the second half of the year; second, our expectations for the timing of operating expenses previously noted; and lastly, general and administrative costs should increase over the Q2 run rate based on anticipated increases to headcount, and incentive compensation tied to achieving the forecasted results.

Now I want to review the changes to accounting that impacted the financial information included in our supplemental presentation this quarter.

First, we reduced general and administrative costs by approximately $1.4 million for the development and redevelopment fees paid to Essex from our co-investment partners. In Q1, we had approximately $1 million in development and redevelopment fees, which were accounted for as revenues in Q1. But in Q2, we have reclassified the prior quarter's expense -- or revenues as an offset to general and administrative expenses, to be consistent with this quarter's presentation. This accounting change has no impact on FFO, and will reduce the fluctuation in management fee income and G&A expenses that occurs solely based on whether the development communities are owned on balance sheet or partially owned with partners.

By accounting for these fees as an offset to G&A, our overhead costs will be more comparable between quarters. This accounting treatment depicts the economic reality that these fees are principally reimbursement for the costs of providing these services to our partners.

The second change is that we have temporarily discontinued the allocation of the costs of G&A activities related to property and asset management fees as a separate expense line item on the income statement. Again, this accounting change has no impact on FFO results, and the allocations will be revisited after we merge the Essex and BRE accounting systems in the fourth quarter.

The third accounting change was noted in our press release, and relates to the accrual of the utility reimbursements from residents. This receivable was becoming material, and is considered a preferred accounting method than the accounting for the revenues on a cash basis. This change resulted in a onetime increase to revenue and FFO of $1.8 million, which has been excluded from the same-property revenue, and excluded from Core FFO.

The last change was mentioned on our Q1 Conference Call, and was contemplated in our revised guidance provided in Q1. Essex has adopted the BRE's accounting, which follows Generally Accepted Accounting Principles, the amortization of leased concessions over the initial lease term. This accounting only applies at Essex when it is offered to new residents at a development community. This change increased FFO by $0.01 in the second quarter, and reduced the dilution from the development pipeline. The accounting change will also better reflect the effective rent growth from these communities when the assets enter the same property portfolio.

I will now wrap up with a few comments on the balance sheet.

As a result of the merger, five of the six debt metrics presented in our supplement on S-6 have improved over the same metrics prior to the merger. As we successfully lease up the development communities and grow the net operating income in the same-property portfolio, we are on plan to reduce the total debt-to-annualized EBITDA to below 7x before the end of March 2015.

Year-to-date, we have issued $366 million on equity to match-fund our external growth opportunities. And we are committed to a strong balance sheet, as demonstrated by reducing our line balance in April by issuing $400 million of unsecured bonds with a 10-year maturity.

This ends my comments. And I will now turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Nick Yulico with UBS.

Nicholas Yulico - UBS Investment Bank, Research Division

Turning first to BRE, a couple questions. Should we assume that the second half BRE same-store numbers and growth looks similar to what you achieved in the first half of the year, since you mentioned you still had some of the occupancy benefit coming?

Michael T. Dance

Yes, this is Mike Dance. Yes, we're looking at about 6.6% revenue growth year-over-year for the second half of '14 compared to '13, primarily, as you mentioned, due to the occupancy gains that we can achieve in that portfolio that we've already achieved in the Essex portfolio.

Nicholas Yulico - UBS Investment Bank, Research Division

Okay. And then if I turn to Page S-7 in the supplemental. You give the legacy BRE property revenue, NOI, et cetera. If I do the math, it looks like the margin on the BRE portfolio is like 64.5%, and your same-store margin 69%. How should we think about that gap? And how much do you think you could close there?

Michael T. Dance

That's predominantly Proposition 13 write-ups in their portfolio. So those were basically estimating Prop. 13 at this time, based on advice we're getting from consultants, but that's to be determined. We think we're doing a good job estimating those, but more to tell as we get supplemental tax bills from the county assessors.

Nicholas Yulico - UBS Investment Bank, Research Division

Okay. And then just lastly, on the development pipeline, can you remind us where you think expected yields are on the pipeline underway today; and then separately, what was just completed in the second quarter? And I was also hoping to get an updated thoughts on Wilshire La Brea, that's a bigger asset, how you think about the stabilized yield there and what the NOI contribution might be for 2014 since you saw some lease-up.

Michael T. Dance

Yes, this is Mike Dance. Let me just comment briefly on the BRE portfolio, and then I'll hand it back to John or Mike on the Essex portfolio. On the BRE portfolio, as part of business combination accounting, we're required to assign fair values to all of the assets. And then we looked at the state of completion there relative to cost to complete. The assets that are delivering in 2014, we pretty much brought in at a low 4 cap rate. So those will be stabilized in the low 4 rate, plus the rent growth we're achieving in those markets. I'll let John or Mike now talk about the Essex portfolio.

John D. Eudy

This is John Eudy. On the existing portfolio on the Essex side, the cap rates we have estimated on our stabilization is in the mid- to high-6 range. And the ones that we've turned over to operations fully this quarter were actually slightly on the high side of that range.

Michael J. Schall

Nice work, John.

Operator

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

Nicholas Joseph - Citigroup Inc, Research Division

When do you expect the same-store revenue growth gap between the legacy Essex and legacy BRE portfolios to only reflect the different submarket allocation, not redevelopment contribution, the occupancy gains you talked about and other income differentials?

Michael J. Schall

Nick, this is Mike Schall. I'm not sure there's a real easy answer to that, because we approached each part of the businesses separately. I think we've reported on -- in prior calls that we have discontinued the -- a lot of the redevelopment activity on the BRE side, pending transferring it over to the Essex way of looking at things. And just to give you an idea of what differences there are. We take an asset-by-asset approach on redevelopment. We look at each asset separately within its market, try to determine what things we get paid for and what things we just want to turn. We don't use a cookie-cutter approach. We use a customized asset plan for each one. And so we expect to start layering in redevelopment activity back into the BRE portfolio sometime in the third quarter. And actually, there's one large asset in Emeryville that there was some significant damage that was subject to an insurance claim, where BRE got $20 million back. So we're going to do an extensive rebuild, or a reconstruction on that, and pull it out of the same property pool, for example. But I guess, to answer the question, it'll probably take a year before there's a full redevelopment plan on the BRE side. It'll start right away, but it will be building up over the next year. Does that answer your question?

Nicholas Joseph - Citigroup Inc, Research Division

That does. And then just going to the acquisitions you mentioned, primarily in Northern California. Is that a result of more assets on the market there, or a strategic decision to grow that market, or a shorter-term opportunity you see?

Michael J. Schall

It's really all of the above. I mean we try to find the best markets, obviously. We try to measure growth rates, cap rates; try to look for the best opportunities within our portfolio. I'd say, as a general rule, the lowest-risk and highest-return opportunity is still in redevelopment. However, moving large dollars in redevelopment is difficult, because of what I just said, which is a specific asset-by-asset planning process, and it is difficult to deploy redevelopment dollars in a high-quality manner without trying to have just basically a systematic reduce of many things. So we're going to continue to be focused on redevelopment. We think that, that is our highest total return, but we're not going to be able to move huge amounts of money in that area.

Within the development side, we want to continue to be a developer, an active developer. We got up as about as high as 10% of enterprise value in our development pipeline at the bottom of the cycle. And we think, at this point in the cycle, we're unable to exactly figure out what's going to go grow faster: NOIs or construction costs. And therefore, we're going to be more conservative at this point in the cycle, and we may reduce our development exposure to somewhere around 5% of enterprise value, just to give you some idea. And so we'll find opportunities within that spectrum. And we continue to see some pretty interesting development deals that we're working on.

And then so finally, on the acquisition side, we still think Northern California. And we're comparing a lot of deals back and forth. We have passed on some deals in Southern California. We have gravitated to, rather than, let's say, the super A market within Northern California, finding opportunities that might be in a B+ city near a transit-oriented site, a transit-oriented district, where someone can get on, for example, BART or light rail and commute into town, because we believe that given how expensive it's getting in some of the core areas, that there's a logical transition to still good locations that have good transit options as being the best total return in the acquisition area. Does that make sense?

Nicholas Joseph - Citigroup Inc, Research Division

It does. And then, I guess, just between kind of those A locations and the B+ locations, what kind of growth differential are you underwriting?

Michael J. Schall

Well, again, this is the important distinction. I mean, typically, as you come out of a recession, the A areas are going to grow the fastest, and the B areas are going to essentially get the benefit of the second wave. And so we think we're in that second part of things. We're actually -- if you look at our own results, you'll see Alameda County, for example, which is mainly the B assets growing actually better than some of the A areas. So we're starting to see the transition from really expensive areas, people being forced to move out of the really expensive areas, and that is benefiting, again, the still good areas, but not Downtown San Francisco, for example.

Operator

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

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Just quickly, just some questions here. The turnover difference between BRE and Essex, if you could just comment a little bit more on this. Was this more of the way like the way that the BRE tenants were managed from corporate? Or was there a more active approach to try and, I don't know, I guess, not retain people? If you could just give some color. And just because that seems rather glaring. And then also maybe a little bit on what the duration difference was. If you guys are going for 11.5 -- I think you said you're going for 11.5, or maybe it's now 11.5, but if you could just give some color on the difference of the duration strategy.

Erik J. Alexander

Yes. Alex, it's Erik. I think one of the biggest drivers was not so much the focus. I think BRE, like everybody, wants to retain people as much as they can. I think the strategy of how -- what you offer the residents, in terms of their length of stay. And so what we saw is Essex is in the 11.5 average term range on the renewals. And for the past 18 months, the BRE portfolio had seen closer to 10 month renewals. And that was really based on the offers. The offers favored a 10-month renewal, where typically, the renewals in the Essex portfolio favored a 12- or a 13-month lease, from a pricing perspective. So what we saw in June and July was a result of changing that, trying to push the longer-term lease, with an eye on managing our lease expirations so we set ourselves up good for next year, and just get in a better position for pricing.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. So there wasn't like an active part on BRE to get people to move out. It was more just how they did their duration of the lease renewal.

Erik J. Alexander

Yes, I don't believe there was an active plan to try to move them out.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then on the operations side, if we just use EQR-Archstone as a sort of a template, it seems like there are 2 stages to getting synergies. There's, one, the initial, which you guys have outlined and sounds like may take a year. And then there's the next stages, which is as you operate the portfolio, the properties in close proximity, there are efficiencies that you get above and beyond. So can you just give us a sense for sort of, if you take a sort of on a 1-to-10 scale and say 10 is full integration, everything going, how much do you think you will integrate over the next year for efficiency improvement; and then how much -- and then by default, what you think is then left over the longer term?

Michael J. Schall

Alex, it's Mike Schall. That's an interesting question. I would say that this first year is going to be picking the low-hanging fruit oriented, which means lowering the turnover ratio, focusing on occupancy, building pricing power, training the people so we all think alike and approach the business the same way, implement all the systems and the integration so that we are one company. Interesting note during the quarter was it took us a couple months to reconcile the definition of financial occupancy, because they were different between the 2 companies, for example. And so there's a tremendous amount of detail, and we're trying to work through that. I think that's going to take a good year. We are, at the same time, accumulating lists. And Mr. Burkart has a lot of this, and he may want to comment, creating lists of opportunities that we see that we want to pursue at some point in time down the road, when we get back to the scenario I referred to in my comments, the sort of a re-visioning of how we provide the service. And again, given the proximity of properties in certain clusters, notably in my call, North San Jose and Downtown LA, we know that, in certain cases, for example, price optimizers compete with, from property to property, without considering that the same owner may own both, for example. And situations like that have got to be resolved. I think we get to none of that during this first year. We may want leasing offices that are open till 9:00 at night within the main clusters, for example. We may want more specialized maintenance, so that you have sort of a cluster maintenance group, some which are highly skilled in plumbing and other -- a variety of other tasks. Essentially, all that stuff is out there. That is the broader how we are going to provide the service in the future, we will not get to in this first year. And we are, as a general statement, really busy trying to keep our eyes focused on the things ahead of us. We all recognize that these are not annuities. They are businesses. The world changes quickly, as we saw in our mea culpa moment in Q3 2011, which lives in infamy around here. And we remain vigilant in trying to make sure that we react appropriately to changing conditions, that the communication up and down the organization is appropriate, that we're monitoring things appropriately with reports, and that we are prepared to react if conditions change.

Operator

Our next question comes from the line of Jana Galan with Merrill Lynch.

Jana Galan - BofA Merrill Lynch, Research Division

I was wondering if you could provide an update on condo conversion activity in your markets this summer?

John F. Burkart

Sure. This is John Burkart. As it relates to -- let me talk about condos in general. So clearly, when we look at the markets, in all of the markets, the condo pricing is moving, as it is in most of for-sale housing. The hottest market, no doubt, is San Francisco. San Francisco Bosa is actually building a couple of towers, one in San Francisco and a couple in Seattle. And to put it in some context, the San Francisco tower of 267 units, about 200 of them have sold out in a very short period of time. Compare that to, say, Seattle, where they're selling about 15 a month for a 700-unit tower. So all of the markets it's moving forward. San Francisco is at its closest point. However, we're still not at the point where it's, you might say, frothy, at the point where we would say it makes sense to convert because, at the same time as we have the condo price moving, we also have rents and apartment values moving. And so again, it's not a just condo price issue. It's a, where is the arbitrage opportunity where we can find the chance that someone will pay perhaps a half to a cap more for our apartments and valued as a condo? So we're not quite there yet. We're monitoring it very closely. We're engaged in numerous conversations. And we'll react, as Mike says, to the market when it -- as it gets there. But it's definitely moving forward.

Jana Galan - BofA Merrill Lynch, Research Division

And Erik, I'm sorry if I missed this in your comments. Could you provide move-outs to homeownership this quarter and maybe an update on rent-to-income?

Erik J. Alexander

No I haven't provided that. It hasn't materially changed since the last quarter. It stands around 11% for the portfolio overall, highest in the Pacific Northwest, and lowest in Southern California.

Michael J. Schall

And then, this is Mike. Let's see, rent-to-median incomes, not a whole lot of change there. We track the current rent-to-median income against the long term average from 1990 to 2013, and those relationships look pretty healthy. I'll go through a couple of them for the sake of discussion. In Seattle, for example, rent-to-median income, because incomes are doing very well in Seattle, 16.9% versus the long-term average 1990 to 2013 of 17.4%. So that looks good. San Francisco, currently at 25.1% against a long-term average of 24.4%. San Jose, 20.8% versus 20.3% long-term average. Let me do one more, LA, 20.4% currently against 22.4% long-term average. Again, I think the thing that is different about the West Coast is we are adding so many jobs that are professional in nature, that have high income levels. And it has the effect of pushing income levels up, and therefore, the affordabilities are not becoming stretched.

Operator

Our next question comes from the line of David Toti with Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

I just have 2 simple questions, and I might have missed this, but the portfolio metrics were a little odd in that turnover declined, occupancy was relatively stable but concessions rose, which I was a little surprised. I would think that, that number would follow turnover. Can you just provide a little bit of detail on that dynamic?

Erik J. Alexander

Yes, I might not be clear on the concession part, the -- If you're referring to the...

Michael J. Schall

It rose nominally, yes. I mean they didn't rise a lot. And I think most of it was one asset that is competing against a new community -- or actually, several new communities. I think it was the 5600 Wilshire asset. So I think that accounts for almost all of the concession number. Right, Erik?

Erik J. Alexander

Yes, that was the big concession number. [indiscernible] asset specific.

Michael J. Schall

And then I'd also comment that, again, the turnover number where BRE's was in the, what, 63% range. I mean that's a function of a high-turnover, high-lease-expiration period during -- intentionally, during the peak leasing season. And it takes time for us to bring that number down. It will -- we have to be there for a full cycle of implementing our view of how you do renewals; and a little bit longer lease terms, as Erik mentioned; and a variety of things. So again, some of these things just take time to implement.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay, that's helpful. I was just curious on the mechanics. My other question, and this is maybe for Mike Dance. I would have thought we'd see greater levels of dispositions, given asset pricing. How are you guys thinking about asset sales relative to other costs of capital in terms of sort of a funding source? And why aren't you -- sort of why aren't you maybe disposing more at this point in the cycle?

Michael J. Schall

David, it's Mike Schall. It's a topic that we are talking about a lot these days, but I would suggest to you that we have done the calculations, and we have concluded that using a combination of stock and debt on a -- essentially balance sheet -- near balance sheet neutral type of basis, is better than using recycled asset proceeds. And there's a couple of caveats to that. One is that we, all things being equal, don't want to operate in Phoenix, and so there is a pretty good likelihood that we will sell out of that market. And the other caveat is keep in mind that, because of Prop. 13, the buyer and seller essentially have different cap rates, because the buyer is going to have a reassessment, and therefore, his NOI is going to be lower than it is on our books. And therefore, that acts as an impediment, in effect, to sell. Not -- and again, not that we won't sell, we're just going to be careful about time. But in our view right now, with debt costs rallying 50 basis points or so, and the stock hitting all-time highs, we are better off issuing stock to fund new acquisitions than using dispo proceeds.

Operator

Our next question comes from the line of Rich Anderson with Mizuho Securities.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

So just a couple of questions on BRE. What is the difference between their second and third quarter lease expiration schedule now versus yours?

Erik J. Alexander

Yes, so the -- this is Erik. So this, the third quarter has a higher turnover expiration than Essex. So we were -- they were 63% in the second quarter, and we were in the low 50s. The last couple of years, that profile was 70% for BRE and kind of mid 50s for Essex. And so we're seeing basically the same thing. And we're doing -- like you said, we're offering the longer-term leases, and we're doing some advanced renewals to try to bring that all under control. And I think that the physical occupancies so far are evidence that it's working. The fourth quarter is more similar to ours, and we don't expect a big issue there.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

That's actually good information, but not quite the question I was asking. When it comes to, like, the percentage of your leases expiring in the second and third quarter, I'm sure it's more than 50% of the total, right? You try to target that. What is that number for Essex, not turnover, but just the raw expiration? And what is that number for BRE?

Erik J. Alexander

I'm sorry, Rich. I'll have to get back to you with the specific number for both those portfolios.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Okay. Mike Schall or whomever, when you think about the combination of BRE, they bring more Southern California to the mix at the margin than you had originally. Do you think that, that's a particular opportunity given that Southern California hasn't started that ramp-up yet? Or is that kind of just splitting hairs?

Michael J. Schall

That's another good question. In a normal world, I would think that we would expect Southern California to have that ramp-up, but I think this is a very unique recovery period. This recovery period is really being dominated by tech, life sciences and energy. And that, we think, is going to continue to favor the North, Seattle and Northern California, and whereas Southern California is more of a diversified economy, and we think it will still do well, but unless the recovery broadens out or, let's say, until the recovery broadens out, we think that we have a distinct advantage in Northern California and Seattle. Obviously, we don't know, and we're trying to make decisions that are going to benefit the company over the long haul. I still think Southern California is a very, very strong market, very limited supply. We still think good things are going to happen in Southern California. And actually, I'd also mention, because of the tech and life science influence in Northern California, it can be -- and Seattle, it can be a little more volatile than Southern California overall. So I think having a balanced portfolio, as we have -- and as you know, we -- of the 4,175 units that were used to form the joint venture, they were predominantly Southern California focused, so that we maintain more of the Northern California, Seattle flavor to the overall portfolio. And we think that, that's about the right balance at this point in time. Again, could change in the future depending upon what happens in the broader economy.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Okay. And then on the topic of synergies, last quarter, you had operating G&A synergies ranging from $24 million to $27 million for a full year run rate. You beat on the BRE side, in the second quarter, you mentioned $0.02 better than expected. How come you didn't adjust the synergy target? Or did you and you're just kind of waiting for somebody to ask?

Michael T. Dance

Rich, it's Mike Dance. There are a number of vacant positions in G&A that we're going to be filling here in the second half of the year. So I believe it was some of the turnover that wasn't expected. We're going to be filling those positions. So that, and I think I mentioned in my remarks that we're having a great year, and we're hoping that we get rewarded for that in compensation levels. So that is going to also be adding to the second half of the year's G&A.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

All right.. So the operating is outperforming. G&A might be a little bit higher, and the net is no change at this point.

Michael T. Dance

That's right.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Okay. And then the last question, Mike, for you then. Did you give any consideration to the accounting change, in particular the amortization of concessions over the life of the lease, and moving in that direction? Did you have -- did you give any consideration to taking it all upfront? And just curious what your thought process for -- was for not doing it that way.

Michael T. Dance

We are doing lease concessions on GAAP for the development communities. That's where it's material, where it -- again, it's a lot of work. We're not doing it for the same-property portfolio. We make -- we decided to make that change when we looked at all the BRE assets that are being delivered in 2014. So we are -- we did change our policy to recognize concessions upfront, and amortize that over the life -- the initial term of the lease. And that did benefit Q2 by about $700,000 in FFO. So that was all contemplated in Q1's guidance. So I think -- did that answer your question?

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Yes, that's fine. All right.

Operator

Our next question comes from the line of Haendel St. Juste with Morgan Stanley.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Erik, I guess I wanted to get some color from you on the Essex same-store revenue growth in Southern California, well above your peers'. So I'm just curious how much of that, would you say, is location, price-point driven versus upside in the BRE portfolio.

Erik J. Alexander

Yes, I think it's some of all of that. We had good results in Ventura County, where we moved occupancy in the first quarter. So we got some price gains there. Los Angeles, I think, fundamentally, has been better. I think evidenced by some of the lease-up activity that I mentioned. So that's carrying over into our stabilized assets where we're seeing some better pricing. And then we have made occupancy gains, I think, particularly not just in the BRE portfolio, but also in Essex San Diego. So all of those things have contributed.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. And one or two more for you while you're there. Overall turnover in your portfolio was relatively unchanged year-over-year, but we did see almost a 10-percentage-point year-over-year decline in Seattle. Is that you guys being more cautious today given the ramping supply you referenced earlier in the call in the Seattle metro area? And then given the near-term outlook for Seattle you provided also earlier, can we perhaps see SoCal revenue growth exceed Seattle's by perhaps next year this time?

Erik J. Alexander

So the first part, the turnover was a little higher in Seattle last year due to some renovation activities that are not the same this year. And then we also see a higher conversion this year on renewal offers in Seattle. Part of that related to our renewal strategy and some of the self-limiting increases that we've set. And then with respect to Southern California beating Seattle next year, did you say?

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Well, maybe. You tell me. You tell me.

Erik J. Alexander

I don't know. I'm -- what I'm hoping for is it ties the same level that Seattle is this year. We're both enjoying that kind of growth. But I do think that you're seeing maybe a little more consistency in the growth in Southern California. Very anxious to see how the third quarter turns out, and hope that this is less bumpy and more sustainable, and that it moves towards those levels.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. And last one now, speaking of renewals. Maybe I missed it, but could you give us the new and renewals perhaps by region, if you could, for 2Q; and then also the early reads, well, July actuals and early August, what you're asking for?

Erik J. Alexander

Yes, the early -- sorry, the August and the September is 6.5 for the Essex portfolio, and 5.7 for the BRE portfolio. And I think I'd commented in the -- in my comments about the second quarter being 6.3% overall for Essex. That number for BRE was 5%. And again, that's probably a little bit lower than it would have been, but again, we're pushing a renewal strategy to extend leases, to reduce turnover, to bring that occupancy up, and get into a better position later.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Did you -- or could you perhaps give those by region, the renewal and new for the -- during the quarter?

Erik J. Alexander

I don't have it right in front of me, Haendel.

Operator

Our next question comes from the line of George Hoglund with Jefferies.

George Hoglund - Jefferies LLC, Research Division

Most of my questions have been answered, but I guess, one thing: I'm looking at your preferred equity investments. Is there the chance that any of those might turn into acquisition opportunities over the next 12 months?

Michael J. Schall

George, it's Mike Schall here. I don't know what the opportunity to do that. We -- it's obviously on our mind and part of the reason that we are in that business, not just for the return, but to be part of a discussion at the term of the preferred equity investments. But at this point in time, there are no discussions ongoing about taking any of them out.

Operator

Our next question comes from the line of Michael Salinsky with RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Erik, you gave a whole bunch of leasing statistics just at quarter end, where is the loss-to-lease there? I mean I didn't talk about moderation, but are you seeing that gap actually widen as you're capturing a lot this trend?

Erik J. Alexander

Yes, we are. It's getting pretty big. I mean July has been a good month. And for Essex, it's around 8%, and for BRE, it's just shy of 6%. And it's a double-digit number in the Bay Area. So yes, it's growing.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Impressive. Second question. I believe you talked a little bit about redevelopment, but now that you've got the portfolio for 4 months, you know the properties a little bit better, you got a handle on the lease-up, what's kind of the scope or scale you see of redevelopment opportunities across the BRE portfolio? Is it greater than that of the Essex portfolio?

John F. Burkart

Mike, this is John speaking. It's actually pretty similar to the Essex portfolio overall. However, the BRE assets are a little bit newer. So Essex, we tend to have a little bit more infrastructure, plus the outside finishes. And for BRE, it's a little bit more of the outside finishes, but the opportunity is pretty significant. As Mike said, we're -- we've had teams of people go through each and every asset. We've had multiple offsite meetings. And we're really rolling it into our portfolio plan that we expect to come out in -- over the next year. And it'll be at about the same level as what we're doing at the Essex portfolio right now.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. Third question, possibly for Mike Schall. The $385 million you referenced, I mean how should we think about that? Is that mostly B property? Is that A properties? What's kind of the acquisition strategy right now? Is there a focus on A versus B? Or is it really more submarket driven, no differential between A versus B right now?

Michael J. Schall

Yes, it's actually a little bit more submarket driven at this point in time. There were assets that traded that we dropped out of the bidding process when the cap rates for, I would say these are A assets and A locations, went sub 4. We're really not all that interested in participating in some of those transactions. And again, we would rather play this, what typically happens when you have a very tight apartment condition where people are forced to move out to the next area. So we're trying to go to transit-oriented areas in still good cities that are still near the jobs, and where rents are lower and cap rates are higher, and try to anticipate that trend of people that will be moving out or will not be able to find a apartment in the best areas and they're willing to get on a BART train or whatever and commute in.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay, so this is more suburban type product that you're acquiring here...

Michael J. Schall

I'll give you an example. A couple of these buildings are within 10 miles of North San Jose, where all the jobs are, for example. We're not talking about going to the hinterlands. We're talking about going to good cities, Fremont, for example. Again, with transit options, given that the traffic in the Bay Area is becoming more problematic over time. And again, we're trying to find those places where people want to live, offer a good quality of life, can access their -- the employment nodes and provide the appropriate return to us.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. Then finally, at your Investor Day last year, you provided a 3-year outlook that assumed pretty healthy growth there. The growth that we're seeing obviously is tracking above that. Are you seeing growth in addition to what you had expected, or are you seeing a compression of the cycle?

Michael J. Schall

That's -- I think that they can work together. I don't -- I'm not sure that you're seeing compression in the cycle. We would expect a longer cycle, as we suggested there. We went back and looked at all of the recovery periods for the last 50 years, and we concluded that, when you have major financial recession type periods, the recovery periods tend to be longer. And we certainly think that, that's a key part of this. The other part of it, though, is what's going on with incomes. I mean, as long as incomes continue to grow, and the overall affordability equation is tolerable to the consumer, we think that this can go on longer than we might otherwise have expected. But I think the difference between this cycle and several of the previous cycles are the number of high-quality, high-paying jobs is different. The amount of wealth that is being created is also different in that you have companies that are very profitable, as opposed to if you go back to, for example, the late '90s where you had companies with no operating history whatsoever, that you were able to raise $1 billion in the market and operate a "to be formed" type of company. It's a much different scenario to that. I mean we see, at this point in time, real jobs, income levels doing very well, the -- for example, the Microsoft announcement of 18,000 jobs essentially being let go, and of somewhere around 1,500 of them in the Seattle area is what we're expecting. A lot of those people are highly skilled. And again, there's a number of companies that are looking for those skill sets. So we're not sure exactly what impact that's going to have, but I feel like it might be more muted than what you might otherwise think given the magnitude of the losses.

Operator

Our final question today will come from the line of Nick Joseph with Citigroup.

Michael Bilerman - Citigroup Inc, Research Division

Final, wow, that's a high hurdle. It's Michael Bilerman. So I noticed your marketable securities balance went up about $6 million to $106 million. And I wasn't sure if that was a purchase of additional stocks, if that was increases in market value. I know there's a bunch of bonds in there, but there is, like, I don't know, $22 million, $23 million of common stocks, and I didn't know if that was something of a strategic opportunity on the tongue [ph] that we need to be mindful of.

Michael T. Dance

Michael, this is Mike Dance. I assure you it is not a strategic opportunity. It -- we do have a captive insurance company that continues to have no losses, but continues to collect premiums. That's some of it. Some of it's increases in market values, but no strategic investments.

Michael J. Schall

And then just to be clear, Mike. The captive insurance entity, I think it has around $40 million in it?

Michael T. Dance

$45 million.

Michael J. Schall

$45 million in it. So the -- we have a tiered investment scheme which has -- the first couple of tiers are very safe, and then it becomes a little bit more discretionary and/or more like ETFs and that type of investment in those layers. But it's really a function of that, wanting to remain liquid and have those reserves set aside in case there is a self-insurance type loss.

Michael Bilerman - Citigroup Inc, Research Division

And then we spent a lot of time on this call talking about how you've been able to influence the BRE portfolio in processes and things like that, but I'm curious if there's been any influence at all on the Essex portfolio from anything that you've been able to garner either out of operations or any other sort of discipline that, like, came from looking at BRE, that's had some influence on the Essex properties?

Erik J. Alexander

Sure. There have been. I mean, I think the information has gone both ways. I think we see a lot of it in the integration stuff. In the systems that we're changing, we've adopted some of those things that serve our internal customers. On the customer side, we're -- we'll be adopting a customer care platform that was used by BRE in a process we think works well. And we'll adapt some ideas we have on that. Some things related to utility bill-back, we're looking at. We've had some just great collaboration on stuff. I met with a manager in Seattle, who said -- who transferred from a BRE community to an Essex community, and she said, "I just love the way you do this simple renewal." She said but, "Gosh, there's like 12 steps to get to the price. I have some ideas on how you can fix that." And I'm like, "All right. Let's get together and talk about that with the right people." And so again, people are really, I think, being encouraged and sharing ideas. And I think that's been a big part of the integration is it -- constantly encourage that, and don't pretend that we have all the answers. So yes, we're differently getting ideas from all the people that are involved.

Operator

Thank you. At this time, I'd like to return the floor back over to management for closing remarks.

Michael J. Schall

Okay, thank you, operator.

In closing, we thank you for joining the call. This is truly an exciting time, if not exhausting time, at Essex. We appreciate your interest in the company and look forward to updating you again next quarter. Good day.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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