Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BRE Properties, Inc. (NYSE:BRE)

Q4 2011 Earnings Call

February 7, 2012 12:00 pm ET

Executives

Constance B. Moore – President & Chief Executive Officer

John A. Schissel – Executive Vice President, Chief Financial Officer

Scott A. Reinert – Executive Vice President, Operations

Stephen C. Dominiak – Executive Vice President, Chief Investment Officer

Analyst

Jeffrey Donnelly – Wells Fargo Securities, LLC

David Bragg – Zelman & Associates, LLC

Michael Salinsky – RBC Capital Markets

Swaroop Yalla – Morgan Stanley

Robert Stevenson – Macquarie Research Equities

Ross Nussbaum – UBS

Eric Wolfe – Citigroup Inc.

Jana Galan – Bank of America/Merrill Lynch

Presentation

Operator

Good morning. My name is Leah and I will be your conference operator today. At this time, I would like to welcome everyone to the BRE Properties Fourth Quarter 2011 Earnings 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.

Constance B. Moore

Thank you, Leah, and good morning everyone. Thank you for joining BRE's year-end 2011 earnings call. Before we begin our conversation, I'd like to remind listeners that our comments and answers to your questions may include both historical and future references. We do not make statements we do not believe are accurate and fairly represent BRE's performance and prospects, given everything 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 risk and uncertainty.

We encourage listeners to read BRE's Form 10-K for a full description of potential risk factors and our 10-Qs for interim updates.

This morning, management’s commentary will cover our financial and operating results for the fourth quarter, the investment environment, our financial position and outlook for 2012. John Schissel, Scott Reinert and I will provide the prepared remarks. Steve Dominiak will be available during the Q&A session.

Let me start with 2011, reported FFO per share of $0.57 for the quarter came in at the high end of the range we provided in conjunction with our third quarter earnings call. Annual FFO totaled $2.14 per share, which included the $0.05 preferred stock redemption charge that occurred in the second quarter.

Excluding this non-cash charge representing the original issuance cost, annual FFO totaled $2.19 per share or through the high end of our initial guidance range of $2.06 to $2.18 set back in January of 2011.

On the heels of an outstanding year in 2010 on so many fronts we approached 2011 with optimism that we would execute on our plan and put the company in a very good position for the next several years. I am very pleased with the progress we made this year. The steps we have taken over the last couple of years have provided BRE both with financial and operational flexibility to benefit from the positive fundamental that characterize the apartment sector.

I want to thank all of the BRE associates for their commitment and delivering on such strong results in 2011. Our core markets are strong and getting stronger. As we and others have expressed many times over the next few years increased demand for rental housing could significantly outpace new supply as the prime renter cohort increases and homeownership level continue to decline to pre-bubble level.

Moreover the lack of affordable single-family housing options provides a traditional comfort that our markets will continue to be some of the strongest in the country for rental housing. 2011 was another very active year for BRE.

On the acquisition front, we acquired over $200 million in both existing assets and land for future development. Re-operating communities were acquired in 2011 for a $171 million. One asset is located in Valencia, which is in North LA County and two assets in the East Bay of Northern California.

Our 2011 acquisition along with the properties we acquired in 2010 bring the total acquisition of operating properties to 1,700 units and over $460 million in the last two years.

In addition to the existing operating assets, we acquired two land sites in Mission Bay for $41 million. These sites represent our first assets in the city of San Francisco and we expect to start the first phase in the second half of this year. With the investment activity and job creation in Mission Bay we are very exited about the long-term prospects for these properties.

From a capital perspective, we've raised over $500 million in new equity capital further enhancing our balance sheet flexibility and since 2010 we have raised in excess of $800 million.

And finally, we continue to sell our non-core assets in the Inland Empire. In the fourth quarter we sold two assets for proceeds of $65 million and recorded a gain of $14.5 million. Today, we have one asset remaining east of the I-15, which will be considered for sale in 2013 when the related secured debt can be paid off.

In 2010, the combined Inland Empire sales totalled five communities with 1,900 units generating proceeds of approximately $190 million. Our exposure to the Inland Empire has been reduced by more than half and now stand at 5% of expected NOI for 2012 down from 11% in 2009.

We expect that development will be the primary driver of growth and value creation over the next few years. With most of the major portfolio repositioning complete, transaction and redevelopment activities will be focused on improving asset quality within our core market.

Our same-store revenue results were inline with expectations we updated at mid-year. Same-store revenue was at 3.4% for the annual period and 5.5% for the fourth quarter.

On an annual basis our same-store NOI increased 4.25% just above the midpoint of expectations set at the beginning of the year and totaled 6.6% for the fourth quarter.

Operating fundamentals have continued to be positive and job growth accelerated in 2011 adding close to a 170,000 jobs or 1.4% in our core market although not quite enough to bring unemployment down to the national levels it is encouraging and support the pricing power in our market.

Our outlook for 2012, it seems job growth will be up another 1% to 1.5% in our core markets. And along with the continued positive demographic trends and the general lack of supply we expect continued pricing power in 2012.

Our release outlined guidance for 2012. FFO per share is guided in a range of $2.30 to $2.40 per share. The 235 midpoint of guidance represents an increase of approximately 10% over the reported FFO number of 214 in 2011.

John will provide additional detail around our guidance and the exhibit in the financial reporting provides a lot of detail around the assumptions and drivers. So I will focus my commentary around our same-store results. Same-store revenues are expected to increase 5% to 6.75%. Loss to lease at the end of the year sits at 4% as asking rents did not increase during the fourth quarter.

We expect first quarter revenues to increase about 1% sequentially from the fourth quarter. And then the growth trajectory to pick up to the 2% range in the second and third quarters similar to what we saw in 2011. The year-over-year comparison, the coverage quarter, so as a result year-over-year quarterly revenue growth at the midpoint of our assumption range would be in a high five to low six range each quarter.

Southern California, which represents 60% of our same-store revenue, was late to the recovery, but the recent pace of increases particularly in LA is encouraging. The midpoint of revenue growth expectations in Southern California, which includes our San Diego, Orange County, Los Angeles and Inland Empire, combined is 4.5%.

In the Bay Area the midpoint of expected revenue growth is 9% and the comparable numbers in Seattle is 7%. John will provide more color on expense growth. But the headline expense growth of 4% to 4.5% translates to core expense growth of 2% to 2.75% when adjustments are made for the property tax rebate we received in 2011 for prior tax years and the year one operating expenses associated with the adoption of revenue management.

With the revenue expense guidance NOI should range from 5.25% to 8% and the midpoint at about 6.63%. 2012 development advances should be in the low $200 million range. During the fourth quarter, we started construction on Solstice, our second Sunnyvale site and our Mid-Wilshire Boulevard site as well.

We will begin to deliver first units to Lawrence Station in mid-year and will complete this property in the first quarter of 2013. Going forward, development advances should range between $200 million and $250 million per year over the next three years and will represent our primary investment strategy.

Our guidance does not assume any stabilized operating communities acquired in 2012. Cap rates in our coastal markets remain extremely competitive fueled by the widespread understanding of the demographic and supply fundamentals supporting multifamily and the availability of attractive financing.

The high volumes of capital chasing limited supply have cap rates currently at or below 4% in coastal California. We will continue to evaluate potential acquisitions in 2012 and we’ll always be opportunistic where we can, but we do not expect to be as active in closing deals as we’ve been over the last two years.

And finally a word on our dividend, we announced an increase of our annualized dividend from $1.50 per share to a $1.54 per share representing a 2.7% increase. We have communicated that our goal is to bring our AFFO payout ratio down closer to 70%, provide the flexibility to operate comfortably through all cycles.

We are at the very early stages of our development activity, so our capital needs will accelerate and we won't see material cash flow from the current pipeline under construction until 2013 and early 2014. So while our FFO is expected to grow high single to low double-digit we felt it prudent to increase the dividend at a slower pace.

Before handing over the call to Scott, as we see it while the macroeconomic environment both here and abroad will likely be bumpy in 2012, apartment fundamentals will continue to benefit from an improving job market, a reduction in home ownership rate, favorable demographic and minimal levels of new supply.

As the economy continues its slow recovery, BRE is well positioned for growth. We’ve significantly reduced our exposure to our non-core markets, so we're closer to the coast. We have continued to strengthen the balance sheet and we have a visible external growth from our $1.3 billion development pipeline located in some of the best submarkets in the country.

And with that let me pass the call back over to Scott.

