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

Executives

Constance Moore – President and Chief Executive Officer.

Edward Lange - Chief Financial Officer, Chief Operating Officer, Executive Vice President

Bradley P. Griggs - Executive Vice President – Development

Deirdre A. Kuring - Executive Vice President - Property Operations

Analysts

Jonathan Lid - BD Group

Dustin Pizzo - Banc of America

Lou Taylor - Deutsche Bank

Mark Biffert - Goldman Sachs

Kristin O'Connor - Morgan Stanley

Alex Goldfarb - UBS

Karin Ford - KeyBanks Capital Market

Rich Anderson - BMO Capital market

Michael Selinsky - RBC Capital Market

Richard Paoli - AVP Investment

Steve Swett - KBW

BRE Properties, Inc. (BRE) Q4 2007 Earnings Call February 6, 2008 11:30 AM ET

Operator

Good morning. My name is Carmen, and I will be your conference operator for today. At this time, I would like to welcome everyone to the BRE Properties Fourth Quarter and Full Year 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answers session. (Operator Instructions).

Thank you. I would now like to turn the call over to Constance Moore, President and Chief Executive Officer. Please go ahead.

Constance Moore – President and Chief Executive Officer

Thank you, Carmen. Good morning everyone. Thank you for joining BRE's fourth quarter earnings call for 2007. If you're joining us on the internet today, please feel free to e-mail your questions to askbre@breproperties.com at any time during this mornings call.

Before we begin our conversation, I'd like to remind our listeners that our comments and answers to your questions may include both historical and future references. We do not make statements that 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 risks and uncertainty. We strongly encourage listeners to read BRE’s Form 10-K for a full description of potential risk factors and our 10-Q for interim report.

This morning, our commentary will cover our operating results, our investment activities and our financial reporting. Ed and I will provide the commentary and Brad and Deirdre will be available during the Q&A session.

Let me start with our fourth quarter results in our key take away. We had a good quarter and we had good results for the year. Our core FFO growth was 11% for the quarter and 15% for the year. Sequentially core FFO was up $0.02 per share in line with our expectation.

Same store NOI growth was up 6.5% for the year and 3.5% for the quarter. The quarterly figure was impacted by the timing of certain property expenses and masked the revenue growth of 4.6% for the quarter. For the year, same store revenue growth was 5% and property level expense growth was 1.5% for the year.

As we indicated in the earnings release, operating conditions in San Francisco, Seattle, Los Angeles and San Diego are quite good, supported by a relatively decent level of job growth, enough to support strong operating metrics and market rent growth. On the negative side the operating markets with the greatest exposure to single family housing Sacramento, The Inland Empire and Phoenix continue to struggle.

Market rents are flat from a year ago and occupancy levels range between 91 and 93%. During the quarter we completed the cleanup job in San Diego and North Los Angeles from the wild fires that occurred in October. As expected the cost associated with cleanup were not material totaling about (inaudible) that are included in the same store reporting.

In December, we issued our initial guidance for 2008 with an expected earnings per share range of $1.15 to $1.30, and an expected FFO range of 2.70 to 2.85 per share. All elements of our guidance remain intact and our guidance is maintained as reported.

Ed will discuss the same store operations and financial topics; I will continue to discuss our investment activity.

During the quarter, we sold two communities that were classified as held for sale. Brentwood Town homes in Seattle an 81 unit community and the sale price was $12 million with a gain of $5.4 million. The cap rate off trailing 12 months operating income was 5%. We acquired this property in 1998 and our IRR was 14%. Our decision to sell the property was driven by its small size and location south of the airport, a fair distance from the concentration of our core portfolio in Seattle.

In addition, we sold our Shaliko community in Sacramento, a 152 unit community. And the sale price for this property was $20.6 million and the gain was 11.2. The cap rate on this asset off again trailing 12 months operating income was 5%. We acquired this property in 1996 and our IRR was 16%.

We have one remaining community held for sale in Seattle also located south of the Sea-Tac Airport. As reported in our guidance release, during 2008 we intend to continue with property sales in a range of 150 to 200 million. Or we expect to continue our dispositions in Sacramento. Specific property decisions will be made during the first quarter.

Transaction cap rates for apartment remained stable and relatively low. If anything, we have seen a flight to quality. High quality assets and markets have seen very little price change. Lower quality assets and markets have shown greater cap rate sensitivity. If you look at our supplement, you will see that we have adjusted our composite cap rate for the portfolio, but only modestly.

Coastal California cap rates remained firm ranging from 4% to 5 to 5.5%, depending on location and quality. Cap rates in Seattle are in a fairly wide range, between 4.5% to 5.75%, driven by submarket location, age, and the quality of the assets. Sacramento and Phoenix cap rates appear to be priced in the low to mid 5 to 6.25% of the upper end. The company's composite cap rate remains at or about 5%.

Turning now to our development activities, there is really no news to report on the development program as it relates to cost and schedules. They remain consistent with our reporting last quarter. Three of our construction sites Pasadena, Orange, and Emeryville, essentially delivered unit inventories late in the fourth quarter and early into January. We are executing on final punch lists to deliver final certificates of occupancy expected late this quarter.

The first quarter usually starts out pretty slow from the traffic and leasing perspective. But leasing activities at Emeryville and Pasadena are proceeding well. We expect to reach physical stabilization, which essentially to us is about 95% occupancy, during the second and third quarters. And we will then begin to burn off leasing concessions; depending on market conditions the communities could reach economic stabilization in mid-to-late 2009.

Our development property in Orange is nearly completed and leasing activity while slowed by typical seasonal pressures and the job situation in Orange County is actually proceeding fairly well. Market rents are holding up. Average market rent is running about $2.15 per square foot. Concessions are running in one to two months' rent in the Platinum Triangle for properties going through lease-up and we are in that range as well.

