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BRE Properties, Inc. (NYSE:BRE)

Q2 2012 Earnings Call

August 1, 2012 11:00 AM ET

Executives

Constance Moore – President and CEO

Scott Reinert – EVP, Operations

John Schissel – SVP and CFO

Analysts

Swaroop Yalla – Morgan Stanley

Jana Galan – Bank of America/Merrill Lynch

Eric Wolfe – Citi

Karin Ford – KeyBanc Capital Markets

Dave Bragg – Zelman

Rob Stevenson – Macquarie

Michael Salinsky – RBC Capital

Rich Anderson – BMO Capital Markets

Michael Bilerman – Citi

Operator

Good morning. My name is Roxanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the BRE Properties Second Quarter 2012 Earnings Conference Call. Just a reminder that today’s conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Please limit yourself to one question and one follow-up question.

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

Constance Moore

Thank you, Roxanne, and good morning, everyone. Thank you for joining BRE’s second quarter 2012 earnings call.

Before we begin our conversation, I’d like to remind listeners that our comments and our answers to your questions may include both historical and future references. We do not make statements we do not believe are accurate and fairly represent BRE’s performance and prospects given everything that we know today. But when we use words like expectations, projections or outlook, we are using forward-looking statements, which by their very nature are subject to risks and uncertainties.

We encourage our listeners to read BRE’s Form 10-K for a full description of potential

risk factors and our 10-Q for interim updates. This morning management’s commentary will cover our financial and operating results for the quarter, the operating environment, and un update on our investment and activity, our financial position and our outlook for the balance of the year. John, Scott and I will provide the prepared remarks. Steve Dominiak will be available during the Q&A session.

FFO per share totaled $0.59 for the quarter, which compares favorably to the range we provided in May of $0.56 to $0.58. Our results came in through the high end of the FFO range as property level expenses came in lower than anticipated.

We are updating our annual FFO guidance to a range of $2.32 to $2.38 with a midpoint at 2.35, which is unchanged from our initial guidance. The updated guidance reflects the continued strength of market fundamentals that we see in our Northern California and Seattle market while also recognizing the impact of less trends experienced by our Southern California markets in the first half of the year.

We are encouraged by the June job numbers in our core market. San Diego reordered year-over-year job gains of 23,000 or 1.9% growth. Orange county reordered gains of 33,000 or 2.4% growth, and Los Angeles posted new jobs of 78,000 for growth of 2.1%.

On a percentage of growth basis, these gains all exceeded the markets of New York, Washington, D.C., Dallas and Atlanta. The San Francisco Bay area and Seattle markets continue their strong growth in employment, recording year-over-year gains in June of 3% and 2.6%, respectively.

These numbers suggest that Southern California job growth is finally gaining traction. There is no doubt that the uneven pace of the recovery in markets like San Diego, which experienced the negative effect of troop rotation early in the year, challenged our ability to aggressively push rent and impacted the patient growth for the entire portfolio. As a result, we’ve brought the midpoint of our annual same-store revenue guidance down by 50 basis points from the initial midpoint, reflecting this market condition.

We have benefited from better than expected expense savings in our same-store portfolio, but we’ve also lowered the midpoint for our expected growth rate by 75 basis points for expenses.

In the second half of the year, we expect a natural deceleration in revenue growth from the 5.5 we reported in the first half. But, we do expect an increase from the second quarter results of 5.1% as we benefit from some of the momentum we experienced late in the second quarter.

There are a couple of notable data points. First, new leases were signed at an increase of 5.4% during the quarter and the trend throughout the quarter was very encouraging. The monthly trend increased from 3.5% in April to 5.6 in May, to 6.5 in June. The rollout of LRO was completed during the second quarter and we are very pleased with the seamless rollout and adoption by our on-site and pricing team.

We are encouraged to see the improvement in the rental rate activity increases in Southern California. June and July increases were greater than 4% to the 165 basis points higher from the same time a year ago. We also look at peak level rents relative to today’s rents to provide context about potential for continued growth. Rents in Southern California remained 5% below peak levels providing room to run. Although Seattle rents have increased significantly they are still 3% below levels achieved in the third quarter of 2008. Bay area rents on the other hand are now 6% above the previous cycle peak.

However, income levels have dramatically improved and the lack of broad based supply still provide the strong foundation for operating fundamentals in the Bay area. Even with the continued rent increases, move outs due to rent increases in the second quarter declined 50 basis points year-over-year to 13%, sequentially declined from the first quarter by 160 basis points.

