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BRE Properties, Inc. (NYSE:BRE)

Q1 2012 Earnings Call

May 2, 2012 11:00 am ET

Executives

Constance B. Moore – President and Chief Executive Officer

Scott A. Reinert – Executive Vice President, Operations

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

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

Analysts

Michael Salinsky – RBC Capital Markets

Swaroop Yalla – Morgan Stanley

Jana Galan – Bank of America/Merrill Lynch

Eric Wolfe – Citigroup Inc.

Derek Bower – UBS

Ross Nussbaum – UBS

Richard Anderson – BMO Capital Markets

Nicholas Yulico – Macquarie Research

David Bragg – Zelman & Associates

Andrew James Mcculloch – Green Street Advisors, Inc.

Karin Ford – KeyBanc Capital Markets

Operator

Good morning. My name is Cameron, and I will be your conference operator today. At this time, I would like to welcome everyone to the BRE Properties First Quarter 2012 Earnings Conference Call. Today’s call is being recorded (Operator Instructions) After the speakers remarks there will be a question-and-answer session.

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, Cameron. Good morning, everyone. Thank you for joining BRE’s first quarter 2012 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 that we know today, but when we use words like expectations, projections or outlook, we are using forward-looking statements, which by their very nature are subject to 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 first quarter, and the investment environment. John, Scott, and I will provide the prepared remarks. Steve Dominiak will be available during the question-and-answer period.

We are pleased with our first quarter results as our financial and operating result came hence through the high-end of our expectations. Reported FFO per share totaled $0.57 compared with the range we provided at the start of the year of $0.54 to $0.56. The $0.02 variance from the midpoint was driven primarily by property-level expense saving from a mild west coast winter, and G&A expense at the low-end of expectation.

We continue to see very healthy revenue growth across the majority of our portfolio. Year-over-year first quarter same-store revenue increased 5.8% and increased over the fourth quarter pay of 5.5%. The San Francisco Bay Area and Seattle remain our strongest market. In Southern California, Los Angeles is our strongest market, and Orange County is positioned for stronger growth as we enter the prime-leasing sequence. San Diego remains our most challenged market and reflects the Tale of Two Cities, with the Northern half of the city much stronger than the Southern portion, which has been impacted by military troop rotation.

The big four drivers of our drivers of apartment were demographic, supply, propensity to rent and job growth continue to support the demand for multi-family both at the property level and at the rate level.

Multi-family construction activity is increasing in several of our market albeit still below peak level. Seattle and San Jose will see a noticeable increase in deliveries over the next 12 to 24 months. And while there maybe pockets of supply as these properties lease up, both of these markets have some of the strongest job and more importantly, wage growth in the country, which will support the absorption of new products in these markets.

Rent-to-own gaps remained very wide in the Bay Area and Orange County at $500 to $600 a month.

While the gaps have compressed a bit in L.A., San Diego and Seattle, we are not losing a significant number of residents to home purchases. Across the portfolio, move-outs to home purchases were 10.3%, slightly lower than prior year’s pace at 10.5%. L.A. move-outs to home purchases were only at 8.1% and Orange County was even lower at 6.7%. Seattle represents our market with the highest move-outs at 12.8%, that’s still below average for this market.

New investment activity during the quarter was focused on the funding of our four properties that are under construction. We expect first delivered homes in June for our Lawrence Station asset in Sunnyvale. We’ve a balance-to-fund of approximately $275 million on our four communities under construction. Two of the four cycle, we fully delivered by mid 2013 and Wilshire La Brea and Solstice will start delivering in the fourth quarter of 2013 and into early 2014.

While there is talk of supply becoming a challenge nationally, our West Coast markets were still issuing from it at a slower pace than historical norm. The current monthly average of permits issued in our markets is about 2,500 per month, which is lower than average for the last 15 year of 4,200 per month. Given both the level of competition and opportunities for acquisition, our investment activity is focused on our development pipeline.

At the beginning of the year, we anticipated funding our development requirements with a mix of ATM equity, community dispositions and drives under our revolving credit facility. After recent $40 million of credit under the ATM in the first quarter, we now expect to lean more heavily towards community sales as the source of capital. We currently expect to sell a $130 million to $180 million of community properties prior to year.

Let me address the salesforce.com’s announcement in late February, but it was putting on hold is build-out of the Mission Bay campus and our view on the impact to our Mission Bay site. The relocation of sales force from the Financial District to Mission Bay was not threshold consideration for us when we invested in Mission Bay. But of course it was viewed as a positive for our immediate submarket.

The underlying investment rationale for our side has not changed. San Francisco was chronically underserved by new institutional quality multi-family housing, and the employment base within the immediate proximity Mission Bay along with the market amenities proximity to the south of market or some profit market, and access to public transportation make it one of the most attractive sites in the Bay Area.