Market interest and appeal for our product is very high. It is a very beautiful community. As we expected, leasing will be competitive all year. This is a large community at 460 units and we will require all of 2008 to achieve physical stabilization. Key for this asset will be the Orange County market conditions at the end of 2008. If the region is able to contain or absorb the mortgage related job losses and conditions firm up, we will be able to begin the process of burning off concessions.

Orange County remains largely unaffordable with respect to medium home prices, and we don't expect that to change materially over the next twelve to eighteen months. Any recovery on the job trend could trigger a strong recovery in this market. But it may take a bit of time to get there.

During 2008, we have three sites that we'll start constructions. At or about mid year, we plan to start construction at our Santa Clara site totalling 271 units. This property is in a very strong Silicon Valley submarket. In the second half of the year, we plan to begin construction on the second phase of our Pasadena Community adding another 212 units and we plan to commence construction in Seattle at our development site on Mercer Island totalling 166 units.

All three of these projects are podium developments and we will require a couple of years to complete. The aggregate future investment on these three communities is approximately $224 million.

Before handing the call over to Ed, I just want to summarize that I'm pleased with our operating results for the quarter and for the year. In a year when the credit markets collapsed and fundamentals decelerated or eroded for many businesses, we were able to hit the mid point of the guidance established at the beginning of the year. In our case, it was actually before the start of the year.

With the various challenges we had during the year, most of which were market or external factors, certainly some of our making I'm pleased with the company's results and earning though. And believe we are well positioned to meet the challenges that await us in 2008.

From an operating perspective, 65% of our semester NOI is being generated in markets that continue to enjoy fairly strong operating fundamentals. Physical occupancy across the portfolio looks pretty solid averaging 94% during the fourth quarter and ending the year pretty much on top of that figure. At the moment, portfolio wide occupancy is 90.5%; a great number at this time of the year and given the economic climate it is very good.

Our effort to create a new onsite staffing model has been very successful. At mid year last year we reported the implementation of a plan that reduced property level staffing and payroll by 80%. This created almost $1.3 million in payroll savings for just about $0.03 per share and helped to improve our operating margins, now at more than 71%.

We continue to use technology as an accelerator to faster a true shared service platform with the heavy emphasis on centralization and automation. As we continue to push for greater efficiency and productivity, the impact should be increasingly visible in our same store results and operating margins.

Cost increases reported out at the end of the third quarter triggered some market concerns of our development programs. It was unfortunate. Individual problems always seem to be more of into a generalization for an overall program. This is ours to address, and I believe we have.

Our business model is to maintain a continuous pipeline of development between 1 billion and 1.5 billion some of the most difficult, yet rewarding development markets in the country. In California, where it can take more than 5 years to transform a piece of land into an income-producing asset, the work is not for the faint of heart, and requires discipline. I believe we have the right programs and our efforts to date have been accretive in terms of earnings and value.

Consistently excellent performance is the objective we have set, and we intend to meet it. The proof will be in our results, and given the transparency of our business reporting, we look forward to sharing those results.

We significantly strengthened the balance sheet in 2007. We opportunistically raised 300 million of ten-year notes in March, at 5.5%, at a price of 99 over the then ten-year treasury. In September, we recast our unsecured revolving credit lines, increasing its capacity to 750 million, dropping the line cost to less than 50 basis points over LIBOR, and extended the term out of five years. We are not facing any material debt maturities until well into 2009.

We have successfully executed on the property sales, at attractive cap rates, and will continue that program this year. We made a decision early in 2007 to build a bunker for what we believed could be an ugly period. We may not have foreseen the magnitude of the issues, but we've certainly got the ugly right. We are in a very good shape and we will be able to continue our business program during this turbulent period of time.

Let me turn the call now over to Ed, who will provide a report on our property operations, and other financial data.

Edward Lange - Chief Financial Officer, Chief Operating Officer, Executive Vice President

Hey, thanks Connie. Good morning everyone. As Connie indicated, Core FFO for the year was up 15% over 2006, an increase of $0.35 a share. I want to break down the components of that a little bit.

Overall, real estate NOI increased more than 21 million or $0.40 a share. Fixed capital charges both debt and preferred, increased about $0.02 a share and corporate G&A increased about a penny.

Our same store NOI growth translated into about 13 million of additional income over '06, or $0.25 a share. Our lease of properties or properties that we have completed, the NOI from those properties improved more than $4 million or $0.08 a share. In the stabilization of our mission Peaks Property and rehab added 2.3 million of NOI, or $0.05 a share.

Good things usually happen when you can drive net operating income on a couple of fronts and hold the interest in G&A pretty tight. Given the backdrop of what occurred in the second half of the year, we are very pleased with the results in '07, and already jumped into what should be a fairly intense 2008.

Same store results for the year were close to our expectations. The year over year expense growth for the quarter, at 8%, sticks out a bit. As Connie indicated, the spike is timing-related, associated with the timing of repairs and maintenance costs in '06 versus the timing in '07, there was a greater weight of these expenses in the second half of the fourth quarter of 2007.

Turnover was up in fourth quarter '06, over fourth quarter '06, again more timing-related than anything else. The cleanup costs for the October wildfires are in the fourth quarter expenses, but they are not very much. The same store results for the year are more healthful from an expense standpoint. The quarter, the 8% quarter increase is no indication of a trend.

Essentially we have 2 distinct operational dynamics going on. Two-thirds of our operations – San Francisco, Seattle, Los Angeles, San Diego, are operating at a fairly high level. Revenue growth is ranging 4.5 to 9%, occupancy levels are at or about 95%. We've got a pretty tight 30 day available level running between 6 and 7%.