Scott A. Reinert

Thanks, Connie. The portfolio performed as expected during the fourth quarter generating year-over-year fourth quarter same-store revenue growth of 5.5%. The fourth quarter is a slower seasonal period and we navigated through the quarter very effectively leaving us in a solid position as 2012 kicked off.

We closed the year with same-store occupancy of 95.2% in December and 30 day availability at 7%. In the last 30 days we selected LRO as our vendor for revenue management and we’re in the process of configuring and integrating the system to BRE’s operating environment.

We expect to have first units deployed by the end of the first quarter and all units rolled by mid-year. We’re extremely pleased with the process to-date and look forward to updating on our progress throughout the year. As mentioned in the release, because this is an implementation year we have not included any revenue lift in our guidance for 2012.

During the quarter we completed 2,400 new lease transactions and signed nearly 2,200 renewals. As expected during the holiday season, new lease rates were lower than the peak or the third quarter but we still reported a 2.1% gain over the prior resident rates. Renewal rates continued to be strong and averaged more than 4.5% during the quarter. I will review each of our markets covering our operating position as we end the year and our outlook for 2012 beginning with San Diego and working north.

San Diego was impacted by military rotation out during the fourth quarter as three naval ships left between November and the first part of January. Annualized turnover during Q4 was 64% compared to 61% a year ago, which was our only market where Q4 annualized turnover increased year-over-year.

Military move outs represented 23% of the total move outs during the quarter. We closed the year with occupancy at 95.2% and availability of 8%. Q1 ‘12, renewal notices have been sent out in the 4% to 4.5% range. We think 2012 revenue growth for San Diego will be in the range of 3.0% to 4.25% range with current loss to lease of 2%.

Presently, in the northern part of San Diego, which represents 60% of our NOI is performing quite well and it’s benefiting the most from improvement in tech, biotech and defense industry.

The southern portion, which represents 40% of our NOI, remains a bit soft as we work through the impact of the military rotation. That said we expect solid job growth of about 1.5% during 2012, but like this year's 2% growth it’s difficult to say just how much traction we’ll get given the impact the U.S. Navy has on the region.

We believe new supply and shadow market supply should have minimal impact on San Diego in 2012. Orange County posted sequential revenue growth of 1.2% and year-over-year fourth quarter growth of 4.3%.

Recent improvement has been driven by an improving jobs environment with Disney and Kaiser Permanente having significant hires recently. We closed the year with occupancy at 95.3% and availability of 7.5%. Q1 ‘12 renewal notices have been sent out in the 4% to 4.25% range.

We think 2012 revenue growth for Orange County will be in the 4.5% to 5.5% range with current loss to lease at 3.5%. We expect modest job growth of around 1.5% during 2012. New supply, particularly from the airline company, will have a moderate impact on the market in 2012. Our exposure to the Inland Empire was trimmed during the quarter as we sold two assets in the eastern half of the Inland Empire.

We closed December at 95.5% occupancy and had availability of just under 7%. We've been able to post modest growth here as the marketplace is still very price sensitive given the amount supply in a negative rent-to-own spread.

There are no major news headlines here, we expect to operate efficiently in 2012 and we expect to achieve growth of 3% to 4%. Los Angeles had a very strong fourth quarter. Sequential revenue decelerated to 2.2% ahead of the typically harder Q3 pace. Occupancy levels recovered throughout the summer and we were above 96% throughout the fourth quarter enabling our sites to achieve some pricing power which we took advantage of with a 3% push during the quarter.

Job growth in the first half of 2011 did not meet expectation. However jobs did stabilize mid-year and now are beginning to show recovery. We closed the year with occupancy at 96.3% and availability at 6.9%. Q1 ‘12 renewal notices have been sent out in the 4.5% to 5% range. We think 2012 revenue growth for LA will be in the 5% to 6.25% range, with current loss to lease of 3.75%. New supply should have minimal impact in 2012.

The Bay Area had a great fourth quarter posting year-over-year revenue growth of 8.1%. We did meet resistance on new and renewal lease rates during the fourth quarter and that of occupancies, which ran at just below 95% throughout the quarter yet we quickly recovered to 96.1% by the end of January.