Move outs due to home purchases are up slight, but are still below historical ranges for our core portfolio. From an affordability standpoint, our applicant’s income levels have more than kept pace with rent increase, year-over-year new applicant’s income levels are up 11.1% in our core market.

Turning to investments, at the end of the quarter we delivered the first units at Lawrence Station in Sunnyvale, California. The initial leasing has gone extremely well and we are achieving rent in excess of underwritten trended rent. We are targeting 30 leases per month and have achieved greater than 40 leases in the first 30 days. The first units were delivered on schedule and based on our progress to date we anticipate the project to come in at or below budget.

Including Lawrence Station, we have four projects under construction representing 554 million in total costs with 235 million left to be funded. We currently expect to start our Mission Bay and Redwood City project by year end bringing the total under construction to approximately 760 million with an estimated balance to complete of 400 million. Both of these numbers exclude Lawrence station which really should be completing by the first quarter of 2013.

Upon completion of these projects, we will have delivered approximately 1900 units in some of the best core locations in the country. Ultimately, we expect to manage to a developing pipeline in the range of 700 million to 900 million. During the quarter, we closed on the purchase of land in Pleasanton, California, a site that we had under option contract since October 2010. The site is our second site in Pleasanton. It has been a five-year effort to secure development approvals for both sides.

These sites are directly across the street from Dublin/Pleasanton Lawrence Station and our strategically located in the Hacienda Business Park, the largest development of its kind in Northern California with over ten million square feet of mixed cubed face occupied by 475 companies with over 18,000 employees.

We sold one small asset in the San Diego during the quarter and we look to be more active with dispositions in the second half of the year. We have identified a group of assets with a value of 3 to 400 million that we may sell over the next several years. The properties of some of our older assets or within slower growth submarkets with a waiting towards San Diego and Orange County. We expect these sales to be the primary source of equity over the next 18 months to fund the development pipelines. The timing and the sizes of this disposition activity will be managed so as to minimize the dilution and tax considerations from disposition activity. Many of these assets have a very low tax base. We expect to transact on 120 to 150 million for the remainder of the year.

Two of the properties we expect to sell are in the southern half of San Diego as we look to reduce our exposure in this market. We do get asked what our comfort level of exposure is in the San Diego market. As we have said many times, we think this market has all the long term characteristics for successful multifamily investments, specifically high barriers to entry for new supply, with a high cost of housing and an older single-family housing stock, an educated work force and of course some of the best weather in the country. Ultimately through asset sales and additional investment activity, we would expect our presence in San Diego to be not more than 15% of our NOI.

In summary, as we move through the third quarter we were encouraged by the improving job numbers in our core markets and it helped to improve portfolio occupancy at the end of July and while the trends we experienced at the end of the second quarter are continuing without a visible catalyst it significantly improved conditions in Southern California, it remains hard to predict the timing of stronger revenue growth from this market. Although it’s now fully implemented across our portfolio and it’s been widely accepted by our associates and we are pleased with the early result. And we’ve made great progress on the development pipeline which remains on time and on budget. The early leasing activity along station is very encouraging at rents significantly above our underwritten trended rents.

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

Scott Reinert

Thanks, Connie. I’d like to first give on update on the implementation of our third-party revenue management system and then I’ll move into specific operational commentary. Within the past 30 days we’ve completed the rollout in the implementation of the LRO revenue management system. Many of you will recall that we commenced the rollout in Mid-March in Seattle followed by San Diego and the Bay Area in April, and the balance of Southern California throughout May.

We implemented the new lease module first and then cycle back to each market and activated the renewal application after testing the new lease performance and giving our team the chance to be live with the product.

At this point in the process we’re extremely pleased with what we’ve seen so far including be prouder of the effort of everyone involved and it fully rolled out from such a short period of time.

As discussed on previous calls, given this is an implementation year, we’ve not provided additional revenue lift in our forecast as we walk through the nuances of the new system and calibrated to our specific properties and markets. I will say that results were very encouraging but we still have lived with it for a full operating cycle.

Turning to the second quarter results, we generated year-over-year same-store revenue growth of 5.1% and sequential quarterly revenue growth of 1.4%. As noted in the supplemental new leases were signed at 5.3% gain over the prior residents rate while renewals grew 4.5%.

Overall, turnover ticked up slightly on a year-over-year basis by 120 basis points, 65% in Q2. The top two reasons for move out were number one, relocate out of the area at 15%. Number two, rent increase are too expensive at 13% and number three, home purchases at 12%.

I will now review each of our markets starting with San Diego. San Diego had momentum build late in the second quarter as the military troop rotations that impact us earlier in the year reversed and turned to net positive.

In addition, 13,000 jobs were added to San Diego during the quarter. We feel like we turned the corner in June and we’re able to be positive growth on new leases for the first time this year. The supplemental will show 0.6% growth, but momentum was building to June where we achieved growth of 2.1% with preliminary result for July accelerating further.

Renewal growth has been positive throughout the year and we expect that it will continue to 2.5% to 3% range. Occupancy at the end of July stood at 96.2% with 6.8% available, so San Diego is going much better today.

In Orange County, jobs data has also been positive growth 2.4% during the past 12 months and adding 8,400 jobs in the second quarter alone. During the quarter we saw momentum building as new and renewal rates grew each month but it came at some expense to occupancy as compared to Q2, ‘11 at turnover increase.

We expect renewals to come in for the third quarter in the 4.5% to 5% range, up from the 3.4% Q2 rate of increase. Occupancy at the end of July was 95.6, with 6.2% available. Los Angeles continues to be our strongest performer in Southern Cal with healthy year-over-year revenue growth of 5.7% which reflects both year-over-year improvement in rental rates and the occupancy levels.

Operating fundamentals are being supported by the addition of 78,000 jobs in the last 12 months and 33,000 jobs in the second quarter combined with limited new supply. Occupancy leasing has been healthy and occupancy at the end of July, 95.1% and 7.4% available.

Q3, ‘12 renewal notes have been sent out in the 5% to 6% range. Bay Area had another strong quarter posting year-over-year revenue growth of 8.1% and growth on new leases and renewable 8%.

This metro area has seen very strong growth of 3% year-over-year, one of the highest growth rates in the country.

Our assets on the Peninsula and San Jose, generated year-over-year Q2 revenue growth of 10% and our other Bay area, that’s primarily in East Bay generated growth of 6.5%.

We’re very pleased with the results from the assets we’ve acquired and developed in the South Bay. We invested $175 million in the Silicon Valley over the past few years and we’ve seen revenue growth of 12.3% year-over-year on these assets.

I’d also like to note here and as Connie mentioned in her remarks, we’re very excited about the opening of our newest asset, Lawrence Station. In the first 30 days activity and interest has been strong averaging more than 40 hours per week and 10 rentals. Rents on our conventional homes are well ahead of our original pro forma in 25 of 41 units leased, but then leased at slow market rent with no discounts or concession. We’re very proud of the entire team with the results here.

Back to our same-store portfolio in the Bay area. We expect the strong leasing trends to continue with South Bay outpacing the East Bay, but healthy growth numbers in both markets.

We’re sending out renewal notices in Q3 in 7% to 10% range and occupancy at the end of July stood at 95.4% with 7.6% available. Seattle also had a very good quarter posting year-over-year revenue growth of 8.2% and growth on new lease and renewals of 9.2%.

Following in Amazon, our large employers there that continue to drive job growth. The Seattle metro added 43,000 jobs or 2.6% over the last 12 months.

During the quarter, we saw an influx of contract workers supporting growth on new leases of 13%. There’s a seasonal nature to the contract workers, so we don’t expect to see continued growth at these high levels.

On renewals we’ve seen the increases run at or about 6% all year and we think that number may tick up a bit in the third quarter with longer-term nature of existing residents not likely approach the double-digit figures currently being achieved on new leases.

And August and September renewals are going out around 6%. Supply is going to (inaudible) in this marketplace over the next few years, but for the balance of 2012, activity is limited to 1,600 units in the Downtown and (inaudible) area where we have low exposure.

That said, so Seattle continues to see reductions in year-over-year turnover down 350 6basis points, that’s 57% in Q2. However, we did see an uptick in home purchase at 19% compared to a year ago quarter of 13%.

So, far this has not impacted our ability to drive revenues, we’re keeping a close eye on it. At the end of July, occupancy was solid 96.7% with availability at 6.7.

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

John Schissel

Thanks, Scott. Just a few additional comments before we open up the line for questions. Reported FFO per share of $0.59 exceeded the midpoint of our expectations provided in May, due primarily to savings and operating expense. In particular utilities where we’ve experienced lower than anticipated costs as well as improvements in reimbursement levels.

We also experienced lower than forecasted repairs and maintenance during the quarter. As a reminder overall expense growth of 4.1% for the quarter on a year-over-year basis reflects the 2012 impact from first time revenue management costs not present in 2011. We also had the benefit of tax refunds in 2011, which lowered our base on a year-over-year basis.

G&A ticked-up in the second quarter from first quarter levels reflecting certain costs that were pushed from the first quarter into the second quarter. Our G&A load this year was front-end weighted and we will see it move down sequentially from levels in the first half of the year.

Lastly, we repaid a $66 million mortgage in February of this year with proceeds from our line and that along with higher levels of construction and process, which resulted in increased capitalized interest led to a sequential decline in interest cost.

Guidance for the third quarter reflects the positive impact of incremental NOI from property operations offset by potential illusion from the timing associated with capital-raising activity. We expect to fund another 100 to 120 million in development advances during the second half of the year on top of 90 million that we advanced year-to-date through June.

As Connie mentioned we will use proceeds from asset sale supplemented by proceeds from our revolver to fund this capital requirement. Embedded in the 120 million to 150 million asset sales was approximately 20 million to 30 million in proceeds from the sales communities held in joint ventures. The assets being sold for the most part in the initial phase of marketing and we will provide an update on our progress 90 days from now.

We had 251 outstanding underneath the line at quarter-end and given that we have no debt obligation pressures for several years we have significant financial flexibility. Of course, bond market dynamics are favorable and we continue to monitor and evaluate market conditions with respect to potential long-term issuance.

With that I’ll turn it back to Connie.

Constance Moore

Thanks, John. Roxane, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first caller Swaroop Yalla with Morgan Stanley.

Swaroop Yalla – Morgan Stanley

Hi, good morning. Connie you mentioned that Q3and Q4 will trend up slightly higher in terms of same-store revenue growth. I’m wondering if this quarter has anything to do with the transition of your revenue management system? Or is this primarily you’re seeing some weakness in the markets completely.

Constance Moore

This quarter meaning the second quarter?

Swaroop Yalla – Morgan Stanley

Yes.

Constance Moore

I think I’ll let, Scott, elaborate a little bit more on that. I mean, obviously it was the month that we rolled out the bulk of LRO. But I don’t really know that it was LRO in specific. I mean, I think there was clearly some weakness in southern California, although we did see the trends begin to pick up. But I think we started the second quarter a little weaker in southern California than we had anticipated. And certainly it’s again strengthen as we got through the end of the quarter. So I wouldn’t blame it on LRO.

Scott Reinert

Yes, Swaroop, this is Scott. So during the quarter, we did see occupancy follow-up 30 basis points in comparison to the second quarter last year. Part of that was our push on rental increases. We had very strong new growth on our new leases and we had strong renewal growth, so we saw some turnover uptick and a little bit of fall back in occupancy.

That said, we feel like our occupancy is very competitive in the marketplace. With what’s been reported so far from our peers, we’re actually ahead of the average of our peers. And three out of five of our main markets. So we feel pretty good about where the occupancy is. We’re headed to Seattle, LA and Orange County and slightly lower in Bay Area and San Diego.

It was an implementation quarter for LRO and as you know it doesn’t come out of the box to run its specific property of market. During the quarter we were calibrating it to our markets and our specific dynamics. And as I mentioned we produced great growth numbers, better than we’ve seen in many years and so we’re excited about where LRO takes us in this third quarter, particularly on renewals which we just turned on.

Swaroop Yalla – Morgan Stanley

That’s helpful. And I guess my follow-up question is given the strong drop numbers in Southern California and the fact that your calibration will largely be complete. Do you see these as sort of catalysts, and I mean, would it make you more constructive on your Southern California outlook?

Scott Reinert

You know, as I said it’s been so choppy down there. I mean, I think it’s really more, I mean, we are encouraged and we were certainly encouraged with what we saw in the second quarter. And as I mentioned, every month it started to improve. And so I think it’s just been very tough to predict and so we’re encouraged. And so sitting here today with those job numbers and the ADP numbers came out today at 163. So it will be interesting to see what the jobs number on Friday come out with.

If it continues it should bode well and again, we’ve seen some strength in these markets and occupancy has definitely firmed up particularly in San Diego. But I don’t want to sit here today and say I am encouraged in changing anything.

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

Thank you. Good morning. I guess, you know, following up on the nice momentum pick up month-by-month. Do you think that the new same store guidance is on the more conservative side or is there a disproportionate amount of Southern California versus Northern California lease expirations in the second half or anything else going on?

Scott Reinert

No I don’t think there’s anything unusual with the expirations. I think part of it is clearly some of the leases that we wrote in the first quarter and second quarter early on obviously live with you throughout the year. So it impacts your ability to grow. But again, we like the momentum, we like the trend, but I don’t feel like we’re being conservative.

Constance Moore

John?

Jana Galan – Bank of America/Merrill Lynch

Thanks.

John Schissel

There’s a natural seasonality to the business, so we’ll see that come in through the balance of the year late you know, as we go into the fourth quarter.

Jana Galan – Bank of America/Merrill Lynch

Okay. And Scott, I apologize if I miss this in the prepared remarks. But did you give a new lease and renewal numbers for the portfolio for July?

Scott Reinert

I did not. July just ended yesterday. We’ve got some preliminary numbers, they’re trending above the second quarter levels for the same-store portfolio, new leases came in around 6.5% and renewals came in around 5.5%.

Jana Galan – Bank of America/Merrill Lynch

Great. Thank you very much.

Operator

We’ll go next to Eric Wolfe with Citi.

Eric Wolfe – Citi

Thanks. I just wanted to follow up on the revenue growth guidance and try to get a better understanding of what you need to sort of see that reacceleration in growth. I know it’s not much, it’s going up for 5.1 to 5.25%. But just trying to understand what you need from a renewal or new lease perspective to get there. I mean, would you say it’s fair that you sort of need to see kind of like a blend of 5% growth for the rest of the year and sort of flattish occupancy to hit the midpoint of your guidance?

John Schissel

Yes.

Eric Wolfe – Citi

Okay. So 5% and so if I am looking at your results now, you’re sort of in the 6% range then I guess that’s going to sort of trail off into the fourth quarter to like 4% or 3%. Just trying to understand how that all sort of works together to get to your mid point?

Scott Reinert

I think that’s an accurate assessment. I mean, we look at – we have that detail certainly when we roll it up. We’re looking at growth on a revenue basis between 5.2 and 5.4 over the next two quarters.

Eric Wolfe – Citi

Okay. And -all right. So, I will – maybe I’ll circle back. And then just lastly in terms of revenue growth, I think last quarter you mentioned that it was up like 16%. I’m just wondering, is that going to trail off through the rest of the year and what was driving that, I guess outsize growth for I guess a couple quarters?

Scott Reinert

So, it’s not going to trail off. The year-over-year comparison will trail down, but the other income growth continues to be pretty strong for us. In the first quarter we were up like 15.8%, which was a couple of things. One, it was a pretty weak comp from the prior year’s quarter where our other income averaged about 3.4% in a world that’s normally is around about 3.6. So it was a Q1 ‘11 comp that was a little bit low. So, in second quarter, we came in, I think it was 3.6% or 3.7% of our gross potential rent, which is about where it is – where it should be and it was like 9%, 9.5% greater than Q2 of a year ago. So the numbers are still strong.

Eric Wolfe – Citi

Okay. All right. That’s helpful. Thank you.

Operator

We’ll take our next question from Karin Ford with KeyBanc Capital Markets.

Karin Ford – KeyBanc Capital Markets

Hi, good morning. Just wanted to ask the expected cap rate. Well, I guess the cap rate on the disposition that you did this quarter and then what your expected cap rates are for the assets for sale and are they all in San Diego, the ones you’re selling for the balance of the year?

Scott Reinert

For the first question on the cap rate. The higher cap rate was a 5.9% cap rate when you adjust for tax, to sell our cap rate, BRE’s cap rate goes up, which are within the mid to high sixes. Keep in mind it was a smaller asset, older asset. That’s why the cap rate was in that range.

As to the assets that we’ll be marketing, I’ll echo John’s comment that it will be older, slower growth asset that we have targeted some asset in Southern San Diego to reduce our exposure in that market.

Constance Moore

They are not all there. So, it’s Southern San Diego and Orange County.

Karin Ford – KeyBanc Capital Markets

Got it. And my second question is just on development yields. Can you just give us an update, given the favorable construction where the cost is coming out on Lawrence Station and the favorable rent trends, where you think the yield will end up there? And can you talk about what you think might be going, where the trends might be on the Wilshire trended yield just sort of re-looking at that in light of what’s going on in Southern California today?

Scott Reinert

Sure. We have four projects under construction today. Two, in the Bay area; one Mercer Island; one, Lawrence Station. The current return on that is in the very high 5% range. We expect it to stabilize in the mid to high sixes.

Sunnyvale, which we call Solstice has a current return in the mid sixes and should trend to the high seven.

Aviara and Wilshire La Brea, which we call our legacy assets. Aviara is trending at a five – I’m sorry, it’s current return is at high five, it should trend to the low five. Wilshire La Brea’s current return is in the low fours, and it should trend to a five.

The next two projects that we do plan to start Mission Bay and Redwood City by the end of the year. The current returns are in the low to high fives, and both will stabilize above at seven.

Karin Ford – KeyBanc Capital Markets

And that’s reduction in the expected trended yield on Wilshire, is that right?

Scott Reinert

No it’s actually almost a 100 basis points increase. When we started the project not 100 about 50 basis points.

Karin Ford – KeyBanc Capital Markets

Okay, so it’s probably about 50 there.

Scott Reinert

When we started the project we were below our current return was just below a four and the kind of return was in the mid to high four.

Karin Ford – KeyBanc Capital Markets

Got it. Okay, thank you.

Operator

Operator

We’ll go next to Dave Bragg with Zelman.

Dave Bragg – Zelman

Hi good morning. Just another question related to revenue growth guidance realizing that different companies handle this differently but when you talked about your outlook for the year. How do you contemplate these dispositions, are they still embedded in your guidance or are they not?

Scott Reinert

They are embedded in our guidance.

Dave Bragg – Zelman

Okay. Thank you. And then on development, could you just comment on the outlook for supplies in San Jose given the recent spike in activity there and how that affects your decision on Redwood city and how you view competition at that lease up by the time it gets going.

Scott Reinert

Well, the supply picture hasn’t changed from what we discussed last quarter. There is a bubble of supply coming into the San Jose market, and as we discussed Lawrence Station is preceding that. It should do well. Sunny dale will start delivering units and or Solstice as we call it will start delivering units in the fourth quarter of ‘13, given its location, we expect that to do well. And then Redwood City is really on the Peninsula and shouldn’t compete directly with the supply that’s coming into the San Jose market place.

Scott Reinert

I would, this is Scott, I would add Dave that the bay area is exhibiting some of the strongest job growth in the entire country, and so far, that demand has been very strong at Lawrence Station. Our South Bay properties are up quite very well, I know that the airline project in north San Jose is doing very well. I think they have delivered a couple hundred units, maybe a little bit more than that. They’ve absorbed those very well. Last I heard they had absorbed something like a 165 out of 250 or something like that in just a few months time. So the market is gobbling it up and the job growth numbers appear to support the number of supply that is being delivered right now.

Dave Bragg – Zelman

Okay. And thank you. And then last question for John. You mentioned it briefly, but can you elaborate on the potential bond issuance later this year and where could you price nowadays on tenure money?

John Schissel

Well, we don’t want to provide too much detail around it, but as you know in our guidance starting at the beginning of the year. We had forecasted a bond offering and suggested it could happen in the last half year depending on market conditions. So you know, we continue to evaluate that. Given current market conditions we think we could price, in the 3.5 to 3.25 range, if not lower.

Dave Bragg – Zelman

Great. Thank you.

Operator

We’ll take our next question from Rob Stevenson with Macquarie.

Rob Stevenson – Macquarie

Good morning, guys. John, what’s the spend on LRO that’s in the expense line item in the first half of the year and what do you expect in the back half of the year?

Scott Reinert

That was about 200,000 roughly in the first half and 400 in the second half.

Rob Stevenson – Macquarie

Okay. So if I look at the same store expenses the year-over-year growth is something on a six month basis somewhere around $2.2 million year-over-year of which about 200,000 of that is – represents LRO.

Scott Reinert

That’s correct.

Rob Stevenson – Macquarie

Okay. I mean, what – and if I take a look at your guidance, the midpoint of your expense guidance range for the year is 3.5 so it sort of implies a 3% back end of the year from an expense standpoint. What’s other than LRO is driving your same-store expenses up this year, given Prop 13?

John Schissel

Well, again, we had a lower tax base last year because of the refunds that we took into. And then it’s just a mix of things. We’ve got some payroll coming through there in terms of additional programs that we have with respect to preventative maintenance on our properties and a number of other cost. And we do run through property management fee and so as revenues increase on a percentage basis, you will those increase.

Constance Moore

Yeah. Let me just elaborate. You probably recall, we said that in – the difference, the delta in our apartment taxes on those where we had rebates, not assessed value adjustments, but rebates in 2011 was about $1.8 million in the same-store portfolio. So I’m going to say in the first half that must have been $900,000.

And so you’ve got a 1.8 million of sort of one-time so Prop 13 we – our assess value in our property taxes have gone back to their normal Prop 13 but we did get the benefit last year. So you have that dealt as well. And then, as John mentioned, we do have a 3.25% property management fee in all of our same-store numbers including the yields that Steve quoted on the development. There’s a 3.25% property management fee. So as revenues are growing 5.5%, so are property management fees.

Rob Stevenson – Macquarie

Okay. So it’s really the rebates that are driving the expenses much more so...

Scott Reinert

That’s the biggest – yeah, that’s the biggest component. I think if you go back and you look at the original guidance, that we did. I think John did a good job of sort of identifying what the core expense growth would be if you excluded those. Those really one-time items that I would say are unique to BRE this year in terms of our property taxes and the LRO expenses.

Rob Stevenson – Macquarie

All right. And then lastly, what is bad debt expense trending for you guys these days. And how that compare sort of sequentially in year-over-year?

Scott Reinert

It hasn’t really moved at all over the past couple years. It’s come in and on rents it’s about 45 basis points, plus or minus.

Rob Stevenson – Macquarie

All right. Thanks, guys.

Operator

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

Michael Salinsky – RBC Capital

Good morning, guys. You gave some good statistics there on forward renewals and where new lease trends are in the quarter. Where was financial occupancy at the end of the quarter as well as the end of July and how does that compare on a year-over-year basis in the second half of the year. What are you guys laughing against?

Scott Reinert

I’m not sure we have it.

Constance Moore

I’d say, there’s a lot of looking at papers.

Scott Reinert

Yeah. I’m not sure we have it, financial occupancy at quarter end, we show it certainly in our supplemental for the quarter and we can get back to you on what it was at quarter end.

Michael Salinsky – RBC Capital

I appreciate that. Just trying to see how – I know you guys were around 95.6 last year and you – I think you start going in at 95.1, kind of going into the quarter here. So I’m just curious to where that pencils off for the second half of the year. And then, on the renewals, how much moderation are you seeing versus where the notices go out versus where the notices go out what you are actually achieving.

Scott Reinert

This is Scott, Mike. It’s been pretty consistent for us anywhere from Right on what we’re asking to 100 basis points in some markets, but I would say overall within 50 basis points.

Michael Salinsky – RBC Capital

Are you seeing more pushback on that?

Scott Reinert

In some markets, yes. In the Bay area are the number one reason to move out, rent increase too expensive at 18%.

Constance Moore

So that – Mike, this is Connie, that does kind of affect the numbers. So when we say we were send out 20 letters that are renewal of let’s six, and if only 10 of them renew because and the others leave and then we get new leases and those 10 might accept 5.5, it kind of distorts the numbers a little bit sometimes. So, you have to – what you’re sending out all of those – some of those choose to move out, so it can impact your numbers and we get the opportunity to bring someone in new at a higher rent.

Michael Salinsky – RBC Capital

And the second question I had. The revenue enhancing CapEx increased pretty healthy. I knew you guys are doing a few redevelopments. Do you know the breakout by chance of what the actual amount spent on the redevelopments versus what is revenue generating?

Scott Reinert

Yeah, we haven’t broken that out. We can get you that detail.

Michael Salinsky – RBC Capital

I appreciate that. That’s all I got. Thank you.

Operator

We’ll take our next question from Rich Anderson with BMO Capital Markets.

Rich Anderson – BMO Capital Markets

Thanks. Good morning, everybody.

Constance Moore

Good morning.

Rich Anderson – BMO Capital Markets

So despite the positive trends month-to-month trend you saw on the second quarter, you’re bringing down same-store revenue primarily. I guess San Diego is the main culprit, but are you – do you have any bigger picture considerations in your new guidance, broader economy or even a global perspective that might have – given you’re a little bit sober approach to the second half of the year?

Constance Moore

Well, I think most of it has to do with the results of our existing markets. But we’re not ignorant of the fact that it’s just a global slowdown. And from when we think about the original thoughts on GDP for our core markets, it was significantly stronger than where it came in.

For example, if you look at Q1, we thought that the forecast in our portfolio is going to be about close to 2.5 GDP and our markets came in at 0.7. So, I think you have to be mindful of the slowdown. I mean there’s consumer confidence. There’s a lot of stuff going on between our election, consumer confidence, fiscal cliff, Europe. So that doesn’t vale, I mean sometimes I do feel like particularly here the in the bay area, we’re a little immune to some of that just because of given the strength of the job markets, but I don’t think we can overall ignore that and our residents certainly can’t ignore that.

But I think bringing down – John and Scott might have a little more color in this, but I think that bringing down the revenue is really more a reflection of, sort of, what happened to us in the beginning of the year. Because when you write those leases – I’ll pick on San Diego, when you write those leases in San Diego in the beginning of the year, you’re living with those for 12 months. And so the first four to five months in San Diego were certainly weaker than we expected, those leases we’ll living with, but again we like the trends that we’re seeing, but it just doesn’t really sort of have a material impact on back of the year just because you’re living with those leases.

Rich Anderson – BMO Capital Markets

Okay. And then the follow-up question is there was a point made. I don’t remember who said it, in the second half you have seasonality to consider, but what why would you talk seasonality if you’re talking about year-over-year comps.

Scott Reinert

Rich, this is Scott. I think I made that comment and I was just pointing out that as we look at growth rates on new or renewal leases those will tend to trend down as you go through the fourth quarter. Yes, you’re right, last year in the fourth quarter they’re trending down too. So we expect to still get strong year-over-year growth, but the absolute growth rate on each lease will trend out from what we saw in the second quarter or third quarter.

Rich Anderson – BMO Capital Markets

Okay. Thank you.

Operator

At this time, we have one question remaining in the queue. (Operator Instructions) We’ll take our next question from Eric Wolfe with Citi.

Michael Bilerman – Citi

Yeah, good morning. Its Michael Bilerman here with Eric. I just want to come back to sort of the revenue guidance. And you think about this what would be a reacceleration into the back half of the year. So call it from 5.1 in the second and something as probably 5.25-ish to get to the 5.4 midpoint for the year.

And I’m just curious what gives you the confidence that you will reaccelerate in terms of your year-over-year growth, especially given the fact that your comps get a lot more difficult in 2H, relative to last year. And I realize there’s going to be some regional aspects to your portfolio that makes it different than peers. But pretty much to a tee, all of the other multi-family landlords are decelerating in growth modestly into the back half of the year or flat at best. So maybe you can just go into a little bit more detail about what’s happening.

John Schissel

Yeah, I’ll take this is John. Mike, I’ll take a first stab at it. I’m not sure we’re saying that there’s going to be significant growth over the second quarter. And certainly it’s down from what we’re showing in the first quarter. But I do think as we’ve talked about, we saw some occupancy flip in the second quarter and we built some good momentum as we ended the quarter.

And when we look at that and push through the numbers, we see us trending in that range that we quoted. So as Connie said I don’t think it’s conservative, I don’t think it’s aggressive. I think it’s what we see today as we trend towards that midpoint with six months left.

Eric Wolfe – Citi

This is Eric. That’s helpful. I’m just curious as you look at that. I mean, does that give you, I guess, I would say increased confidence for 2013, heading into the year. Or is it just too early to really sort of start talking about that at this point. I guess, I would say that if you’re reaccelerating into the back half of the year then you would have to be somewhat optimistic going into third 2013.

John Schissel

Well, big picture we’re optimistic because we do see growth, but I think beyond that it’s not appropriate to talk about 2013 at this point in time. And as you think about, you’ve had a lot of talk about San Diego. It looks like a lot of the markets decelerated not just San Diego. And so it’s hard to just to blame one market, but it did seem as though there was deceleration across each of the markets in second quarter.

Scott Reinert

So Eric, this is Scott. I think mostly what we saw was the change in occupancy that I talked about earlier. For the most part our new and renewal release growth was – as stronger as we’ve seen in quite a while. And as we moved through May and into June, we started to see a stronger build in those rental rate increases and then July came in strong as well. I gave you our preliminary numbers there. So that’s what gives us some confidence that we’ll see an acceleration from the second quarter through the back half.

Michael Bilerman – Citi

And then just last question, Connie, I guess as you think about the stock, obviously it was under performer in the first half of the year and started to outperform a little bit here in the third and you have given most of that back today most from the report. The stock itself, do you view your capacity that you have as a stock buyback being an opportunity if the sharers continue to trade wide relative to peers, as a use of capital?

Constance Moore

Well, I think it’s a good question. And yes, we’ve certainly notice the under performance this year and obviously this morning as well. But no, I think just given that we’ve got a development pipeline that has needs to fund, you know, and the balance of the pipeline including stuff that hasn’t started, it’s $900 million. I don’t think so it would be prudent for us to start buying back stock and then try to figure out a way to fund that pipeline. We’re very encouraged with the pipeline. We believe in the pipeline and the growth. I think Steve has done a traffic job when identifying these sites and getting them under construction. And as I said several times and you’ll probably hear it several times more over the next several years that they are performing as we expected and the rent continues to increase. And so I just don’t think it would be a prudent use of our capital.

Michael Bilerman – Citi

Thank you.

Operator

We have no further questions at this time. Ms. Moore, I’ll turn the conference back to you for any additional or closing remarks.

Constance Moore

Thank you Roxanne and thank you everyone for participating in our second quarter call. Again, we’re looking forward to talking to you in 90 days and looking forward to sharing those results with you. Thanks and have a great day.

Operator

Thank you for your participation. That does conclude today’s conference.

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