This is worth noting salesforce.com currently has 80,000 associates working in San Francisco. And it currently occupies close to 1.5 million square feet of space with its recent announcement to take 400,000 square feet at 53 month. We also understand that they are currently looking for an additional 300,000 to 400,000 square feet, bringing their current office requirements in the city to two million square feet. This matches what they were considering for the Mission Bay campus.

In their announcement, salesforce.com indicated that they were growing so fast they needed to pay now not several years from now, that can only mean good things for the city. With some of the cities tightest rental conditions and highest ramp, this vibrant area will remain extremely well positioned to (inaudible) project when delivered, which we currently estimate to be in 2015, first in its really coming very, very late in 2014.

Before handing the call over to Scott, as we see it, the macroeconomic environment, both here and abroad remains characterized by episodes of "fits and starts". Apartment fundamentals continue to benefit from an improving job market albeit little bit slow this morning with the ADP announcement. Reduced levels of homeownership rate, favorable demographic and minimal level of new supply.

As the economy continues its slow recovery, BRE is well positioned for growth. We significantly reduced our exposure to our non-core market. So we’re closer to the quote, and we have continued to strengthen the balance sheet and we will have visible external growth from our development pipelines located in some of the best sub markets in the country.

Let me now turn the call over to Scott.

Scott A. Reinert

Thank you, Connie. During the first quarter, we generated year-over-year same-store revenue growth of 5.8% and sequential quarterly revenue growth of 1%. The first quarter is a slower seasonal period and we navigated through the quarter very effectively leaving us in solid position as we entered the peak (inaudible) season. Wed close, the first quarter with same-store occupancy of 95.5% in March and 30-day availability at 6.2%, and then we closed up in April at 95.9% occupied and 6.2% available.

We began our LRO revenue management rollout in mid-March. As of today, we’ve been live in Seattle for six weeks, five in San Diego for a month and live in San Francisco for two weeks. We go live in Los Angeles tomorrow and we’ll complete the rollout by the end of June. We spend a good bit of time upfront on our implementation plan and it’s paying off. The rollout is going very well with the team of professionals well (inaudible) and the disciplines of revenue management pricing. We’re extremely pleased with the process today and the seamless adoption by our on-site team, and I want to thank them for their focus and efforts.

During the quarter, we completed 2,800 new lease transactions and signed nearly 2,700 renewals. New lease rates were signed at 1.9% gain over the prior residents’ rate. Renewal rates continue to be strong and averaged 4.2% during the quarter. Overall turnover ticked up slightly on a year-over-year basis by 144 basis points to 55% in Q1, which I’ll detail a little more as we move on.

Now I’m going to review each of our markets, covering our current operating position and our view of lease renewal request going out in Q2 as we enter the prime-leasing season, and I’ll start with San Diego and work my way North.

As we discussed in February, San Diego was impacted by military troop rotations out during the fourth quarter and early first as three Naval ships left between November and the first two weeks of January (inaudible) our ability to push prices. Annualized turnover during Q1 was up 164 basis points at 62% compared to a year ago and while military move-outs was once again the number one reason at 20%, relocate out of the area was number two at 11.6%, and rent increase to expensive was number three at 11.3%.

Availability averaged 8.1% throughout the first quarter, 9% in South County and 7% in North County. At the end of April, availability has now been reduced to 6.9% overall and occupancy is back to 95.2%. Q2 ‘12 renewal notices have been sent out in the 2.5% to 3.5% range. Orange County posted sequential revenue growth of 0.5% and year-over-year first quarter growth of 4.6%. Difficult first quarter seasonality pre-empted any pricing power in Orange County during the quarter.

Occupancy levels have dropped 40 basis points from fourth quarter and availability averaged 7.7%. However, this was one of the two markets where we saw a [welcome] drop and turnover from the prior year, due to the reduction of 600 basis points down to an annualize rate at 58%. Home purchase move-outs was very low at 6.7% with job related and relocate out of the area, the top two reason at about 10% each.

Today the job environment feels much stronger in Orange County than it did at the same time last year. We believe we are now positioned for solid growth in this market as we close the month of April with occupancy at 96.3% and availability of 5.3%. we have started moving market rents up and Q2 ‘12 renewal notices have been sent out in the 3% to 4.5% range.

Los Angeles continues to improve and with our strongest performer in Southern California with healthy year-over-year revenue growth of 6.4%, which reflects both year-over-year improvement in rental rates and occupancy level. Turnover during the quarter increased to an annualized 58% with rent increase too expensive is the number one reason at 20% of our move out.

Private sector jobs have shown improvement, while public sector jobs appeared to stabilize. There is very little new supply in this marketplace on a percentage of stock basis. We close the month of April with occupancy at 96.1% and availability at 6.4%. Market rents are moving up here as well and Q2 ’12 renewal notices have been sent out in the 4% to 5.5% range.

The Bay Area had another strong quarter posting year-over-year revenue growth of 9.5% and sequential revenue growth of 2.5%. Occupancy levels increased by 100 basis points during the quarter and will continue to push hard in the Bay Area as we have now entered the prime-leasing season in a position of strength. (Inaudible) seen availability numbers stand at 95.6% and 6.2% respectively.

Turnover for the quarter ticked up in March after being flat the first two months and then about 560 basis points at an annualized rate of 55%. The top reason for the move-out then increased too expensive at 19%. Job related and relocate out of the area were net at 15.7% and 12.8% respectively. The text sector remains strong enabling the same growth in South Bay. The East Bay has benefited from the spillover effect of both San Francisco and South Bay and (inaudible) strong. Q2 ’12 renewal notices have been sent out in 6.5% to 8% range.

Seattle had a very good quarter, posting year-over-year revenue growth of 8.1% and a strong sequential increase of 1.8%. The strong sequential increase was driven by occupancy improvements as contract workers typically leave during the fourth quarter, returns in the first part of the year. This was the other market that I’ll turnover to tick down year-over-year dropping 200 basis points to an annualized rate of 43%. The top reason for the move-out was rent increase too expensive at 15.2%. With home purchase and relocate out of the area the next two each at 12.8%.

Presently, our occupancy stands at 96.6% and availability is at 6%. Volume has been very active over the last six months and provides support for broad-based strength in Seattle. Supply is going to creep into this marketplace over the next few years, but 2012 activity is limited to 1,800 units in the downturn area and another 1,700 units spread throughout various other Seattle submarkets. So far job growth in demand projection supports this level of additional supply, which is now returning to more normalized level. Q2 renewal notice has been sent out in the 6.5% to 7.5% range.

In summary, we feel good about how we’re positioned at the start of Q2. As I mentioned earlier, during the month of April, we’ve reduced same-store availability down to 6.2%, indicating we now have the best pricing power that we’ve had since last summer. With the best of the leasing season right in front, Northern California and Seattle are positioned to continue with revenue growth in the high single-digit and Southern California with the exception of San Diego with more stable than it was a year-ago enabling us to push hard and see how much we can get.

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

John A. Schissel

Thanks, Scott. I’ll briefly expand upon a few as Connie’s comments before we open up the line for questions. Reported FFO per share of $0.57 exceeded the midpoint of our expectations provided in February, due primarily to a lower repairs and maintenance costs throughout our portfolio and lower levels of G&A.

We saw a year-over-year absolute revenue growth, 5.8%, which reflected occupancy related gains of 40 basis points and revenue per apartment growth of 5.4%. A 5.4% growth reflects a couple of factors, a growth potential rent growth, net of concessions was 4.9% and we saw ancillary income, which includes garage fees, storage fee, (inaudible) fees, cancellation notices and so forth grow 16% reflecting the improved operating environment and our ability to both charge and collect these fees. Sequential revenue increases in the second quarter expected to be offset by higher levels of G&A expenses that we pushed into the second quarter and a customary up tick in the property level expenses.

The second quarter will also be the first period in which we will incur property level fees under our LRO software subscriptions. Our G&A expense was expected to be high in the first of the year for a variety of reasons are primarily due to the timing of settlements around ordinary course legal matters. We expect it to be lighter in the back half of 2012 and are still very comfortable with the annual range of $22 million to $23 million provided in February.

This also good opportunity to remind listeners that we detailed in our February 6 earnings release, additional color around the 2012 impact of higher real estate taxes in year one LRO cost, absent those costs, really the real estate taxes, we would have been around 2% quarter-over-quarter on a year-over-year basis.

Lastly, I would add that there is an element of conservativism on the low-end of second quarter guidance given the dynamics of the San Diego market. On the capital side, development advances totaled $35 million during the quarter and we estimate that we will fund another $170 million to $190 million over the reminder of the year. After raising 40 million of equity through our aftermarket offering program, we will look to meet the weight of our funding requirements through the reminder of the year with proceeds from community dispositions, which we expect to be in a range of $132 million to $180 million.

Our financial position metrics continue to be strong. We recapped our $750 million revolver in January with an initial term through April 2015. we have satisfied our debt maturities for the remainder of the year and outside of our revolver have less than $125 million in total maturing debt between today and 2017. This gives us significant flexibility and financial headroom in the coming years.

With that, I'll turn it back to Connie.

Constance B. Moore

Thanks, John. Cameron, we're now ready for the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Michael Salinsky with RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Good morning guys. First question, can you talk a little bit about what you’re seeing early results from LRO as you’re rolling it out there, whether you’re seeing any kind of pickup in that the markets you have rolled it out?

Scott A. Reinert

Hi Mike, this is, Scott Reinert. Yeah, it’s still a little bit early; the longest we’ve had it out is in Seattle where we’ve been out for above six weeks. we're very enthusiastic about the results. but it's a little early to say that we're seeing a lot of pickup there, but it does look very good.

Michael Salinsky – RBC Capital Markets

Are you guys going to make a rise to the system or is it running pretty smooth as you’re ramping out there?

Scott A. Reinert

I'm sorry, I didn't catch the first part.

Michael Salinsky – RBC Capital Markets

Are you [having] to make a lot of adjustments to the system as you’re rolling it out or is it pretty much plugging and go at this point?

Scott A. Reinert

If you're talking about our pricing decisions in terms of overrides from what LRO said. No, we’re not making it any big adjustments there. but with any deployment of something like there’s a lot of fine tunings that goes out in the front-end as you look at your comparable dataset and how those properties are comparing. and so there’s some fine-tuning going on, but not a lot of adjustments.

Michael Salinsky – RBC Capital Markets

Okay, that's helpful. And then it’s my follow-up question, can you talk a little bit about your expectations for San Diego in the second half of the year, and also I don't believe you gave April trends of the portfolio overall, can you give us an update where you stand in terms of rents and occupancy as of the end of April?

Scott A. Reinert

I believe I gave occupancy on each region as I went through, Mike I could tell you if your question is about where we are with April renewals in new growth. we don't have final April numbers yet, we’re still scrubbing them. but overall, renewals for April are around four and new leases have moved up to the low three.

Michael Salinsky – RBC Capital Markets

Okay, portfolio wide occupancy?

Scott A. Reinert

Portfolio wide occupancy, hold on one second. Portfolio wide right now, we are as of yesterday 95.9 and 6.2 in our stabilized portfolio.

Michael Salinsky – RBC Capital Markets

Okay. And then any San Diego expectations for the back half of the year?

Scott A. Reinert

In terms of occupancy and revenue growth?

Michael Salinsky – RBC Capital Markets

In terms of the market overall, it has been a challenging market has started to become challenging in the second half of last year and it's continued thus far. Just wondering what you guys are kind of underwriting for that market in the second half of the year. I wonder you guys are expecting an improvement, and you expect the kind of slug out there?

Constance B. Moore

Well I think as Scott, this Connie. As Scott, mentioned obviously the troop rotation in the last half of last year and then first part of this year really had an impact in that, that sort of has now impacted the market. So we don’t necessarily expect additional downward pressure. we just haven’t seen a catalyst yet in that market. I think as John mentioned and in terms of our guidance with the second quarter, there is a little bit of conservatism on the low-end just to sort of reflect what we’re seeing or more importantly, what we’re not seeing in San Diego. I think it’s interesting if you look at both, the housing market and the multi-family market. the housing market in San Diego is a market that had a lot of cancellations on the single-family side. so it's a market that hasn't quite yet got an attraction, particularly at the southern end of San Diego. so I would tell you that I think our expectations at the beginning of the year when we talked about San Diego was that the revenue growth would be sort of in that 3% to 4%. I would tell you our expectations are probably on a little bit lighter than that. but we’re in the peak-leasing season right now. so, we’re running as fast as we can. I do think that availability and occupancy are strong there. So it’s going to be our ability to push rent. so, I think it's probably a little bit premature to say what is the back half of the year while the much better sense if we get through the peak-leasing season, but I think availability and occupancy feel good right now, just – its that there needs to be a catalyst in San Diego, we just haven’t seen it yet.

Michael Salinsky – RBC Capital Markets

Thank you guys. I appreciate the color. I’ll leave the floor.

Operator

We'll go next to Swaroop Yalla with Morgan Stanley.

Swaroop Yalla – Morgan Stanley

Yes, hi. A question on the dispositions front, basic guidance, can you just give us the timing of these dispositions and maybe also the markets that these assets are in?

Constance B. Moore

Well, we've talked about between now and year-end about $130 million to $180 million. And so at this point, we’re sort of identifying those assets that we want to, disclose that these will clearly be assets, as we've talked about, now that we have our footprint pretty much the way we’d like it, we’re now refining our California portfolio. and so, you'll see us look at some of our older assets in the San Diego, Orange County, and I think that’s where you’ll see it. and again, so but these are really probably be towards the back half, you got enough, Steve if you want to add any color to it. He doesn't want to add any color. Okay.

Swaroop Yalla – Morgan Stanley

Okay, great. And then looking at the turnover in Los Angeles, I mean just looking at the quarterly numbers; it looked like 10% pickup in the turnover rate, 49%. just wondering if you feel that maybe the turnover is more than you expect as you push rents and how you're balancing that with the revenue growth?

Scott A. Reinert

The turnover did pickup in LA and as I mentioned in my prepared remarks, we did get some pushback on rent increases. and so we saw a pretty good jump there. Our expectation is that we will be fine there, the market seems to have stabilized, we had a very good first quarter and our occupancy and availability are in good shape now.

Constance B. Moore

Yeah. I think that things you notice is that while there is turnover, it hasn't impacted in the occupancy and in fact first quarter occupancy in ‘12 was up from first quarter ’11, at the same time, we had the turnover so. on the one hand, it really gets us an opportunity to sort of capture those higher rent to those people – new people are moving in. and I think it's just sort of a natural course of where we’re coming out a slow period where you have people living in apartment communities that perhaps they couldn’t necessarily afford long-term. and so you're seeing some of that. but that higher turnover was impacting our occupancy, I think we would be worried, but occupancy is stronger today than it was a year ago, even with the higher turnover. So we think that is a good thing.

Swaroop Yalla – Morgan Stanley

Great, thank you.

Operator

We'll go next to Jana Galan with Bank of America/Merrill Lynch.

Jana Galan – Bank of America/Merrill Lynch

Hi, good morning. Maybe follow-up in the disposition, it’s up quite a bit from the zero to $150 million guidance earlier. I was just wondering if you see any potential FFO dilution from that and in fact getting offset by the better than expected first quarter.

John A. Schissel

I don’t think it’s that far off in total in terms of how we’re thinking about our capital needs, and some of these dispositions will be back ended in terms of how they are executed, so we don’t see any impact within the range that we have provided in terms of dilution.

Jana Galan – Bank of America/Merrill Lynch

Thank you, and I guess maybe moving to development, I know the growth – your external growth will be more development focused, but may be if you can discuss what you’re seeing in land costs and then if on the acquisition front there isn’t any more kind of one-off or value add deals that you’ve seen come to market?

John A. Schissel

On the land cost side we continue to see upward pressure on land prices especially prices were fully entitled land. We aren’t seeing as much upward pressure on the sites we are pursuing, which are the sites that we could start in year four, year five from today that require a lot of complex entitlement work. On the acquisition front, there is a dearth of transactions in California, any assets that comes out even the value add assets are receiving a void of capital interests as to one-off transactions given the pricing in the market place today, we aren’t seeing very many of those.

Jana Galan – Bank of America/Merrill Lynch

Thank you, very much.

Operator

We’ll go next to Eric Wolfe with Citi.

Eric Wolfe – Citigroup Inc.

All right, thanks. First question is just on the new and renewal lease growth coordinate supplemental, if I look back at the last four quarters, it looks like it’s averaged around 3.8%, so I’m just wondering how you get up to 5.8% in terms of same-store revenue growth?

Stephen C. Dominiak

I think that’s where we are breaking it down that we had some impact of concessions burn through in the first half of last year and that gets you to the GPR number of 4.9%, and then you turn on the 16% ancillary income growth and that’s what’s driving it. You do have greater operating efficiencies that we are dealing with and Scott, can talk more about that, it’s got multiple turns of units during the period. You have different pools, which isn’t a big contributor, but we had Inland Empire assets and some of those lease quoted numbers last year. We don’t show month-to-month some of the lease quotes that we show on a quarterly basis and those have some pretty big game, so it’s just a – it’s a variety of factors, but it’s a lot of it is due to the ancillary income.

Eric Wolfe – Citigroup Inc.

Okay, but just to be clear that the numbers you’re quoting in terms of new and renewal leases do include concessions into that – in those calculations right, the burn off concessions or they don’t?

Scott A. Reinert

No, they do.

Eric Wolfe – Citigroup Inc.

They do, okay. And then second question is, I’m not sure if you track this, but the income spread between the people that are moving out now and people that are moving in, I’m just sort of curious, if you look at like to say this last quarter, what is the difference in incomes between the people moving in versus the people moving out and sort of how big is that gap.

Scott A. Reinert

This is Scott. So most people or most companies that I know have been certainly don’t ask people to give us their income levels when they leave, we won’t tracking them on the front end, when people give us a notice they don’t normally say here is where my income is today, so it’s hard to say. But what we do look at is what kind of movement are we getting on the new people coming in versus the people that came in last quarter or a year ago, et cetera. I can tell you that our average income is up in the portfolio from first quarter of ‘11, it’s up 8% in our portfolio.

Eric Wolfe – Citigroup Inc.

Got you. And that’s just the people moving in on the year-to-year basis.

Scott A. Reinert

Correct.

Eric Wolfe – Citigroup Inc.

Good, thank you.

Operator

We go next to Derek Bower with UBS.

Derek Bower – UBS

Hi, good morning guys.

Scott A. Reinert

Hi.

Derek Bower – UBS

Just focusing on Orange County, we’ve heard some pretty positive commentary out of your some of peers on demand this spring and occupancy seems to be running a 100 bps higher, but renewals fell short of your targeted range in February. Was that a conscious decision to get occupancy backed at 96% threshold and may be replication of getting more aggressive on renewals going forward. Just trying to get understanding, if that was made as a result of the LRO integration.

Scott A. Reinert

Derek this is Scot. No, it has nothing to do with LRO. We haven’t started LRO in Orange County yet, but so we went out with what we thought were pretty aggressive renewal increases and we just couldn’t get the traction, and so we had to back down a little bit and negotiate them down in order to regain occupancy in Orange County. That said we made good recovery during the month of April and we are in very strong position today and we start to see pretty strong growth there.

Ross Nussbaum – UBS

Hi, guys this is Ross Nussbaum here with Derek. Cony, I got a philosophical question for you, which is that if we step back a minute and look at folks who were buying assets that’s four endo cap rates in Europe, your prime markets, if we think about the level of NOI growth is going to be obtained over the next three, four years, even if we were optimistic and say okay, let’s rough estimate 20% NOI growth in the next three or four years, you’re not even going to get your yield up on that asset to 6% and that doesn’t even think about what valuation in fact could not occur from where interest rates may or may not be a couple of years from now. In your mind, how does that make any sense for anybody to be buying assets in your markets that’s for (inaudible).

Constance B. Moore

Well I think that’s the challenge and which I think is why you’ve seen us not be very active on the acquisition front, and I think that in Coastal California a couple of things to reiterate receipts that first of all there is a (inaudible) product and when a product does come at like a Feeding Frenzy and totally because as we talked about the four, top 13 encourages people not to sell their assets, when an assets comes to market, it’s already core assets in California, and is viewed as sort of a price and so there is a controlled premium paid for it, if you will.

Cap rates are actually in many Coastal California markets below four, so which is one of the reasons why we said all right, let’s take a look at leaning a little more heavily on disposition, so that we can take advantage of the desire for multifamily in California, while at the same time trimming some of our older California assets, so it’s hard for us to look at low 4’s and high 3 cap rates and say it’s makes a lot of sense. I know much it sound as super core asset you might sort of say, okay we are going to bite the board because long term this is a great quality cash flow, but it’s very difficult, but it’s not uncommon here in California.

So I can’t speak to what others are thinking about in terms of their NOI growth, and what their cost of capital is and what their expectations are for on exit cap rate. But you point out a very great risk, I mean interest rates we know ultimately will go up obviously they declined again this morning on the job number, but at some point we know – we see much debt in this country interest rates will have to go up and it will impact valuations and one would hope that people think about that, but I think it’s one of the reasons why philosophically, we have shifted to development and development yields in California are historically lower than development yields across the country as well for the very reasons I just talked about, but this spread on development relative to current cap rates, is still in that 150 to 175 basis points and we view that it’s the right way to allocate our capital.

Ross Nussbaum – UBS

I appreciate that that said, do you still plan on tapping into the ATM or do you plan on backing away from that given the step up disposition plan?

Constance B. Moore

No, I think as we’ve said, we did $40 million in the first quarter and we really did that because as we’ve said at the beginning of the year, we could have needed somewhere between $150 million and $175 million of equity like capital. And, so we did the ATM early, but as we continue to see floppiness and continue to see floppiness in some assets that we just can’t quite get our arms around, we just said what, it makes sense for us to take advantage of that market right now and lean a little more heavily on disposition. So I think for the balance of the year, you’ll probably seen as an overweight dispositions and using the ATM.

Ross Nussbaum – UBS

Okay and then final technical question from me. It looks like the same store pool changed a little bit this quarter with some assets in looks like Seattle, LA, San Fran added in, I’m guessing that given the mix of the assets that came to the same-store pool it had a beneficial impact on your same-store reported results, is there anyway to back that out?

Constance B. Moore

Well, remember last year I think…

John A. Schissel

Yeah marginally when you contribute that number of assets, it is not going to have a great disproportion of weight, but the bias yeah you’ve got it is a positive.

Ross Nussbaum – UBS

Okay, so tell more something a little more than a rounding error to be upside?

John A. Schissel

A little more than a rounding error, but not much more.

Ross Nussbaum – UBS

Okay, I appreciate it. Thank you.

Operator

We will go next to Rich Anderson with BMO Capital Markets.

Richard Anderson – BMO Capital Markets

Hey, good morning everybody.

Constance B. Moore

Good morning.

Richard Anderson – BMO Capital Markets

So you mentioned the mild west coast winter and I don’t even know what that means, I’m coming from New York, but what’s real impact did the mild winter have on you guys, is that more like a rounding error or is there something meaningful there?

Constance B. Moore

No, I mean I think we have winter here. We have cold, we get rain and then I think…

Richard Anderson – BMO Capital Markets

No clouds that we don't know about it?

Constance B. Moore

No, no, we don’t know. No clouds, but I think what really happened in the first quarter, I mean clearly when you think about California, our rain comes from late November to March that’s when we get rain, sometimes we get some amazing storm and so between (inaudible) and issues that are associated with lots of rain in the concentrated period of time is usually what happens to us in the first quarter. We had very little rain this quarter. So it impacted, it had a reduced impact on operating expenses and what we might called extraordinary repairs or surprises that happen on a property. And so I think we benefited just like the East Coast with the lighter storms and no cloud and we had less rain. So it was mild for us even though all of our winters are more mild than the East Coast.

Richard Anderson – BMO Capital Markets

Okay. And then the second question is on broader question on guidance. You maintained your guidance and all signs are good, everybody saying kind of the same thing, so about fundamentals and yet it is measured by FFO guidance, it’s not getting any better and I know that’s kind of a simplistic way of looking at it. But what do you think that that’s the case, I mean in past upturns it’s been a steady increase up tick in guidance. Is that a function more of dispositions weighing on your earnings in a specific situation for you or conservatism maybe you could just provide a broad perspective on that?

Constance B. Moore

So, I think it’s a combination I mean I think are part it Southern California, which is Los Angeles has started to increase about sort of what we expect in that period at this time. It was producing less than what we expected. So I think there is Southern California sort of is in our overweight to Southern California is putting a little bit of conservatism, which when you say continuum FFO guidance updates, I mean I think most of us and certainly BRE updates is a perspective on the year at the end of those on the second quarter call.

Richard Anderson – BMO Capital Markets

Yeah.

Constance B. Moore

For the first quarter call, I mean it’s kind of like it’s kind of a quiet quarter, not much happens. We just kind of put our head down and execute it and just did what we’ve said we were going to do. And so now we’re in our peak leasing season, so we will have much more visibility as we sit here in August, talking to you about the second quarter, we kind of bounce through the front end of the peak leasing season and have a much better sense of where FFO, where the markets are going to be, but I do thing for BRE particular got 60% in Southern California and while Los Angeles is accelerating and certainly it’s producing better than what we expected at the beginning of the year that’s been muted a bit by San Diego.

Richard Anderson – BMO Capital Markets

Okay, that’s good color. Thanks, Connie.

Operator

(Operator Instructions) We’ll go next to Nick Yulico with Macquarie.

Nicholas Yulico – Macquarie Research

Hi, thanks. Sorry, if you already covered this. But it looks like you guys got approval recently for the Pleasanton BART station development from the City Council. Can you just talk about how are you thinking about building those – that’s going to be in two different phases, if there is any hurdles left to start building, how long it might take to build that project?

John A. Schissel

You are correct. Both parcels were approved by City Council. There is an appeal period that we’re running through now. If once that appeal period expires and there is no and we determine there is no further entitlement work, we can start our construction documentation and plan check for building permit, which means we could start the projects in late ’13 or early ’14.

Nicholas Yulico – Macquarie Research

Okay, great. And then how long might have take to build both phases there?

John A. Schissel

Those are typically because of the product type. There are probably between 24 and 28 months to complete the full project.

Constance B. Moore

And first units could be delivered sooner than that…

Scott A. Reinert

First units will probably delivered in months 15 or 16.

Constance B. Moore

Right, so you start leasing in (inaudible) sort of 18 months out, but you have your final PO at that 24, 26 months.

Nicholas Yulico – Macquarie Research

Okay, great. And then just one other BART transit question, is that I guess Walnut Creek is sort of next one that’s you’re trying to get approval for, is there any update on that? I think there was some sense you might get ruling on that this year?

John A. Schissel

That is still the case we expect to complete the SECO process, the environmental review by the fall of this year and with that timing we would expect to be able to apply for building permits design review and have that completed and ready to start in the second half of ‘14.

Nicholas Yulico – Macquarie Research

Okay, perfect. Thanks for the update.

Operator

We’ll go next to Dave Bragg with Zelman & Associates.

David Bragg – Zelman & Associates

Hi, good morning. Just I think you made a commentary on dispositions, you mentioned markets, but can you talk a little bit more about the nature of these assets? I assume that there are order relative to your portfolio may be lower quality and then combined that with your comments on the floppiness of the market, are you seeing maybe strengthening in demand for Class B assets related to Class A?

Stephen C. Dominiak

I’ll answer that, Dave. This is Steve. We are seeing strengthening of demand and it’s mostly by virtue of the fact that it’s the Class B assets that are coming to the marketplace today. That most of the Class A stabilized coastal asset have traded our [Walnut] or not expected to trade in the next 12 to 18 months. So that’s where the strength is coming from in the Class B, just by virtue of it. Those are the ones that are coming to market.

Constance B. Moore

And Dave, you are correct, I mean these are as again when we talk about refining our portfolio these with the over assets and we also it’s important to know that the GSEs are still out there, and they are very attractive. And so some of these assets that are over that might not go, but not might not be viewed as institutional quality force between for larger institutions because of the location and because of the age are very attractive to smaller buyers and smaller all the buyers that then would be using (inaudible) for refinancing at very attractive rates today. So I think it’s important that we continue to take advantage of that financing while it’s available.

David Bragg – Zelman & Associates

Just Steve just to summarize that I know we are speaking generally because there haven’t been that many transactions, but it seems as though the Class B cap rates spreads to Class A are narrowing and this is a good time to take advantage of that.

Stephen C. Dominiak

I think that’s right, Class A stabilized properties are selling in a very high 3% to 4% range and Class B standard location, quality, all that factors in would be in the high 4% some very low 5% range.

David Bragg – Zelman & Associates

And what are your price and expectations on the sales over the balance of the year from the cap rate perspective?

Stephen C. Dominiak

Given that we haven’t identified the asset, I think it deteriorated to venture gas and what we expect is cap rates to be.

David Bragg – Zelman & Associates

Okay. Thanks.

Operator

We’ll go next to Tom (inaudible) with Bank of America/Merrill Lynch

Unidentified Analyst

Hi, you guys ended the quarter with over 200 million drawn in your revolver, (inaudible) with running you revolver with that much drawn and if you had plans, to refinance that in (inaudible).

Stephen C. Dominiak

Well, I think I heard the question. I’ll try to answer, you did break up. so if I don’t answer, this is John speaking to (inaudible). I think one you always look at user proceeds, you have a view on interest rate, and you also have a view on your sources and since we are leaning towards asset sales for the reminder of the year. I think we’re comfortable on a steady state where our line is today.

we always look to capital market conditions with a view towards interest rates. we don't feel they’re going to run away from us. We had projected a back half of the year, a bond offering and we’ll always asses as we get further into the year that could happen or we could push it into next year. we’re still, we continually look at capital markets conditions against our sources and need, and I think the benefit we have is we have no maturities outside our line until 2017.

Unidentified Analyst

Sure, yeah, that’s exactly the color I was looking for as the timing and whether or not the dispositions might have to impact on that. Thanks for the comments. I appreciate it.

Operator

We’ll go next to Andrew Mcculloch with Green Street Advisors.

Andrew James Mcculloch – Green Street Advisors, Inc.

Hi, good morning. Just on the ATM in the first quarter, it was interesting that you showed issue equity at a price below an EV, why is the ATM at all given where your stock was trading, I know it’s a small amount, but can you just talk about your thought process there?

John A. Schissel

Absolutely, one we are guided by blackout periods. and so if we are looking to issue, we have to issue within those periods. and we were above the weighted average price during that time period. but when we started the year and this will be a consistent theme you’ll hear as long as you hear us talk. balance sheet strength is paramount to us, over the long-term for our shareholders. And as you said, it wasn’t a large amount, we wanted to maintain consistent balance sheet strength and now because of the volatility, we saw on our stock in the first half of the year, we’re going to look at asset dispositions to be more judicious with the equity usage issuance.

Andrew James Mcculloch – Green Street Advisors, Inc.

All right, thanks for the color. And just one question on disclosure. On page 16, your supplement, I think you use to provide market rent per unit on there. Did that get moved or eliminated and if it is eliminated, why do you cut it?

Stephen C. Dominiak

Well, as we move towards LRO, market rent starts moving around everyday effectively. so it just becomes less of a meaningful term to publish externally.

Andrew James Mcculloch – Green Street Advisors, Inc.

All right, thank you.

Operator

Next will go to Karin Ford with KeyBanc Capital Markets.

Karin Ford – KeyBanc Capital Markets

Hi, good morning. I think you said in your remarks that in your second quarter guidance range at the low-end, you were projecting conservative scenario for San Diego. can you just talk about what assumptions are in the low-end for 2Q there?

Stephen C. Dominiak

I'm not sure I want to go into assumptions, but I think what we’re saying is that we recognized San Diego as a more dynamic market. we have less visibility in terms of pricing power there. given what happened in the first quarter and the fourth quarter where the conditions are. So as a result, we want to build in a cushion as we work through the peak-leasing season and we’ll have a better view as we come out of the second quarter.

Karin Ford – KeyBanc Capital Markets

Got it. And which markets did you see pushback on renewals in 1Q? I think you said San Diego and Orange County or were there any others?

John A. Schissel

Well, we saw a pushback on renewals everywhere and that's very normal and typical, when you’re in this type of marketplace. it was more pronounced in some markets like Los Angeles, I mentioned and the Bay area. but it’s – we always see, pushbacks from renewal increase.

Karin Ford – KeyBanc Capital Markets

Okay. And do you expect there will be a gap between where your second quarter notices are and where the ultimate renewal lands will probably shakeout for 2Q?

Stephen C. Dominiak

That’s also fairly typical and we would expect it to be in the 50 to 100 basis points range depending on the market.

Karin Ford – KeyBanc Capital Markets

Okay, thanks very much.

Operator

And we'll take a follow-up from Swaroop Yalla with Morgan Stanley.

Swaroop Yalla – Morgan Stanley

If, I just wanted to touch on the expense growth in Seattle, I feel something around 10% is that related to probably tax primarily or…

Stephen C. Dominiak

Yes.

Swaroop Yalla – Morgan Stanley

Just some color on that?

Stephen C. Dominiak

Yes, Swaroop, it’s all related to our property tax.

Swaroop Yalla – Morgan Stanley

Great, thank you.

Stephen C. Dominiak

Let me clarify property tax refund that we received last year during the quarter.

Swaroop Yalla – Morgan Stanley

So – basically.

Stephen C. Dominiak

Yeah.

Swaroop Yalla – Morgan Stanley

Okay, thank you.

Operator

At this time there are no more questions in the queue. This concludes the Q&A portion of the call and I would now like to turn the call back to Miss Moore for any closing remarks.

Constance B. Moore

Great, thank you Cameron. Thank you for joining us this morning and we look we forward to see many of you, in June. Have a great day.

Operator

Ladies and gentlemen this does conclude today's teleconference. We thank you for your participation.

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