Tech sector remains strong enabling sustained rent growth in the South Bay. The East Bay has benefited from the spillover effects of both San Francisco and the South Bay employment picture being so strong. Q1 ‘12 renewal notices have been sent out in the 5.5% to 6.25% range. We expect 2012 revenue growth will be in the 8.25% to 9.75% with current loss to lease of about 60%.

Single-family affordability and a broad lack of new supply are supporting fundamental. Seattle posted year-over-year revenue growth of 8.2% for Q4. The sequential increase of only 0.4% reflects the typical seasonal trends in Seattle, which has a high level of contract workers that leave during the fourth quarter and return on the first part of the year. Occupancy averaged 94.8% during the fourth quarter ending the year at 94.9% that improved quickly to 96.2% at the end of January.

Q1 renewal notices have been sent in the 5% to 6.5% range. We expect 2012 revenue growth will be in the 6.25% to 7.75% range with current loss to lease of just under 6%. We expect continued job growth during 2012 driven by Boeing and Amazon, who have announced continued expansion.

The impact of new supply in 2012 is mostly isolated to the downtown market. Broader base supply will creep in 2013 and 2014. It remains to be seen if the employment picture can keep pace.

Finally, I’d like to give a quick overview of move-out activity during the quarter. As is typical of Q4, we had our lowest total move-outs for the year booking an annualized turnover rate of about 53%. As noted in our supplemental we managed to reduce turnover in 2011 by 200 basis points. The three takeaways from Q4 are, number one move-outs to home purchase reached 11.3%, a 60 basis points increase to Q3 but still at or below historical averages.

Number two, move-outs due to rent increase or being too expensive remained the top reason but moderated some, retreating from the Q3 high of 15.5% down to 13.5% in Q4. And number three, as a mentioned earlier, move-outs to military increased 330 basis points from Q3, the highest of year at 8.2% overall and 80% of the 200 move-outs to military occurred in San Diego with the reminder in Orange County.

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

John A. Schissel

Thank you, Scott. I'll spend a few minutes providing additional commentary around our 2011 activities and then review in more detail our 2012 guidance. As Connie discussed we generated per share earnings that after adjusting for the preferred redemption charge exceeded our expectation set at the beginning of 2011. This all happened within the context of the significant level of unplanned capital and investment activity that included the $440 million common equity offering in May, the redemption in repurchase of $120 million of our 6.75 preferred shares, the $115 million purchase of two operating communities, the acquisition of the two Mission Bay land parcels and the sale of the two Inland Empire assets in the fourth quarter.

This activity continued our strategy of upgrading the quality of our portfolio of cash flows while also maintaining top tier capital strength. So when looking at our financial position at quarter ended December 31, 2011 debt-to-EBITDA stood at 6.7 times compared to 7.8 times for the quarter ending December 31, 2010.

Our secured debt is a percentage of gross assets, is less than 20% and our floating rate debt as a percentage of total debt is just under 8%. Most significantly we have created tremendous balance sheet flexibility as we head into a period of increased development activity. At year end 2011 we had four projects under construction with funded cost of approximately $307 million.

In January, we closed on the renewal of our $750 million unsecured revolver with market leading pricing reflective of the strength of our banking relationships. The revolver has an initial maturity of April 2015, and can be extended for an additional year provided we meet certain conditions.

As a result, our debt maturities are well-laddered with no near to intermediate term pressures. Outside of our line of credit the next meaningful debt maturity is a $300 million bond maturity in 2017.

Turning to our 2012 guidance, Connie and Scott addressed the revenue growth assumptions in our markets, so I will move to the expense side. As we’ve detailed on our release we expect same-store expense growth for 2012 to fall within a range of 4% to 4.5%. As the saying goes, the devil is in the details and in this case we have two items that are unique to this year's expense growth compared to 2011. First, we were extremely active in 2011, we're showing tax appeals, which resulted in awards of over $1.8 million and effectively reduced our tax burden by 5%.

These were one-time appeal proceeds from prior tax years and did not result in a permanent reduction of the properties assessed values while a positive result it did serve to lower the base year in which we measure year-over-year growth.

Secondly, as we have discussed we are in an implementation year for the adoption of a third-party revenue management system, something we didn't have last year. We are forecasting an additional 600,000 in costs associated with fees and personnel expense that we did not incur in 2011. These will be ongoing annual cost, but again we’re not present in 2011 and as a result it makes for a unique year-to-year comparison.