It is a little early in the year to start talking about rent growth, but in these markets, we have pricing power. We're not being very shy about exercising it where we can. There is another slice of the operations with the single-family housing recession is playing out in full, as we expected. Sacramento, Inland Empire in Phoenix, which represent about 21% of the same store net operating income. Operations are struggling. We expect the struggle to continue throughout the year.

We seem to be able to maintain about 92, 93% occupancy, but rents are flat year-over-year. We certainly are not expecting rent growth this year. There maybe modest revenue growth from these markets but it will be occupancy driven over our '06 levels.

For the moment, Orange County lies somewhere in between with a stronger operating profile that we and maybe others expected at this point. Orange County represents about 14% of same store net operating income, it is currently 95% occupied. A 30-day available stands at less than 7%. Our market run growth in 2007 was just over 3%, about half normal growth levels. Some of this was of our own making; it took almost 6 months to get our occupancy at a position to grow rents. But the loss of jobs certainly triggered deceleration traffic and rent growth in the second half of the year.

Orange County remains unaffordable from a housing standpoint. Meeting home prices for existing stock are more than $620,000 and new home prices average more than $850,000. Information on jobs that came out at the end of year indicated a year-over-year drop of about half a point. Surely, not great, but probably not enough to shake the home prices materially. This market is holding up very well and could generate an 82% to 84% rent growth in 2008, which could be really great performance.

Concessions remain very light in the portfolio, they were earning about 3 days rent, right were they where in the first quarter of 2007. Late payments for residence for the quarter were about 1% up slightly from the third quarter, but really on top of where we were in our first quarter of 2007. Average market rent in the portfolio was 14.46 down about 7 bucks or half a point sequentially pretty much consistent with past seasonal practices.

Moving to the financial reporting and guidance, there is no material items to report with this financial reporting. Capital events were transacted earlier the year; those were in the first quarter and line renewal and the preferred take out occurred during the third quarter.

Corporate G&A for the year came in on top of expectations. The sequential changes timely related for professional fees. The sequential increase with interest expenses is related to the take out of the preferred stock using the line pending the completion of additional property sales.

As Connie stated, we set our additional guidance for 2008 before the end of the year and all the estimates were made intact and are being maintained. It was too early to start measure market rent growth against the estimates. The resiliency we are seeing in several of our operating composite market rent growth in the range of 3.5 to 5%.

As stated earlier, we expect to continue our asset sale targeting the Sacramento region. Disposition proceeds are expected to range $150 to $200 million in 2008. For the cap rate on our most recent sale at the end of the year came in at 5% cap rate. We expect cap rate in secondary markets to continue to widen. So no reason for us to get into a game at this point to trying to guess where the cap rates would be, we will report out the execution if this occurs.

We provided an estimate for corporate G&A at a range of 20 to $22 million for 2008. Apparently, the estimate triggered some questions or maybe some gasps from the audience. We always start the year with the fairly large estimates for items that we cannot reserve for. Development related charge-off insurance claims for both property and litigation and other type of wholly shipped factors.

In addition, the estimates assumes that the addition of a new CFO, which search we hope to conclude during the first quarter. As we get deeper into the year, we will assess our estimate for G&A along with all the other guidance related items. We do this in mid year and we will reassess guidance at that time.

With that Connie, I think we move to questions.

Constance Moore – President and Chief Executive Officer

Thanks Ed. Carmen, I think we are ready for questions.

Question-and-answer session

Operator

(Operator Instructions). Your first questions come from Jonathan Lid with BD Group.

Craig Melter

Hi, its Craig Melter here with John.

Constance Moore

Good morning Craig.

Craig Melter

Good morning. I just wanted to get a little bit of information on how you think away would shakeout some of the stronger market in terms of revenue growth and Seattle and San Francisco and how that growth may compare to what you put up in the fourth quarter?

Edward Lange

Well, we really are not going to break down the estimate by market. I think it is pretty clear that I think for Sacramento for the weaker markets. Sacramento, the Inland Empire in Phoenix, we have indicated flat to slightly nil, let's say 0 to minus 1% market rent growth for the year. So I think you can kind of back into what we are thinking for San Francisco and Seattle. I mean, we are expecting you know probably at or just slightly south of normal market rent trends for both of those markets. I do not think we are going to get into a breakdown.

Craig Melter

And with the movement down in LIBOR over the last couple of weeks, has that changed your capital plans in anyway for '08?

Edward Lange

Well I don’t think it changes our capital plan. As I said, we raised all our capital in 2007 to put us in a shape to run for the next let's say 12 to 18 months without having to tap the public markets. We do have a number of property sales that are queued up and there will be more, they will become more visible at the end of the first quarter when we declare certain assets held for sale. I think obviously what helps us is going to be in the line, the line should run you know, probably throughout the year somewhere between 175 and $200 million and with the actions that the Fed has taken we are going to get some relief in the interest line. We don’t think, it really changes our capital plan.

Constance Moore

Yeah, I think as Ed said, we will reassess at the middle of the year, but at this point that is the only impact that will have on us.

Operator

Your next question comes from Dustin Pizzo of Banc of America.

Dustin Pizzo

Hey, good morning.

Constance Moore

Good morning.

Dustin Pizzo

Ed the sequential improvement in San Diego, I mean a lot of that looks like it was occupancy related, also some market renters, I mean have you seen any notable changes in that market with demand. You know, obviously it appears its bouncing back, I mean have you seen positive changes in housing fundamental that are affecting and are since you elaborate a bit on what's happening there?

Edward Lange

Yeah, I think that’s a great question. We are starting to see the improvement and started talking about improvements in San Diego in the second half of the year. I guess I will do it on two or three different fronts. If you go back and look at the jobs information at the end of the first quarter and then second quarter, the year-over-year job growth data coming out of San Diego show the market will be flat you know, zero. Yet at the end of the year when the job growth data came out for San Diego it showed year-over-year job growth of 1%. All that occurred in the second half of the year. If you believe the data it would suggest that all the job growth happen at the second half of the year. So I think what we saw happening on the ground in San Diego is that the troop rotation issue began to abate a bit, we had two fleets come in during the second half of the year that always helps. We saw some improvement in job growth and I think correspondingly, our occupancy has moved up very smartly throughout the year. We started the year about 92% occupancy occupied at the end of the year 96% occupied. So if we look across our portfolio it is extremely tight, 96% occupied available numbers less than 7%, it’s actually less than 6%, we have no concessions in that market. So on certain unit types we are able to begin to push market rents there a little bit. So I think that there has been general improvements there that are better than what I think you know, most of us in the business expected to see in San Diego probably at the mid point of last year and I think what most of the market saw. But San Diego is doing very well.

Dustin Pizzo

Okay. And then I know in the past you guys have stated that you want to have capital available for any opportunities that are coming down and fund the development pipeline obviously. Connie, can you just I guess update us on your thoughts about share repurchases given, you know, you look where the stock stays, as you look at the $69 NAV that you guys put in the supplemental and it’s a pretty big discount there?

Constance Moore

There is a big discount. And look we are not adverse to stock repurchase; we actually have authorization for 100 million. We do have a development pipeline to fund this year, our development advances probably somewhere between 175 and 200 million. But to the extent that we have accessed proceeds from property sales we will absolutely consider stock repurchases.

Operator

Your next question comes from Lou Taylor with Deutsche Bank.

Lou Taylor

Thanks. Good morning. Ed, can you expand a little bit on the expense timing difference both on turnover and CapEx, if you give me a little bit more specific in terms of the increases in '07 versus lower numbers in '06?

Edward Lange

It’s actually timing. Let me dig into it a little bit and we will get to an average, sort of debt by a 1000 cuts, when you look across repair and maintenance and turnover, there is a bunch of items that go into it, but I think the general trend here is start with the 12 months period expense growth was 1.5% and not just because of the great number, it’s very indicative of what went on with our portfolio last year and our property operations. We get very good expense controls with repaid and maintenance and turnover, there wasn’t a lot of volatility with oil prices, so we weren’t really dramatically impacted by the cost of carpet and paint. Labor still was very tight, but in general, a very good expense control around the maintenance line and turnover and obviously we got relief from the enterprise staffing model that we put in place in mid-year. When you look at the fourth quarter, then you look back to '06, the reason I mentioned, it's a timing issue that in '06, we had more maintenance work performed on the property portfolio in the second and third quarter shifted about a quarter where most of the work was done in second and third quarter in 2006. The work was conducted onsite third and fourth quarter in 2007 and that relates largely to repair and maintenance line. We did have turnover that occurred normalized resident turnover, but occurred late in the third quarter, it ended up impacting our fourth quarter expenses, because the work was performed in the fourth quarter, so that's why it is timing.

Lou Taylor

Okay, thank you. And then second question pertains to single family move out? How is it trending and can you quantify what impact it may be having on your occupancy overall?

Edward Lange

I think you know coastal California is really a tale of two markets. In coastal California, the numbers really haven't budged. I mean move-outs, when we look at our resident turnover, I mean to the extent that the exit interview or the exit data is correct, you know move outs in coastal California for purchasing the home remained very sticky around that 15 to 20% number, it's like typically 15 to 17%. When you get to in Inland Empire, a Sacramento, a Phoenix that number will jump up to 25% and 30% and we are looking at Phoenix right now, you can rent a two to three bedroom home for $900 a month that competes with an apartment everyday of the week and so that we are getting a much higher level in that numbers, it's probably were historically hugged right around 25%, is now on the 30-35% range and is not just move-out for home purchases. We have got move-outs for people that are going to go rent a single family house.

Operator

Your next question comes from Mark Biffert with Goldman Sachs.

Mark Biffert

Hi guys. First question, I guess, I am curious about the leasing velocity at some of your development sites in Southern California especially the Orange site and if that is slowing how does it impact your decision to start the other projects that are under contract that you have posted for the second half of this year?

Edward Lange

In terms of Southern California, the one that we are focused on, I will do the easy one first, I will do Pasadena. We have 188 units. We are basically in full leasing mode at Pasadena right now. Market acceptance for the product is terrific and we're leasing, move-ins are running 25-30 a month and will be from a physical standpoint, will be physically stabilized somewhere like mid year, so let's call it June which is typically definition for mid year. That's going pretty much as we would expect, we are getting the market rents that we underwrote, we don't see any interruptions in terms of lease-up and I think the Los Angeles market last year posted 7% market rent growth is extremely healthy market so that everything at Pasadena is going very well.

With Orange, great market acceptance and we are pleased with the level of level of leasing velocity prior to the fourth quarter, so you know this is seasonal slow down that occurs at last two month of the year and really does not begin to pick up again and so you get deep into February, beginning of March. Prior to let say November, so we look at our July, August, September, October numbers, we were running 40-45 move-ins a month which is a very high level. We were getting very high level of market appeal. Even when you consider that there is couple of small condo deals that were converted into rental housing, we're getting more than our share. Our product competes very, very well with these smaller condo deals, they don't have the amenities. Our units are a better unit. We have got a quite product there with our Orange property. There has been a slow down in traffic which we expected but I think that there is no doubt that the job losses in Orange County combined with the normal seasonal traffic patterns have reduced the traffic levels further. I can't sit here and tell you that right now what we know the move-in numbers are going to be once the seasonal patterns release late February or early March. We believe we are going to be able to maintain, 35 to 40 move-ins a month, which is still a very good level of velocity. Property has been open since June, July of last year and so once we get the mid-year we start to sort of turn on ourselves a bit, which is always a challenge with a larger property. This is 460 units. That's why in our expectations, we're going to need all of 2008 to get this thing leased up. What we're seeing in terms of traffic that's available today, the market acceptance of the product. We're able to get the market rent that we underwrote. So, that we're not getting a lot of pushback on rent.

I think the only concern that we have right now is obviously Orange County is in a tough economic mode with the job losses it took on the chin with the cuts with the mortgage companies. To the extent that the market can absorb those job losses during 2008. We want to be in a position at the end of 2008 where this property is 93% to 95% occupied and we can begin the burn concessions. And, if we're in a position to do that then I think this property's returns are going to look terrific and be pretty much on schedule. If not it's going to delay our ability to get to our target return levels.

Mark Biffert

And, how does that impact your development starts for the other assets that you have lined up?

Constance Moore

Let me address that. Again, the second phase of Pasadena. I think when you look into Ed's description of how well leasing is going there, it makes a lot of sense for us and quite frankly as we look at it in a down market like this, the ability to secure great GMAC contracts and labor costs, this is really the time to be starting lease, and so starting a property in Pasadena to finish off the second phase is going to be a terrific asset. We have one in Santa Clara again right in the heart of Silicon Valley, that's an asset that we absolutely should be starting right now given the strength of that market and then finally our Mercer Islands. The three assets that we're starting in probably some of the strongest markets that we have and really now is the time to be starting those, and so we feel very good about those starting 2008.

Operator

Your next question comes from Kristin O'Connor with Morgan Stanley.

Kristin O'Connor

Hi, Good morning. Can you comment on the type of buyer for the two assets sold during the quarter and how pricing compared to your expectations?

Edward Lange

We would be happy to. Both buyers were private, private buyers, individuals, and the pricing was pretty much on top of what we expected. Actually, we are very pleased. No real surprises with the Seattle sale. It's a smaller property, but the units are fairly good size and that transaction went off very much as expected. In fact, we use a trailing twelve in measuring the cap rate and everybody knows you can kind of mess around with cap rates depending upon which autograph or snapshot you want to take. If you do an annualized third quarter number that cap rate was actually like a 489 or something like that. We do a trailing twelve and it came out to a 5 and that's pretty much what we expected for that property. It's located south of the airport. It's not one of the prime submarkets in Seattle. So, that went off as we planned.

Sacramento actually a little bit better than what we expected. The trailing twelve cap rate on that Shaliko property was 5. I think when we were talking to the market over the second and third quarter we were talking about property sales. We had indicated a range of 5 to 550. So, we came in at the low end and the ranges of private buyer used Fannie Mae for mortgage financing. The transaction was very orderly transacted. I was able to get us that use 65% leverage and ended up getting a mortgage price somewhere through 5.5% so there was no interruptions for the sale.

Kristin O'Connor

Okay. And, as a followup, when we think about CapEx for next year, is the $750 run rate in the supplement, is that a good run rate going forward?

Edward Lange

Yes.

Kristin O'Connor

Yes. Okay. Thank you.

Operator

Your next question comes from Alex Goldfarb with UBS.

Alex Goldfarb

Good morning and thank you for waking up early for us at this busy day.

Constance Moore

It's still dark out here at Alex.

Alex Goldfarb

Well, it's one of these rare sort of one day and here that we get stuck in our offices. So, just to question my two questions. The first one is just on the construction development program, I can understand that lease-up can take a bit longer, but I just want to go back to the comments and just better understand some of the move outs on the estimate completion dates that were for the fourth quarter and now it's been pushed off to the first quarter of '08, and then one project that was end of '09, and got pushed off a quarter in '09 at the Anaheim?

Edward Lange

I think in terms of the properties that are completing right now. So, I think we were talking about Avenue 64, which is an Emeryville Orange and then Pasadena. We're essentially complete. We moved the date for the reporting after the first quarter, but everything that's in that supplement including with the information that's on the development pipeline schedule, ties to our reported financial statement. So that while the cost incurred the balance is too completed, everything ties back to the balance sheet. So there's a bit of precision that we have to have with the schedule that we insist upon. It really just reflects our views in terms of final CO's. It has nothing to do with a sort of physical delivery of units…

Alex Goldfarb

Okay. So those projects should remain on track?

Constance Moore

Absolutely.

Edward Lange

They are very much on track.

Alex Goldfarb

Okay. Second question is on the Willshire deal, the La Brea deal. I saw that one also got pushed off the start date. The cost for that, the 320 million is that locked in with all the final planing in place or is there still negotiation on going in that 320 million and the start date could be influx?

Edward Lange

Well, I think you got to go back to, anything that's listed as land owned where we are proceeding with entitlements, which would include the La Brea site. And then anything on the land under contract we're going through entitlements. So the building configuration the density, I mean when we source a piece of property essentially the only variable we really do know is the cost of the land, everything else is an estimate. So that's where we are with La Brea. Now we feel very good, go back to La Brea and one of the building blocks for that deal is that is that when we bought the property it is already entitled that we could do if we wanted to start today about 475 units and about 10 to 15,000 sq ft of retail. We are trying to maximize the site.

So we're working with the city and the neighborhoods. The $320 million are certainly not locked in. That’s also not a red flag saying, oh! my goodness the costs are going to go up substantially. But the configuration of that building that’s a entire city block, I think some of items that are up in the areas, are we building a single building, a single structure do we need to bifurcate the block to provide access for services and for emergencies. I mean there is a number of issues that are at play.

What we can tell you is that the entitlement discussions with the city of Los Angeles are proceeding extremely well. And the neighborhood discussions are going very well. We ought to have a unit density and a retail configuration in place at some point here. During the year we ought to be in a position to start construction on this site in the first half of 2009. So that our original estimates that we first took down this land 12 months ago and start looking at it more than 15 months ago or maybe a very late 2008 start, November, December now look like it could be a first half of 2009. We really don't view that as material shift.

Operator

You're next question comes from Karin Ford with KeyBanks Capital Market.

Karin Ford

Good morning. I just wanted to ask you an operational question. In the fourth quarter of '06 you guys saw the big occupancy drop. And this time sequentially from 3Q to 4Q of '07 you didn't see nearly as much although sequentially rent declined a little bit. Can you just talk about what you did differently operationally in fourth quarter '07 versus '06?

Edward Lange

Sure. I think if you look back and I am not saying people need to walk around with the transcripts from our calls. But to the extent you got free time…

Karin Ford

To the extent that you do.

Edward Lange

To the extent you got free time and would like to take a look. We were talking about this a year ago. What we indicated is that we pushed rents too far into the fourth quarter. Typical seasonal patterns is that you're going to lose about a point in occupancy during the fourth quarter, and what you will usually do is at least with our portfolio is that we'll rein in the market rent growth even though market rent grows flat during the fourth quarter placing emphasis on preserving occupancy rather than pushing market rents.

And I don't mean to this to be a long winded answer but to understand it, the recovery that took place in the second half of 2005 was just so strong that we got market rent growth and occupancy growth right through the end of '05. So that, from an operating standpoint when we got to the end of '06, property operations continued to push market rent growth right through the end of October. And unfortunately that market rent growth wasn't there. Availability grew and in a very quick fashion our occupancy fell about a point and a half, almost two points during the fourth quarter. So we started 2007 about 92-92.5% occupied across the portfolio.

This year what we did is we went back to good solid blocking and tackling in terms of right after the end of the third quarter market rents were basically capped. And so that we over weighted occupancy under weighted pushing market rents and we were able to preserve the occupancy line throughout the quarter.

Constance Moore

And I think we expected normal seasonal patterns to endorse them.

Edward Lange

Yeah.

Karin Ford

Okay, great. Second question, you had a land part from a Seattle related to Taylor 28 that was held for sale in 3Q and look like it fell out in the fourth quarter, what changed on that land parcel.

Edward Lange

We sold that and there wasn’t really any gain.

Karin Ford

Okay.

Edward Lange

What we did is, we bought a very small piece of land and we did it to facilitate the construction of our Taylor 28 site and we are using essentially as a small there was drive through bank, in fact we have got real side stories, a drive through bank was the first drive through bank in the state of Washington and we wanted to scrape it and build and add to our property. They declared a drive through bank a historic property in a city of Seattle, no editorial comments on that. So we are using it as our construction office, as we sold it to a group that is going to turn into drive through pharmacy. There is really no gain. We bought it to facilitate construction.

Karin Ford

Okay, thanks.

Operator

Your next question comes from Rich Anderson of BMO Capital market.

Rich Anderson

Hey, thanks, and good morning to everybody. On the sale of Sacramento and other dispositions you might do, how would you characterize the population of potential buyers now that you know, there is probably few of them out there have been with the Fannie requirements of loan-to-value and all the risk. Is there half as many buyers or there is just as many buyers as a year ago. How would you quantify it?

Constance Moore

First let me characterize Sacramento, Sacramento has always been sort of a private buyer market as opposed to originally never been an institutional bid., but frankly where are the largest owner and only the public owner in Sacramento. So, our expectations for a private buyer was certainly consistent what happened, because that only been in that market. And that market had really when you know, highly leveraged buyer came into that market, that’s traditional for the private buyer that was using Fannie and Freddie was really priced out of the market. So, the market comes back to them, and so a lot of them are quite comfortable you know, borrowings from Fannie and Freddie at 65% to 70% LTV. And so well you know, I think that the number of bids is probably lower than it was certainly during the frenzy of the apartment market. I think we still had a number of good competitive bids on that property and we are happy with the execution. And I think that buyer was happy with the execution and knows that we have other things for sale. So again it's not quite as proceed, but for Sacramento it went exactly as we planned.

Rich Anderson

Okay. And then second question is I guess some related really, but you mentioned I guess Sacramento, Inland and Inland Empire in Phoenix as you weakest, due to their exposure of single family homes. And I guess the question is that are you talking about the competition to rent single family homes or you talking about the economic dislocation of those families because of the single family home issue. And as a followup, just a quick followup, how mechanically are people renting a home, it is a very different environment in renting an apartment. Are they breaking up homes and renting them, how is it all playing out, it's hard for me to envision.

Edward Lange

Well I don’t typically know what percent of the, for example, the 55,000 homes that are unsold in Phoenix right now, I don’t know how many of them are being broken up and turned into mini flat houses you know, at the bedrooms. But I think in terms of the dynamic, you know we have got single family housing competes with us in those markets and that the median home price isn't that far from the national average. In Phoenix, and Inland Empire and Sacramento about half of the population can afford the median home price for the market place. So that for the most part, housing is affordable and certainly now with a glut of single family houses has been both in those markets, they are chasing for closures, they chasing homes that are straight up for sale. There are also in terms of the rent decision, if you got a spouse or a small child and you can rent a full house for the cost of renting an apartment. I think initially that sounds more appealing. I think that on the other side of the trade, it is you can rent that single family house, but you are going to have to take care of it. So, there is a lot of churning that is going on in these markets. For example, if you got a property in Corona River Walk, we have experiences of very large properties sell 114 units and we are getting a lot of leasing activity there. People that are coming out of single family homes they want to rent. There has been sitting you know just east the Orange County, is the affordable housing alternative to renting Orange County. So we are getting a lot of trade on that, so there is going to be a lot of churning. I don't think the numbers are going to be visible until we get deeper into the year.

Operator

Your next question is from Michael Selinsky of RBC Capital Market.

Michael Selinsky

Good morning, guys. I am wondering you touched on the single-family housing market. You touched on supply a little bit. Can you talk about the number of condo-reversions you are seeing in the market? Just as we are seeing kind of the rise over the past couple of years here, I just wanted to see how much that was coming back on the market in terms of rental.

Edward Lange

It gets kind of dumped into some of the single-family stuff that is out there, obviously but the only market that we had very visible numbers on was really San Diego, and I would say right now, San Diego, our feeling, our folks on the ground are seeing that San Diego is probably a year in front of some of the other housing strained markets in that we are seeing that the absorption in San Diego has largely occurred. I mean for example, both on housing and also on some of the condo trade and that’s to say that not that the problems have gone away, but for example, in Chula Vista, which is south of San Diego, there has been some very good absorption of housing in that market. So that our properties, in that Chula Vista market are 96% occupied, plus we are beginning to move market rent. So that we are starting to see some absorption, but San Diego is probably, they have been deep into this for a couple of years and probably have a year head start on Phoenix and Sacramento.

Michael Selinsky

Okay, and as a follow up. I know it’s a little early to look ahead to 2009, but as you start to look at the supply data for Seattle, how comfortable are you moving forward with projects in that market at this point?

Edward Lange

Well I think we are extremely comfortable and we know that there is going to be some supply that is going to come on the books in Seattle in 2009, 2010. But if you look at where these sites are located, our Bellcara site is right in the middle of Bellevue. And so that is going to be just a wonderfully located site, we should be able to handle whatever else supply comes up in that Eastlake Washington area pretty well. Our other site, Taylor 28 is in the South Lake Union area, that area is probably the largest urban revitalization project in the country being spearheaded by both Paul Allen and now Gates, whose Microsoft is taking as for the first time Microsoft has come off the Redmond campus, they have leased a million square feet of space in Bellevue and they are leasing a lot of square feet in that South Lake Union area. And so that that’s a wonderful located and the last site is Mercer Island and Mercer Island if you know is Seattle is just an amazing place very high quality of life and it’s a real pain in the butt to get any type of entitlements on that Island. So that we feel very comfortable you know, with everything that’s got under construction in Seattle and the Mercer Island job that will start later in the year.

Constance Moore

And I think the strength of the economy between Boeing and Microsoft, Google, I mean they have got some very strong employers they are continuing to see on add job of that market. So while we are aware of the supply that’s coming into that market we think that that market can handle it at this point.

Operator

Your next question comes from Richard Paoli of AVP Investment.

Richard Paoli

Good morning everyone. I have a couple of follow up questions, I guess and then one, I don't recall hearing of the CFO search. How is that going?

Edward Lange

It is proceeding well. I think we made a comment. In our formal comments, we indicated that we had hoped to have that completed by the end of the first quarter.

Richard Paoli

Okay, I missed that, sorry. And then, I guess somewhat of different track, on the year development projects, could you just remind me how you finance them while they are under construction. Are those variable rate construction loans and I guess from a GAAP perspective it may be accounted for differently. And then also, what is the plan for sort of the long-term I guess debt portion especially, of those developments once they are stabilized the long-term financing plan. And I have one other quick question.

Edward Lange

Okay Rich. In terms of, when you look at our development program, you can look at our balance sheet, meaning that only our unencumbered assets are over 90% of the total balance sheet so that we won't use specific construction loans for our properties and we don't put in place individual forms of capital that are tagged to each property. I love having GAAP discussions at 7:15 in the morning, it gets me going.

From a capitalized interest standpoint, we are funding our construction activities off of our warehouse line of credit. So that, in a sense, and we've talked about this on prior calls, is that if you look at our balance sheet and look at our line balances, the most important measure is what is our line balance as a percent of assets, rather than a percent of overall debt. We will typically maintain a variable rate debt in a range of somewhere, I'm going to say, sort of 7-8 to as high as 15% of assets, and that is going to pretty much mimic or basically compare with the level of variable assets we've got on the balance sheet which was represented through CIP, our construction in progress. So that under GAAP, unless you have specific capital assign to a specific property what you use as your average cost of debt, with your capitalization rate, so that in our case and you can pick it right off the supplement, we are using like 5.8, 5.7% number for our capitalized interest. And I think in terms of leverage you know, the balance sheet is essentially our debt to gross assets numbers about 50% and that’s how we kind of look at the leverage and that’s the leverage you can apply to all of our properties.

Constance Moore

And I think if we talked at the level of property sales this year it will be a 150 to 200 million and we really use property sales as proxy for equity in terms of the keeping the balance sheet intact.

Operator

Your next question comes from Mark Biffert with Goldman Sachs.

Mark Biffert

Hi, just one last follow up. On the land that you have held for sale in northern California, has that included in your guidance or was that the on top of what you have given or is there in your niche guidance?

Edward Lange

Yeah there are no gains on land sales in your guidance.

Mark Biffert

Do you knew when you plan to sell that or if that will sell in the first quarter?

Edward Lange

Well we hope to start construction at site at or about mid year and we would hope to transact that land sale about the same time. Maybe second quarter or third quarter.

Mark Biffert

Okay. Thanks.

Operator

Your next question comes from Steve Swett of KBW.

Steve Swett

Hey good morning.

Constance Moore

Thank you, Swett.

Steve Swett

Hi, Connie. In some of the markets where you are seeing job losses and you have seen the largest impact in terms of house price decreases. Is there any thing anecdotal that you've seen in terms of out migration of people from California?

Edward Lange

Not out migration, that's a great question.

Constance Moore

It is a great question.

Edward Lange

And it really reveals sort of a bit of the conundrum in that two of the markets where we are facing the greatest housing pressures actually have the highest level of job growths. So, Phoenix and the Inland Empire still have a very high level of job growth, but the pressure is on the housing side. I think, Steve, three of us have had this discussion before is that prior to the ownership society that was hoisted on to the economy five, six years ago, before the mortgage rules were relaxes, multifamily and single-family could coexist in some of these commodity markets in that people lived in multifamily because they were sort of temporary workers. There was a first living experience away from or they were just simply waiting until they bought a house. So the two industries could coexist and the bridge was the need for a 10% down payment. You could only use 30% of your income to qualify for the mortgage and you had to meet the banks wanted to make sure you could comply with the Fannie Mae or Freddie Mac rules of the road. Once those were relaxed, that natural relationship between multifamily and single-family housing was completely destroyed. Having said that, its not jobs in Phoenix and the Inland Empire, the jobs in Phoenix, there is always some out migration from California. The jobs in the Inland Empire are mostly majorly infrastructure jobs, so heavy duty roads. We have got the former Air Force bases that are being reconstructed. We have got rail lines being built out into the Inland Empire, so its heavy duty infrastructure jobs, not just single-family housing. So we have got 2% plus job growth in Phoenix and the Inland Empire but its that breakdown of the relationship between multifamily and single-family housing that's caused this disruption and of course the huge glut of housing.

Constance Moore

We had a demand shock which a supply shock came to answer. We are just kind of working through that.

Edward Lange

And so hopefully now that this, and also I mean I think now that they have removed the definition of a jumbo up to over $700,000, is not going to help the situation in Inland Empire and Phoenix in terms of multifamily housing. It may help with the net absorption of single-family housing which in the end will help. But its not going to restore the natural relationship anytime soon.

Steve Swett

Okay thanks. And then just one question Ed, on the NAV construct that you've provided that is an operating estimate of real estate value and it does not include any assumption for adjustments for property taxes? Is that correct?

Edward Lange

Correct.

Operator

Your next question comes from Karen Ford with Keybanc Capital Markets.

Karen Ford

Hi, just a disclosure question, I noticed the estimated development yield you have in your development schedule changed from a range of 6.5% to 7.5% just to a point of 7%. Was there a reason why you changed that?

Edward Lange

Yeah I think the composite number is more indicative of what the pipeline is going to produce. I think it is probably just natural that we put out a range. We put our range of 6.5 to 7.5 and everyone kind of gravitates for the 6.5 and suddenly that sort of is the number that gets pegged as what the portfolio is going to do and the program is going to do so that we basically have gone to a composite blend of those two categories.

Karen Ford

And then finally the land sales, the excess land sales, the fact that you're not achieving gains on the one you sold this quarter and the one you're expecting to sell in '08. Is that an indication to us that land values are now in general below your cost basis in land today?

Edward Lange

No I don’t think you should take anything away like that. The piece of property up in Seattle was really just too small to even think about.

Constance Moore

It is really an accommodation for our construction guys.

Edward Lange

It is really just an accommodation for the construction guys and to facilitate the construction of the property. So there was no intent for a gain there. In the one in Santa Clair, it really just has to do with how the land cost is allocated. We are still seeing very healthy prices for land. I am going to say thanks bring up the question 'cause it allows us to basically, but we are starting to see though more and more opportunities on the land side in California. I won't say that we've seen much of a price break. I mean there's a lot of private equity capital has targeted raw land as a target investments. And we're seeing there is still a lot of competition for land. But we are starting to see more and more opportunities on the market and that leaves us to believe that we are going, we hope to see some type of relief in the very high land prices that we had in California for the last several years.

Operator

Your next question comes from Alex Goldfarb with UBS.

Alex Goldfarb

Hi. Just quickly on the development program again. Can you just remind us how much FFO drag you anticipate from the properties coming on line and stabilizing throughout '08?

Edward Lange

Well. I mean I think you've got, I think the way you can quantify is you can look at the investment in those properties in that for probably most of the year. There going to be in the lease up mode, so there not going to be basically carrying their weight. So that, I think the composite yield in those properties throughout 2008 is certainly well below the stabilized level. We're probably talking about something in the 4.5 to 5% range. So it's going to be a drag on FFO. And I think you can get into a number that way. Midpoint of our guidance is almost 7% growth and I think without the drag, we would certainly maybe flirting with something certainly well above that.

Operator

You're next question comes…

Constance Moore

This is the last question, Carmen.

Operator

Yes ma'am. Your last question comes from Richard Paoli of AVP Investments.

Richard Paoli

Made it under the line. I am sorry. I just have one other, I guess its sort of an odd ball question. Do you guys have and I'm looking at the CapEx disclosure in the supplemental and is the 5.5 million if I rounded it up for say the fourth quarter. Is that equivalent to same store 'cause I see you have revenue enhancing rehab costs down below or is there some CapEx that’s not in the same store assets?

Edward Lange

No, that’s portfolio wide Rich.

Operator

At this time, there are no further questions, Ms. Moore.

Constance Moore

Okay, great. Thank you everyone. And we'll talk to you after the first quarter.

Operator

Thank you. This concludes today's BRE Properties Fourth Quarter and Full Year 2007 Earnings Conference Call. 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, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts