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Executives

John Schissel - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Scott Reinert - Executive Vice President of Operations

Constance Moore - Chief Executive Officer, President, Director and Member of Executive Committee

Stephen Dominiak - Chief Investment Officer and Executive Vice President

Analysts

Swaroop Yalla

Jana Galan - BofA Merrill Lynch

Richard Anderson - BMO Capital Markets U.S.

Michael Salinsky - RBC Capital Markets, LLC

Eric Wolfe - Citigroup Inc

Gautam Garg

David Bragg - Zelman & Associates

BRE Properties (BRE) Q2 2011 Earnings Call August 3, 2011 11:00 AM ET

Operator

Good morning, my name is Nancy, and I will be your conference operator today. At this time, I would like to welcome everyone to the BRE Properties Second Quarter 2011 Earnings Release Conference Call [Operator Instructions] I would now like to turn the call over to Ms. Constance Moore, President and Chief Executive Officer. Please go ahead, ma'am.

Constance Moore

Thank you, Nancy. Good morning, everyone. Thank you for joining BRE's second quarter 2011 earnings call. If you are joining us on the Internet today, feel free to mail your question to askbre@breproperties.com at any time during this morning's call.

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

This morning, management's commentary will cover our financial and operating results for the quarter, the operating environment and an update on our investment activity, our financial position and outlook of the balance of the years. John, Scott and I will provide the prepared remarks. Steve Dominiak will be available during the Q&A session.

Reported FFO per share totaled $0.49 for the quarter, which compares to the range which we provided in May of $0.52 to $0.55. Absent the $0.05 preferred stock redemption charge and $0.01 of dilution from the equity offering, results came in at the high end of the FFO range. Annual guidance was updated to a range of $2.09 to $2.17. The midpoint of the annual guidance is unchanged at $2.13. However, the previous range of $2.08 to $2.18 was provided before the equity offering and therefore, did not contemplate the impact of the $0.05 preferred redemption charge, nor an equity issuance in the amount raised.

For the current midpoint, if you exclude the impact of the charge, it's $2.18, or equal to the high end of the previously guided range, and an increase at the midpoint of 2.3%. As we sit here today at the midpoint of the year, we are very pleased with our operating results. Our revenues are tracking to plan, with Northern California and Seattle clearly exceeding our initial expectations, and Southern California lagging a bit, although it has began to stabilize. Our sequential growth accelerated in the second quarter and we expect it to continue to do so for the balance of the year.

At this stage in the recovery, sequential growth is a good indication of the improvement of our market and our ability to push rent. The drivers supporting multi-family fundamentals continues to be the lack of supply, the strong demographic and the increasing propensity to rent. We can't ignore the lack of job growth, particularly in Southern California. But as many have commented recently, the unemployment rate for our primary renter cohort, those with college education, is just over 4%. And the echo boom generation is expected to grow 9.6% in California which compares to only 4% for the nation as a whole, creating a significant pool of potential renters in California which will contribute to our ability to maintain high occupancy levels and increased rent.

The drivers for raising the effective midpoint of our 2011 FFO guidance reflects same-store revenues that are tracking to plan and expense growth that is more favorable than previously expected. Given that we are tracking to the midpoint of our revenue assumptions, we felt it appropriate to tighten the range accordingly with a slight nod to our portfolio being overweighted in Southern California, where macroeconomic conditions are in an earlier stage of recovery compared to Northern California and Seattle. Our updating -- or our updated earnings guidance also incorporated positive outperformance at our 2 lease subcommunities, the benefits from acquisition activity over the last 15 months, including the recent addition in Oakland, as well as reduced interest expense and preferred dividend. Assets acquired in 2010, particularly in Northern California, are performing better than expected, and we acquired an asset in the second quarter that was not included in our initial guidance and is already contributing to our performance, as rents are exceeding our expectations with increases 2x what we underwrote.

Scott will provide specific color on each of our markets. But from a big picture standpoint, we continue to see improvements across the entire portfolio. Sequentially, revenues were up 2%, over 3% in the Bay Area and Seattle and up 1.5% in Southern California, driven by an increase in both rental rates and occupancy levels. The Bay Area and Seattle markets are strong and getting stronger. New leases and renewals were signed during the quarter at an increase of 7.2%, or $100 per lease. We expect that the pace of increase should continue to accelerate in the back half of the year.

Now the comparable data in Southern California during the second quarter was an increase of 2.5% or $35 per lease. We also expect the pace of increases to accelerate during the back half of the year in Southern California, from the current 2.5% to the 4% to 5% range.

We look at peak level rent relative to today's rent to provide context as to where we are market-by-market in terms of recovery. Current rents in Southern California are well below peak levels, providing room to run over the next several quarters. San Diego and Orange County are down 7% to 10% from peak levels, and L.A. is still down 12% to 15%. Bay Area rents are back to peak levels, 6 months earlier than we had anticipated. Seattle rents are still well below peak levels, as this market dealt with significant supply. Today, much of that supply has been absorbed. And while there is discussion of supply coming to this market in 2013, revenue growth is accelerating and occupancies remain strong.

The May $440 million equity offering further strengthened our balance sheet. We feel very good about how we are positioned long term. Our leverage and fixed charge coverage metrics are as strong as they've ever been over the past 10 years. We are now poised to continue to grow our story with investment activity focused on both acquisitions and development. While cap rates continue to be extremely competitive in the low to mid 4s in coastal California, we've been able to source a number of properties above market cap rate. Our Jack London asset in Oakland is the most recent example.

Acquisition activity has totaled over $415 million over the last 18 months at a weighted average first year return of 5%, increasing our operating real estate portfolio by 13%. We currently have another Bay Area asset tied up for approximately $50 million, and plan to opportunistically continue to source transactions that make sense from a location and a cap rate perspective.

Our development pipeline, which is also weighted primarily with Northern California assets, is about to become more active. We have one asset in Sunnyvale under construction, and are set to start a second Sunnyvale asset, our Town and Country site early in the fourth quarter. When complete, the 2 Sunnyvale sites, plus our existing San Jose asset acquired last year, will make up 1/3 of our Bay Area portfolio. Our Bay Area presence has grown from 18% of our portfolio to 22% over the last 18 months. Today, our Bay Area same-store pool does not include any of our recently acquired assets in the Silicon Valley.

We started Mercer Island in Seattle, that site in July, and expect to start our Wilshire La Brea site in the fall. The strength of the Wilshire Corridor and our recent performance at our 5600 Wilshire site gives us confidence in our La Brea site. Second quarter renewals at 5600 Wilshire were done at an increase of 5.6%, and occupancy today is strong at 97.2%.

In April, we acquired the last 2 remaining market-rate multifamily sites in the Mission Bay redevelopment area of San Francisco for the construction of 360 units. This market, which is close to downtown, the UCSF Medical Campus, salesforce.com planned 2 million square-foot campus, and easy transportation to South Bay continues to strengthen.

The economics of this transaction have continued to improve in the few months that we've owned the land. This will be a late 2012 start. This development activity represents total starts in 2011 of $450 million. We expect another $325 million to $350 million in starts in 2012. We expect development advances to total $75 million to $100 million for the balance of 2011. And beginning in 2012, advances should average $225 million to $275 million per year.

Our pipeline represents 4 to 5 years of development activity, and most of our sites are nearly fully entitled today, removing the risk of discretionary approvals as we finalize construction plans. From a liquidity standpoint, except for our line renewal in September of 2012, we have no material debt maturities until 2017, providing us with significant financial flexibility.

In summary, we are pleased with our solid results for the first half of 2011. Fundamentals continue to strengthen in all of our markets, providing a clear runway to continue to push rent. Occupancy remains very strong, sequential revenues are accelerating, supply remains in check, and we continue to believe the next 3 to 5 years could be the best ever for multifamilies, particularly here in California.

And with that, let me turn the call over to Scott.

Scott Reinert

Thank you, Connie, and good morning, everyone. Our portfolio performed as expected during the second quarter, with results very similar to the first, showing a continuation of the trends seen earlier with 2 distinctly different stories between North and South.

Revenues for the San Francisco Bay Area and Seattle are outperforming expectations, with strong rent growth and occupancy levels. Southern California is benefiting from favorable operating conditions, but the pace of recovery is uneven and at times, it's been a bit choppy. Because of this, revenue growth in the company's Southern California communities is slightly behind expectations set at the beginning of 2011.

During the quarter, overall occupancies in the same-store properties were strong and availability tight, with the exception of LA and Inland Empire. For the quarter, portfolio occupancy averaged 95.7%, with availability at 6.2%. Currently, the portfolio occupancy has strengthened to 96% and 5.9% available, with Southern California at 95.8% and 5.8% available.

In April, given our very strong occupancy and availability position, we pushed market rents aggressively throughout the portfolio. In Seattle and San Francisco, the increases were accepted, and additional increases have continued. By contrast, in Southern California, resident price sensitivity caused increases in availability and occupancy reductions. In L.A. and Inland Empire, nearly all of the increase was taken back. San Diego and Orange County were able to hold on to the increase, but the road through the quarter was a little bumpy.

Turnover continued to trend down. For the second quarter in a row, turnover was lower than expected, and for the year, is on an annualized pace of 60% compared to last year's 62%. Top reasons for move out in our portfolio included: number one, relocating out of the area at 15%; number two, home purchases at 11%, which is lower than a year ago and still below historic levels; number three, was job related at 10%; and fourth, was rent increases at 9%.

Renewal increase data is provided for you on Page 17 of our supplemental, and you'll see that we averaged 4.2% growth overall in renewals as compared to 3.5% in Q1. In July, our renewals continued to grow, as we booked increases ranging from 2.3% in the Inland Empire and 3.1% in Orange County, to 6.7% in the Bay Area and 7.6% in Seattle.

And while we do send a number of -- a good number of renewal letters out with strong double-digit increases, it doesn't mean we always get them, because we tend to see more move-out activity on those deals causing moderation to the final results. With regard to new leases, we provided market-specific data in the supplemental, comparing the new leased rent to the prior resident rent. For the quarter, we averaged 4.4% growth with Seattle and the Bay Area leading the way at 8.6% and 8.7%, respectively, and San Diego and the Inland Empire just over 1% each. Our preliminary July results trend favorably at 4.8% overall, showing double-digit growth in the North, minimal growth in Los Angeles and the Inland Empire, and 3% to 4% in San Diego and Orange County.

I'll give you market-by-market color based on relative market strength, starting with the strongest markets. And I'll update you on renewal increases that we're sending out for August and September as we go.

In the Bay Area, we had expected revenues to increase this year at 4% to 5%, and we now expect that range to be 5.5% to 6%. We were successful in securing increases on new and renewal leases, the combination of renewals versus previous leases, and move-ins versus prior leases of 7.1% during the quarter. The momentum during the quarter was significant. The combined increases averaged 5.5% in April, 6% in May and 9.3% in June. Notices for renewals for August and September have gone up, averaging 7% to 9%, and expectations for new leases, as mentioned earlier, could combine for double-digit growth for the third quarter. The area is very strong, and as Connie stated, our non same-store assets in San Jose has done incredibly well. We're also seeing strength throughout the East Bay, as higher rents in the Peninsula and Silicon Valley are pushing people East. We're very confident about our rent growth prospects for this region through 2011 and into 2012.

Seattle increases have been very strong also. Expectations for annual revenue growth are also now in the 5% to 6% range, compared with our original expectations in the 4% to 5% range. New lease increases totaled 7.4% during the quarter. And similar to the Bay Area, momentum picked up throughout the quarter, April at 5.2%, May to 7.9% and June at 8.7%. There's talk of supply again becoming an issue in Seattle, as new construction activity has picked up, but scheduled deliveries over the next 18 months are low by historic standards. We expect new and renewal lease increases to be in the 8% to 10% range during the third quarter, with August and September renewal notices going out with an average of 8%, and new move-ins in the double-digit range. The downtown market is the hottest right now, with Bellevue and Redmond not far behind.

San Diego continues to strengthen, and we now expect annual revenue growth to be in the 2.5% to 3% range. San Diego has had year-over-year job growth of 1%. And equally important, military rotations have been less impactful in Q2 than Q1. The South Bay market was extremely soft during the first quarter of 2011, and was much improved during the second quarter. Revenues improved 1.3% sequentially in the second quarter, and we expect that pace to accelerate further in Q3.

New and renewal leases were done at an average increase of 1.9% in Q2. Market rent increases of over 3% were pushed through in the second quarter and they stuck in San Diego with additional growth through July. The market has been supported by an increase in corporate rentals and large shipbuilding contracts. Renewal increases sent for August and September averaged 4% to 5%, and the portfolio currently stands at 96.5% occupied and 5.9% available.

Expectations for annual revenue growth in Orange County are also in the 2.5% to 3% range. New and renewal leases were signed during the second quarter, with average increases of 2.5% over the previous lease. Revenues increased sequentially 2.2%, primarily driven by occupancy increases. Residents are pretty price sensitive, as we’ve had mixed results with our rent increases. Availability is currently 4.9%, which should allow for acceleration of revenue growth in the third quarter. The job environment in Orange County is mixed. Properties closest to major employment centers are exhibiting the greatest strength, while some of our other assets in more traditional bedroom communities continue to await an employment rebound. Renewal increases for August and September have been sent with an average increase of 4% to 5%. But we do have some going out with increases as high as 10%.

Los Angeles results have clearly been impacted by the reduction of government jobs, which are down 18,000 year-over-year. Overall, employment in L.A. is down 8,500 jobs year-over-year, or minus 0.2%, and unemployment remains elevated. It's been hard to gain consistent traction in this market with some pockets, like the Wilshire Corridor very strong, while others are still early in the recovery. Occupancy was lower than we would have liked in Q2 at 94.7%. And we may sacrifice pricing power in this market to build occupancy before heading into the seasonally slower fourth quarter.

New and renewal leases were signed at an increase of 3.2% over the previous lease during the second quarter. Our expectation for year-over-year revenue growth in L.A. is now in the 1.75% to 2.25% range. Renewal increases for August and September were sent out in the 3% to 4% range.

Inland Empire employment levels are down 1%. We had strong performance in Inland Empire in 2010, by employing an effective rent strategy and focusing on maintaining occupancy. At the start of the second quarter, we tested in higher rent, and availability immediately jumped to 8%. This is our most price-sensitive market. Occupancy averaged 95% for the quarter, but started in April at 95.6% and ended at 94.2% in June. We've increased occupancy back to 95.3% in the last 30 days but it'll be difficult raising rents without further job improvement.

Our expectation for the year-over-year revenue growth in the Inland Empire is now in the 1.75% to 2.25% range. These renewal increases have gone out for August and September in the 2% to 3% range.

In summary, we continue our positive outlook for the year as we see momentum gaining. In the Bay Area and Seattle, we're taking an aggressive stance toward rent growth, renewal increases and revenue generation. It's clear that market fundamentals are strong, and traction is evident. And as such, the plan is to continue pushing until the market pushes back. In the South, we'll continue to focus on maintaining strong occupancy, and we'll take advantage of every opportunity to keep pushing rents.

And with that, I'd like to turn the call over to John.

John Schissel

Thanks, Scott. As we've already touched upon the primary themes for the business and the operational detail for the quarter, I'll spend a few moments providing additional color around guidance in BRE's financial position before we open up the call to questions.

Connie noted how the midpoint of our updated guidance reflected an effective increase of 2.3% from our prior guidance, excluding the preferred charge. The effective raise of the midpoint reflects revenues tracking to plan in the same-store portfolio, aided by lower expenses due to reduced turnover and favorable tax appeal proceeds. We also have seen a substantial contribution of NOI from our non same-store portfolio, including the acquisition of our Oakland community, and we have reduced interest costs and preferred distribution. All this was slightly offset by our higher share count, as a result of our May equity offering. We also outlined in our earnings release a range of possible capital activities, the timing of which would impact our annual results and have been incorporated into our guidance.

On the spend front in May, we expected the development advances to total $150 million and $175 million during 2011. We would tighten that range to $160 million to $175 million, leaving approximately $90 million left to fund.

With respect to our financial position, we are extremely well positioned. Our credit metrics are strong across all financial measures, with no pressures from meaningful debt maturities outside our revolving credit facility until 2017. This substantially reduces our exposure to capital markets volatility, as we increase our development activity. The strength of our balance sheet also allows us to be more aggressive for additional investments if we see opportunity. Our revolver does not expire until September of 2012, and we would expect to begin discussions later this year regarding a renewal of this facility.

And with that, I'll turn the call over to Connie.

Constance Moore

Great. Thanks, John. Nancy, we're ready for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first now to Dave Bragg from Zelman & Associates.

David Bragg - Zelman & Associates

Just following up on your opening comments. I'm trying to understand a little bit better what was embedded in the original revenue growth guidance range, especially at the top end. So first, Connie, since your peers are generally raising revenue growth guidance at this point in the cycle, were you surprised to find that you already know that you're not likely to achieve that top end that you had initially? And then second, you said that Northern California is exceeding your expectations. So how far behind your expectations are you in Southern California? And can you break that out by market, like you did for Northern California and Seattle?

Constance Moore

Sure, I think Southern California is clearly -- when we started the year, the expectations, both external and internal for Los Angeles, were certainly stronger, both on the jobs front and the GDP front. So I'll tell you that our original expectations for the year-over-year revenue growth in Los Angeles was going to be closer to 4%. Today, we see it closer to 2%. So that's probably -- that was -- Los Angeles for us has been the biggest surprise. Now again, as Scott said, it's very spotty. We have strength in the Wilshire Corridor, as both of us mentioned, given the strength that we're seeing sort of in our 5600 Wilshire. And so it's not all of LA but across the board in terms of our portfolio, that's what's happening. If I look at Orange County, not quite a big a gap. Our original expectation was that on a year-over-year basis, revenues would grow just slightly over 3%. We now think it's about 2.6%. So not quite the Delta, but still a little bit slower. San Diego is actually improving. We thought that San Diego would grow about 2.3%. We think it's now going to grow about 2.5%. So I would call that kind of just a rounding error and that's pretty much spot on. And again, the Inland Empire, as Scott mentioned, is our most price-sensitive market. And we did, I think many of -- when we talked to many of you at NAREIT, where we talked about pushing rent, we pushed rents in the Inland Empire and everybody gave us a no go. And so it was like, oh, we're just kidding. But it did create a spike in our availability, and that's not a market where you want to be fighting availability. So our original expectations for the Inland Empire were growth of 2.2%, we now think it's about 1.9%. So again, not as big a delta so the biggest delta in terms of original expectations to where we think we are today is in Los Angeles. Seattle, both Seattle and San Francisco, we thought our year-over-year was going to be about 4.4%, 4.5%. Today, those are both sort of 5.5% and, in San Francisco, could be 5.5% to 6% so both of those markets are doing really well. But again, right now, we do have an overweight to Southern California. And so when we look at the math and when we look at quarter-to-quarter and the sequential results, it's how it flows through. And so we're sitting here, we spent a lot of time talking about how to tighten that revenue. But as we sit here today, July’s done; we've sent out August notices; we'll see how much of those stick. As Scott mentioned, on some of the very aggressive renewal notices, those people tend to move out. But we feel very good about Seattle and the Bay Area. So August notices are out. We'll see how much of those stick, and we're now working on September. So when I look at it, it's kind of like, well, all right, we're really just kind of guessing on what October, November and December's going to do, because we really kind of have the third quarter, I don't want to say in the bag, because obviously, we have to go get it, but we kind of know what we're sending out. So it did not -- when I look at how we performed relative to our peers in the markets that we compete in, I am very happy with what we did, both on a sequential basis and a year-over-year. Remember, if you look at our performance in the second quarter of last year, we actually outperformed many of our peers. Now, since everybody was down, we were the most attractive horse in the glue factory, but we have tougher comps. So I look at it, and that's why we're focused on sequential. And I think our sequential numbers are strong, and as we mentioned, getting stronger. So we knew that the headline of tightening around the midpoint on the revenues was going to be the headline for all of you. But we felt it was the right thing to do because while we knew we couldn't get to the bottom end. We knew the tightening of the bottom end. Because we just couldn't – getting to 3% was just -- that was not going to happen. But it was going to definitely be more challenging to get to the top end at 4.25 so we felt it was the right thing to do. We feel confident in it. And as we look at the balance of the year, it continues to improve. So that by the time we're sitting in the fourth quarter, our year-over-year revenue growth should be closer to 6 for the whole portfolio. But right now, it's kind of how it flows out.

David Bragg - Zelman & Associates

And the follow-up question is, again, on revenue management software. You talked about kind of guessing in the second half or maybe in the fourth quarter, as to how pricing will trend there. And there does seem to be a little bit of a history of underperforming in some specific markets, such as San Diego versus peers. Does this quarter or maybe the revised outlook, have you thinking more about revenue management software? And additionally, how that could help with the forecast in itself?

Constance Moore

Well, all right. I'll let Scott talk a little bit about our thoughts on revenue management. I look at San Diego, and yes, for the last several quarters, we have underperformed. Before that, we were an outperformer for a number of years. So I think part of it's just sort of what's going on in that market. But I'm comfortable with where we are in San Diego, and I like the fact that it's going to continue to accelerate throughout the year in a pretty meaningful way. But I'll let Scott talk a little bit about revenue management.

Scott Reinert

So we all know that this game is all about maximizing revenue, and that's what a yield management or revenue management system does. I always like to point out that we do have a revenue management system, and it's proprietary to BRE, and we think it's pretty good. We manage all the major components, from traffic patterns and demand, lease exposure and supply. Every 2 weeks we're updating our competitive pricing in occupancy. We look at our relative position of strength, and we price accordingly. I spent the first 6 months here studying our properties and our markets and everything we do, and I'm looking very close at the top line revenue. I continue to be open to the possibility of a different system and would never say never. But for now, we're pretty satisfied with our pricing system and more than anything, we're anxious for a more robust recovery in Southern California.

Operator

The next question comes from Eric Wolfe from Citi.

Eric Wolfe - Citigroup Inc

Scott, you gave us some good detail on the level of rent growth you're seeing across your markets. Based on this growth, and I guess the time it takes to run through your lease role, is it reasonable to expect that Southern California is still going to lag next year by a pretty decent margin from a same-store revenue perspective?

Scott Reinert

I don't think so. I mean, I think that we're picking up a lot of momentum right now. And assuming we continue to see a growing recovery, I don't think it'll lag.

Eric Wolfe - Citigroup Inc

So the momentum you're seeing right now is going to be enough? I mean, because it obviously takes time to work through the lease roll. Is it going to be enough to, maybe, bring that market up to sort of closer to where your Northern California and Seattle are performing?

Constance Moore

Yes. I think, when I mentioned our delta between our peak rents and where we are today, actually, over the short to intermediate term, Southern California probably has more room to run now. How quickly we get there, because when you think about Los Angeles, it's 12% to 15% off-peak rent. Whereas the Bay Area, we're there. We got there 6 months earlier. So I think that you're right; it has to work through the rent roll. I think that we're going to close the gap because we're starting to see some nice acceleration in the third and fourth quarter in Southern California. I mean it's probably not going to be quite the double digits that we see in Northern California and Seattle. And principally, Southern California has one of the weakest job markets in the country. And so it has continued to lose jobs. Year-over-year, it's lost -- let me put my glasses on, because this is a little -- but year-over-year, it's lost, in the last 12 months, 8,500, which doesn't sound like a lot of net market. But the government jobs -- I think the government’s also got 18,000. So government continues to weigh on that. So that's a market that while we've got great job growth and more importantly, the quality of the jobs in both Seattle and the Bay Area are amazing. And so I would describe the tech sector as white hot. And in Southern California we've got to get some job growth so that we don't get quite this price sensitivity. But I do think that we will close the gap in 2012.

Scott Reinert

I would just add that we're projecting by fourth quarter our year-over-year growth will be close to 5% in most of those Southern California markets.

Constance Moore

Yes. So that sets up well for our '12.

Eric Wolfe - Citigroup Inc

Right, that's very helpful. And just a question for John. How much volatility and spread have you seen from secured lenders over the last month or 2, just given the economic issues that have come up over the time? I'm just wondering if lenders have adjusted accordingly, or if rates are just coming down with the tenure?

John Schissel

Yes, I can't say we've seen it, especially in the secured market because we're not active participants there. Life companies have become extremely aggressive on their financing quotes. And for lower leverage deals are pricing inside the GSEs in many cases now. On the unsecured side, we think we could price a 10-year deal at a 175 spread in that range today. And it's moved around a little bit relative to the underlying index but not that -- it's come in, if anything. So we haven't seen it widen at all in recent weeks.

Operator

We'll move next to Richard Anderson from BMO Capital Markets.

Richard Anderson - BMO Capital Markets U.S.

Just a quick modeling question first, if I may. Interest expense adjustments in your guidance is down $7 million at the midpoint. Capitalized interest is up 2.7%. Is part of that -- I'm assuming, I mean, part of that $7 million, is that increase in capitalized interest. Is that the way we should be modeling it?

Scott Reinert

Yes.

Richard Anderson - BMO Capital Markets U.S.

So the raw reduction in interest expense is more like sort of $4 million -- well, to be specific, $4.3 million as a result of...

Scott Reinert

Yes. It's a little bit more than that, but what ends up happening as we paid down our overall level of debt, but as development findings have actually gone up and our overall effective rate of interest that we capitalized, because we paid off lower rate debt, that's causing that phenomenon.

Richard Anderson - BMO Capital Markets U.S.

Okay, okay, fair. And then just a big-picture question for Connie, you mentioned, I think you said the best-ever fundamental picture for multifamily for the next 3 to 5 years. Is that what you said? Or were you just kidding?

Constance Moore

No, that is what I said, and I'm not kidding.

Richard Anderson - BMO Capital Markets U.S.

So I mean, how do you see -- how do you look out 5 years and be able to make that statement? What is it about what you see now? I mean, I can understand the next year or 2, but the next 5 years is -- I mean, what is it about now that differs from past cycles that make you...

Constance Moore

Well, as I've said publicly before, I'm very certain about 3. Five, obviously, is fuzzy, because in 2007, who -- in 2002, who knew what was going happen, during 2009. So yes, 5 years is a long time. I'm certain about 3, and I just look at the fundamentals of our business, both in terms of the demographics and the increasing size of our renter cohorts, the lack of supply, particularly in our markets, and I think whether it's permanent or not, we'll never know. I think many of us will be on the other side of the graph by the time we study whether or not there is a permanent shift in thinking about homeownership. But California is a renter state. Our homeownership level has declined back to its normal 55% since 1950. As I mentioned in my commentary, we are expected, as a state, to get 2x the number of the Gen Y cohorts in the state relative to the nation as a whole. They are renters; their views of homeownership have changed. So I feel like we are very well positioned. We have a mixed portfolio in terms of a variety of price points so we can serve a number of cohorts. So I feel very good about where we're positioned, I feel great about our balance sheet, our ability to -- we have, as I said, a 4 to 5-year window on development. So we now have the luxury of looking for very complicated development sites that we don't expect to start for 5 or 6 years. But we've got a pipeline for the next 4 or 5. So I think, for BRE, particularly for the multifamily industry, we can't sit and ignore what's happening in the broader economy. And I'm not so naive to assume that consumer confidence and consumer spending and job growth will not have an impact because it clearly will. But I do think, on a relative basis, there's no place I'd rather be than multifamily.

Richard Anderson - BMO Capital Markets U.S.

But that 3-year -- almost, where you're really comfortable, would presume some level of job growth, I would guess, right?

Constance Moore

Absolutely.

Richard Anderson - BMO Capital Markets U.S.

Okay. And when you say, when you express that confidence and you speak about the homeownership in California is it also -- are you making a statement about its outperformance relative to the nation, I guess? Not that you shouldn’t have a comment about the East Coast or whatever, but would you say that the time duration of this kind of picture that you're painting for the next 3 to 5 years is not as extended in other markets? Is that the point you're making?

Constance Moore

No. I mean, I think -- I do think that multifamily across the country is going to be strong. And so I think if I was sitting in Houston, Texas today, I would be saying the same thing. I don't know those markets as well so it's not really fair for me to talk about the strength of our markets relative to some of the other markets. I do think that our ability to -- once this, the engine of California gets going, our ability to create jobs and as we see it here in the Bay Area, high-paying jobs, there's no question that there's a difference between Northern California and Southern California in terms of their ability to generate high-paying jobs. And I would tell you that Southern California, and perhaps maybe Los Angeles, in particular, I would say more nears the nation as a whole whereas the Bay Area is very tech heavy. Obviously, Seattle is tech heavy, San Diego is more biotech. And so I think both of those, I think, are growth engines, and I think they will continue to be growth engines for this state. Particularly as we see all of the biotech that's coming into Mission Bay and the research that is clustering in this state. So I don't want to say -- I can't speak for the nation as a whole but I do think the demographics for multifamily are consistent across the nation. I just think they're going to be a little bit stronger in our market.

Operator

And the next question comes from Jana Galan from Bank of America Merrill Lynch.

Jana Galan - BofA Merrill Lynch

You mentioned in your comments that the rent growth you're achieving on some of the acquisitions are double what you underwrote. So I was just curious if that's changing the way that you're underwriting current deals. Or are you getting a little bit more cautious because of the kind of rent growth being slower than you thought in L.A., for example?

Constance Moore

Well, most -- well, actually, most of our acquisition activity has been in Northern California, and I’m probably going to have Steve answer that. But I think when we look at these, every transaction is a unique opportunity. And our most recent one was we thought we were being aggressive when we started, but that market has continued to accelerate. And quite frankly, it's very close to our Avenue 64 in Emeryville, and those rents have outpaced what we thought as well. So the Bay Area, again, is just very strong. We're seeing job growth in Emeryville as well and in Oakland. So I think it's really more a reflection of what's happening in this market. And from the time we underwrite and identify a transaction to the time we close, that market has strengthened enormously. But Steve, do you want to add to that?

Stephen Dominiak

Well, when we underwrite our acquisitions, we look at the in-place rent and all. So oftentimes, as we're looking at acquisition opportunities today, the increases are already priced in if it's a savvy property manager that's running the asset. So looking at asset prices today, there’ve been recent trades below a 4 cap rate, just above a 4 cap rate. So underwriting on the in-place rents today, those are too low for us. And they have the current -- typically have the current higher rent already priced into that cap rate.

Operator

And we'll take the next question from Michael Salinsky from RBC Capital Markets.

Michael Salinsky - RBC Capital Markets, LLC

First question, you talked about what sounds like a pending acquisition in the San Francisco area. Can you give a little bit more color on that? And also are you guys marketing any assets at this point? I know you gave a little bit of flexibility there in the second of the year.

Constance Moore

Great questions. As it relates to the Northern California one, I don't really want to talk about it until it's done because until it's closed, it's not our deal. But we are excited about it. And when it happens, we'll announce it. We are exploring in getting a market sort of -- perceptions of value on a couple of assets in the Inland Empire that we would expect that might, as John mentioned, we've got in our guidance the potential of what, $65 million in property sales. So we are exploring to continue to exit the Eastern half of the Inland Empire for all the reasons that we've talked about this morning, as it relates to its price sensitivity.

Michael Salinsky - RBC Capital Markets, LLC

What kind of reinvestment spreads are we talking on that?

Constance Moore

Well, the seller's cap rate on those Inland Empire assets is probably what, 6.5, Steve?

Stephen Dominiak

Yes, in the low 6...

Constance Moore

Low 6s and those would be reinvested in the low 4s.

Michael Salinsky - RBC Capital Markets, LLC

Then second question relates to -- if you could kind of give us a sense on where loss lease is across the portfolio? It looks like just looking from the supplemental. It looks like your market rents across the portfolio were up quite a bit more than effective rents during the quarter. So just kind of curious kind of what gap we're seeing there. If you could break that out between Northern California, Southern California and Seattle.

Scott Reinert

Yes, loss to lease across the same-store portfolio currently stands at 5.5% as of the end of July.

Constance Moore

And how does that compare between Northern California and Southern California? Do you have that, Scott?

Scott Reinert

Yes, Northern California is higher. Of course, it's 9% in the Bay Area; it's 9% in Seattle. L.A. is 3%, Orange County is 4% and San Diego is 3.8%, call it 4%.

Constance Moore

Yes. So that's what gives us the confidence that our sequential and our revenue growth will continue to accelerate through the third quarter and fourth quarter. And then we're setting ourselves up for a nice '12. And so -- but again, sort of tightening that midpoint made sense as we saw how all of this was going to flow through.

Operator

[Operator Instructions] And we'll move next to Gautam Garg from Crédit Suisse.

Gautam Garg

We've been seeing some recent data. It's more a macro question but there's been some recent data suggesting some decline in recent investments in the tech startups in the Bay Area. Do you have some sort of expectation over the next 12 to 15 months about the technology growth? Because it's going to directly impact the Bay Area rent growth.

Constance Moore

No, we have not seen any anecdotal evidence of anything slowing down here. Nothing. The number of job openings and if you're an educated engineer, move out to the Bay Area because it's a very exciting place to live and there's lots of job openings. So we have not seen that anecdotally yet.

Scott Reinert

And while there may be variations for startups, clearly, the dominant players, like the Apples, Googles and Facebooks and Zyngas are doing so well, they continue to create outsized job growth.

Constance Moore

And again, they're continuing to cluster. So we're seeing not only the South Bay, but the strength in the San Francisco with Twitter coming up here and all of the activity that's going on in Mission Bay, it's really, a lot of them are moving satellite offices up to the San Francisco area so that they can cluster both in South Bay and here, because it's where their associates want to live. It's a very exciting time to be in the Bay Area, and actually, in Seattle, as well, with what's going on between Microsoft and Boeing and Yahoo and Google and all of them up there.

Gautam Garg

Right. And my follow-up question is, it's amazing model rent growth. And I know firsthand, because I've been looking to switch apartments for a while, and do you see the rent versus buy argument, like, switching anytime? I know you mentioned that you don't see that happening, but...

Constance Moore

I don't. I think there's a couple of things. First of all, housing, although it's certainly more affordable than it was during the peak in all of our markets, is still relatively unaffordable in Coastal California. And for our residents who are choosing to live in urban markets, for them to move out of our community to go buy a home, they would have to move literally, probably out of the city in which they are living, because the quality of life and their ability to pay would be dramatically different. My classic example is always using Sharon Green, which is down the street from Stanford. People who are living at Sharon Green, they're not going to move out of Menlo Park to go buy a house in the East Bay. They are choosing to live in Menlo Park to be around either Stanford or the cluster of education there, great schools, but they can't afford the $5 million to $7 million homes that are sitting around them. So moving out, as Scott said, moving out for home purchases, I think, was 11%. That's actually lower than our historic. We always have some, obviously, but that's just not something that we spend a lot of time worrying about, because the quality of life in our apartments is dramatically different than the quality of life in the average price home in California.

Operator

[Operator Instructions]

Constance Moore

All right, Nancy, we'll take one more question. If there is one. If not, we'll be happy to...

Operator

We did have another question come in the queue from Swaroop Yalla from Morgan Stanley.

Swaroop Yalla

Connie, you just mentioned that for the Mission Bay sites, the economics have improved dramatically in the last couple of months. So I just wanted to touch upon that. If you can expand on that a little bit. What sort of yields are you underwriting to? Also, the cost per unit is close to 600k per unit. So I'm just wondering what sort of rents are you modeling at.

Constance Moore

Well, I'll let Steve talk a little bit about that. I mean, we continue to underwrite at spreads of 100 to 150 basis points off of acquisition cap rate. Most of the entitlements have been wrung out of that transaction. So those were -- when we underwrote that, those were closer to about 100 basis points spread. But given some of the trades here in San Francisco, that spread has widened. But rents continue to increase here in San Francisco. So Steve, do you want to talk a little about the cost, how we're thinking about that, the levels of contingency that we currently have given where we are?

Stephen Dominiak

Yes, I'll talk a little bit about the current return. We do look for 150 basis point spread from current spot market cap rates to our current returns when we're looking at development sites. As Connie said, if we've wrung out most of the entitlement risk, we'll lower that to between 100 and 125. So the current return on Mission Bay today, on today's rent, is in the high 4% range, which is about 110 basis points over recent trade in the city of San Francisco for an A-quality asset in a B-location. So we're comfortable with that current return. Given the strength that we've been seeing in San Francisco, we think that we'll stabilize right around the 7% return, which is very compelling, given where acquisition cap rates are today in the city. On the cost side, the cost does include a retail component. So there's about $25,000 per unit of value for a retail component. And we also have a substantial amount of contingency in that cost. So I think, less the retail, less the contingency, we're very close to what the recent trade in the city was for a new asset, lesser location. Also, I'd like to point out that even at the $600,000 per unit, condo prices in the area for like product trade at over $1 million. So we had talked earlier about the rent versus buy spread, we're still favorable in terms of condo pricing and rent versus buy at that site.

Swaroop Yalla

Great, that's helpful. Also, just to touch on guidance, what kind of job outlook, job growth outlook you have for 2011 and maybe even 2012, especially by market? Especially given the job growth numbers you put out for L.A? But what's your outlook, and what's baked in the guidance?

Constance Moore

I think it's a little too early to be talking about 2012. I mean, we've been spending the last, it seems like forever talking about the debt ceiling, and so I think we’re now -- everyone's getting back to the data. And data is not particularly great when you listen to all of the news. I mean, I think the APB numbers this morning were – look, at 114,000 it was above consensus, but that's still not great. It will be interesting to see what Friday's numbers bring. Clearly, June numbers were a major disappointment for everyone. As I said, we continue to see job losses in Los Angeles and the Inland Empire, starting to see some pretty good job numbers in other markets. And so while the job numbers have continued to refine this year, I think I'd rather sort of hold off a little bit and sort of say it's just too early to for us to be thinking about '12. I want to get -- I mean, again, I feel great about this market in Seattle. I'm feeling pretty good about San Diego, and it feels like it's strengthening. And even Orange County, and you're starting anecdotally to see the strength in the Orange County office market. And so it's really the pockets of L.A, that are beginning to strengthen a little bit, and then the Inland Empire. And the Inland Empire, I think, clearly is the most exposed to the single-family housing issues that we have in this country, and housing is busted. And for how long? I don't know. So I think I'd like to postpone that until we’ll probably have a better sense of that on our third quarter. Well we better have a better sense on our third quarter call.

Operator

Yes, ma'am, it appears there are no further questions at this time. I'd like to turn the conference back over to Ms. Moore for any closing remarks.

Constance Moore

Well, thank you, Nancy. Thank you for participating on the call today. We look forward to talking to many of you over the next few weeks, I suspect, and we’ll look forward for our third quarter call. Thanks. Have a great day.

Operator

That concludes today's presentation. Thank you for your participation.

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