Excluding these costs, we would see more modest expense growth of 2% to 2.75% in 2012. I would add that in each of the past three years and four of the last five our same-store expenses grew less than 2% but I feel we have done a good job in this area.

Moving to capital and investment activity for 2012, we expect development advances to total $190 million to $240 million based on construction activity on our four existing projects and targeted starts on our Mission Bay and Redwood City projects. We had one active major rehab project at year-end. Between that project and redevelopment opportunities that we have targeted throughout the portfolio we expect rehab capital expenditures to be in a range of $30 million to $55 million for 2012.

This figure also includes previously planned rehabbed expenditures on a number of our acquisition properties from the last two years. In general however expected returns on standalone rehab projects are between 7% and 10%.

But when we planned for funding these activities we start with targeting balance sheet leverages measured by debt-to-EBITDA in a range of six to seven times. As a result we will consider a combination of capital activities that involve issuance under our ATM in a range of $50 million to $175 million and dispositions in a range of zero to $150 million.

As we sit here today, we would estimate that the combination of equity and asset sales together would be a $150 million to $200 million in 2012. The waiting under each option however will be based on market conditions as we proceed throughout the year.

We’re also forecasting a bond offering in the late third or fourth quarter of 2012. I would note though that given the extended outlook for low rates on the one hand and very favorable conditions that exist in the bond markets today on the other hand the timing of such a transaction could be pushed back or pulled forward and we have reflected that in our guidance.

Connie addressed her thoughts behind the dividend increase, which we typically review at the start of each year with our Board. Our payout ratio on an adjusted funds from operation measure is just under 80% with a goal to get it below 70% range overtime.

Now to summarize we believe that with the strength of our balance sheet and the continued strengthening of the quality of our portfolio’s cash flow we’re well positioned to benefit from the ongoing economic recovery.

With that I will turn it to Connie.

Constance B. Moore

Thanks, John. Leah, we're ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Jeffrey Donnelly with Wells Fargo.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Good afternoon, guys. Connie, to take a quick question, I'm curious about actions on pushing rents specifically in the San Francisco market where the anecdotes we continue to hear from private owners is that rent growth there is fairly pronounced. Yeah, but at some level there is arguably diminishing marginal returns for you in pushing rent too hard. Questions whether or not you get credit for it? I'm just curious have you contemplated some level even holding back if you will and that increases maybe to extend your growth prospects as the market may be becomes less frothy in future periods.

Constance B. Moore

Well, I think it's a great question Jeff and I'll let Scott expand on it. But, I do think one of the things that we are careful about and then we think about is and you’ve heard me say that continued revenue growth from market rent increases ultimately have to reflect wage growth. And while in the Bay Area clearly with technology on fire there is a lot of great wage growth, there is a lot of high income jobs in the Bay Area that are continuing to see that kind of wage growth. But across the Board I mean, if you’re not an engineer at one of the tech companies and you’re just Joe, average worker, you’re probably not getting great wage growth in the Bay Area.

So, I do think its something that we have to be sensitive to and I think that Scott has a view both on renewals versus new leases. So do you want to talk about that Scott in terms of how you think about our growing revenue in the Bay Area?

Scott A. Reinert

Well, we'll continue to push as long as we can. We got great fundamentals here, supply remains low and while we’ve recovered pretty much from the peak to trough change in rents we’ll continue to push. In the, on the renewal side last year, we have experimented with some pretty big increases in some of our Bay Area properties and we pushed upwards to 15%. Sometimes we got tremendous pushback on some of those increases, so, we look very closely at trying to get what we can, but not create excessive turnover and that will continue to be our strategy.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Okay, so it's fair to say that you wouldn't expect that at some point in the future whether its six months from now or 18 months from now that maybe your average in [placing] rents in some of those markets might in fact actually be slightly below market, I guess is where I'm kind of going?

Constance B. Moore

Well, as market risk continue to grow, I mean somebody we’ve renewed today, six months from now their rent might be a little bit lower than market as market continues to grow. But I wouldn't say that there is going to be a lot of below market rent. You’ll always in a growing market rent environment you’re always going to have loss to lease. Now that can be a manufactured number, so we don't like to spend a lot of time focusing on it.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Right. No, of course I just meant the gap itself would widen. That’s what I was angling at.

Constance B. Moore

I see. Yeah.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Okay, thank you.

Constance B. Moore

Thanks, Jeff.

Operator

Our next question comes from Dave Bragg with Zelman & Associates.

Constance B. Moore

Hey, David. How are you?

David Bragg – Zelman & Associates, LLC

Good, good morning to you. Connie, a year ago you had come out on this call and said its time for BRE to grow and just wanted to look for an update on that outlook that strategy? You’ve clearly made investments and move forward on development, but the operating unit count remains about the same as a year ago and consistent with prior year’s as well. So can you talk about what it could take you, what you might want to see to be more aggressive on the acquisition front or grow in other ways?

Constance B. Moore

Well, I think two things. You’re right. We did say that we wanted to grow, and I think over the last two years, we have added to the existing portfolio of over $460 million of new existing assets now. Some of that has come through, as we sold 1,900 units over the last several years in the Inland Empire, which was the right decision, as I mentioned we're now closer to the coast. But I look at $1.3 billion pipeline, which to me is pretty darn good growth given our size. And so I think it's going to be a combination of, and right now what I would describe is that we're sort of in that back part of our pipeline with $0.5 billion under construction and as that start to come into the income stream and we’ll start seeing as back fill the development just like we did this year when we added last year's, excuse me, when we added some sites.

And I think we'll continue to be opportunistic about acquisitions that as I mentioned, one, it’s competitive, cap rates are low. And since we have a very visible attractive development pipeline we're going to focus on that. And that's going to become the primary driver of our growth for the foreseeable future. It doesn't mean that we won’t look at acquisitions but right now we’re focused on executing on the development pipeline given that we bought some terrific assets over the last couple of years.

David Bragg – Zelman & Associates, LLC

Okay, thank you. And I might have missed this but can you talk about the types of assets that you're thinking about for dispositions for this year?

Constance B. Moore

No. I think now we have the opportunity, as you know over the last several years, we have spent all of our time focused on our non-core market. And so we've gotten out of most of those core markets as a mentioned in my commentary. We have one left in the Inland Empire that has some GAAP accounts be prepaid until next year. So that will be considered for sale next year.

Now, we have the opportunity, because we really haven't done much selling in California outside of the Inland Empire in Sacramento. Now, we have the opportunity to look at our existing portfolio and think about those assets even in our core markets that might have, from a strategic standpoint have outlived their usefulness that it will require more capital than we think is appropriate for the revenue increases that we could get. So, we don't have anything targeted at this point. But we will begin to look at some of the older assets in the portfolio. Now some of the older assets in the portfolio obviously are some of our best assets. So, it’s really a combination of how do we refine, refine the portfolio and think about that. So, nothing selected right now but we'll be doing some refining in the California portfolio.

David Bragg – Zelman & Associates, LLC

Okay, thank you.

Operator

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

Michael Salinsky – RBC Capital Markets

Just a follow-up to that is there just because in the breakout you guys gave, it also mentioned land sales as a possibility. Are you guys forecasting any land sales in 2012 in that range you gave?

Constance B. Moore

It could be in a consideration, I mean I’ll let Steve expand on this, but what we're finding is that certainly in title site today are very attractive for buyers. So we don't have anything scheduled at this point. But Steve, do you want to expand on our thoughts on that?

Stephen C. Dominiak

We’re still in the process of entitling some of the sites in our pipeline until we get through that process. It's difficult to say which one is that we could target for possible sale.

Constance B. Moore

But we will think about that, just given the frothiness of the entitled site market right now.

John A. Schissel

And this is John. But any land sales we do would be part of that component of overall disposition.

Michael Salinsky – RBC Capital Markets

Okay, that's helpful. Second one, try to read this and do one question because I only got one follow-up here. Can you give us a little bit of a breakout in terms of the [LRO] rollout you guys are expecting and as well as the timing now that you’ve selected LRO? And also can you talk about, little bit about what your market rent growth expectations are maybe for some other regions? I know you went to a great detail of occupancy and I’d just be curious as to what kind of actual market rent growth you are expecting in those markets?

Scott A. Reinert

Yes, this is Scott. So, in terms of LRO as I mentioned in my prepared remarks, we’re in the process right now of implementing the program and integrating everything to our systems. Our anticipation is that some, towards the end of this quarter and probably mid-March we’ll begin to rollout and we’ll go region-by-region, and expect to have our habit completely rolled by the end of June or the first part of July.

With regard to market on assumptions in 2012 business plan although market-by-market to the Bay Area, we're projecting 6.5%, San Diego 2.5%, Los Angeles 5.5%, Orange County 5%, Seattle 7.4%, Inland Empire 3% and that’s all.

Michael Salinsky – RBC Capital Markets

Great, thanks guys.

Constance B. Moore

Thanks Mike.

Operator

Thank you. Our next question comes from Swaroop Yalla with Morgan Stanley.

Constance B. Moore

Good morning.

Swaroop Yalla – Morgan Stanley

Good morning, good morning. I just wanted to follow-up on the LRO again just can you give us some guidance on the revenue lift, you would expect after the implementation, I mean, I appreciate it's an implementation here, but just looking out into the future, what kind of revenue that we could expect?

Scott A. Reinert

When you talk to the vendors the main one that sell these systems, they’ll give you some pretty big numbers. I think we’ve heard as much as 3% to 5%. We think that out in beyond this year, because it’s an implementation here we have so many things, but beyond this year we think it will be 1% to 2%

Constance B. Moore

And the reason for that is, remember we’re not going from no revenue management system, we’re going from our revenue management system, which we feel was pretty robust, but we’re now going to a third-party. So, it's now like we’re going from nothing. And so, I think part of the numbers when the vendors are in sales mode, I mean, I think they're talking about the expectations of the experience with companies had from going from nothing to something. And so, I think that, at this point we’re so early, that I think we rightly so should be conservative, but you can expect that we’re going to get everything itself there.

Swaroop Yalla – Morgan Stanley

That's helpful. And just moving on to development, the rents are moved in these markets. So, can you just talk about the yields on the projects you have under construction?

Unidentified Company Representative

The projects we have under construction, the current returns are in the low-to-mid five with the stabilized returns in the high-60s to low-70s.

Swaroop Yalla – Morgan Stanley

Great, thank you so much.

Operator

(Operator Instructions) We’ll move next to Robert Stevenson with Macquarie.

Robert Stevenson – Macquarie Research Equities

Good morning guys.

Stephen C. Dominiak

Good morning.

Robert Stevenson – Macquarie Research Equities

Connie, when you think about the development pipeline, how do you thinking about risk now, I mean you're roughly 10% of EV with the pipeline you’ve got one project it’s a disproportionate percentage there. Do you think about JVs if you increase the pipeline above this, is 10% to 12% about the upper end of your boundaries or could see this is going to 15%? Can you help us understand that?

Constance B. Moore

You're right. It's a great question. I think I don't see growing from here, I think what we’ve talked about is that a $1.3 billion given BRE size is probably a little bit large. And so, as I mentioned we’re sort of in, what I would call the fat part of the price right now. So our expectation is, is that you should consider the development pipeline, and again as we know as we think about the pipeline it’s the three buckets of under constructions land that we own and Atlanta is under contract, should be in the $800 to $900 million range. And I think that feels about right, but so more importantly I think, think about it in terms of development advances of 2 to 250 a year. Now this year we’re at about sort of the low-200. We’ll be getting, obviously as you’re right, we’ve got a large project in Wilshire, La Brea that's going through and that will be funding between this year and the tail end of 2013, early '14. But is that one goes through, you'll start with and they come into the income stream the pipeline will naturally come down. So the total should be $800 million to $900 million over the next several years, but continue to think about advances in the 200 to 250 a year.

Robert Stevenson – Macquarie Research Equities

Okay. And then, I guess the other question is from a long-term conceptual perspective, I mean, how are you viewing San Diego is that you guys talked about the northern versus the southern, is that eventually becoming again to the eastern Inland Empire and the western Inland Empire? Is there are real reason other than the fact that you have a lot of units there, that you really need to be there longer-term or can that market become a source of capital to fund development and other acquisitions overtime, as you sort of reduce your exposure there.

Constance B. Moore

I think all of the above, we thought about this morning when we talked about sort of helping you understand the breakout of San Diego that the comparison to the Inland Empire would be there I think, and certainly I do not think southern San Diego is anywhere near the Inland Empire. But, what we wanted to understand is right now particularly given the military exposure and in the unique situation with three ships moving out at one time over a relatively short period of time. When we talk about a ship, it's a whole, so it’s a lot of people that move out.

And so what we wanted you to understand was that right now in North County, which represent 60% of our San Diego NOI, is operating significantly stronger than South County, which is more exposed to military and South County in terms of our total NOI for the whole portfolio represents about 8% and but no, I would not tell you that, that becomes the new Inland Empire for us, because we have some great assets there that historically have performed very well.

We have some older assets there and there might be some, as I talked in my previous comments about some trimmings, but we definitely like San Diego, we haven't really, we added one asset in 2010 in North County. But, we really haven't expanded our footprint in San Diego. And so, as we continue to grow the portfolio in other areas, the NOI percentage from San Diego will be continue to come down, but what we really trying to do to help you understand that, while we have 21%, 22% of our NOI coming from San Diego half of that or little more than half of that looks very different in the other half.

Robert Stevenson – Macquarie Research Equities

Okay, thanks guys.

Constance B. Moore

But definitely some of those assets could be used as a source of capital for either additional acquisition somewhere or funding the development pipeline.

Robert Stevenson – Macquarie Research Equities

Okay, thanks.

Operator

Thank you. Our next question comes from Derek Bower with UBS.

Ross Nussbaum – UBS

Hi, good morning guys. It’s Ross Nussbaum with Derek. Connie do you have a ballpark estimate of what your real estate taxes in California would be if you mark them to market?

Constance B. Moore

I think John does.

John A. Schissel

Ross, they would go up by about $20 million to $24 million.

Ross Nussbaum – UBS

$20 million to $24 million, okay that’s all I have. Thank you.

Operator

Our next question is from Eric Wolfe with Citi.

Eric Wolfe – Citigroup Inc.

Hey, thanks. I'm just curious or all the costs for the implementation of LRO being expensed and as so should we expecting most of that to occur in that first half of the year?

John A. Schissel

Eric, they are all being expensed, and I would say they’re ongoing throughout the year and probably build up a little bit towards the back end as we implement, because that's when the fees we kick in on an ongoing basis.

Eric Wolfe – Citigroup Inc.

Okay, that's helpful. And then, in terms of organizational changes you’re making, I think you said you’re taking on some additional staff, you're doing some additional training. Can you sort of walk us through the changes you're making at I guess a corporate or organizational level to implement LRO?

John A. Schissel

Really, we have an infrastructure in place today, and it's just hiring, than we did it internally, because we had a great candidate Director of Revenue Management who will integrate with the field in terms of the pricing strategies.

Eric Wolfe – Citigroup Inc.

Okay. All right thank you.

Operator

And your final question comes from Jana Galan with Bank of America Merrill Lynch.

Jana Galan – Bank of America/Merrill Lynch

Hi, thank you. I was wondering if you can give some more detail on the same-store expenses once you are moved to other items. So, what you're thinking of that 2% to 2.75% on payroll, utilities. And then also kind of where you are in terms of technology implementation, do you think there is any more opportunity to kind of automate processes like online lease renewal, or paying rent online or service request online?

John A. Schissel

I think to answer to the last part of your question absolutely and that's where lot of our focus is to continue to move in that direction and to create a more efficient environment for our residents and prospects. In terms of other line items, we have seen, I would say the greatest expense pressure in property insurance, we operated under a very favorable market environment for a while and [added] very favorable terms, but as we shifted some assets from the Inland Empire and we invested more towards coastal California, and you've seen our development move up on that has impacted our overall insurance program. That's probably the greatest increase within our expense base outside of the items you mentioned and we’re seeing that go up 9% to 12% this year. I would say that, the others between payroll and other items there with personal moving in and out they’re not that 1% to 2%.

Jana Galan – Bank of America/Merrill Lynch

Okay. Thank you, very much.

Operator

We have no additional questions or comments at this time. I'll now turn the call back over to Ms. Moore for additional or closing remarks.

Constance B. Moore

Great. Thank you, Leah. Thank you everyone for joining and we'll see many of you in Florida at the Citibank Conference. And have a great week. Thanks.

Operator

Thank you, ladies and gentlemen. That does conclude today's presentation. We do appreciate your attendance. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BRE Properties's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts