Essex Property Trust Inc (ESS) 2013 Q4 法說會逐字稿

Greetings, and welcome to the Essex Property Trust fourth-quarter 2013 financial results and 2014 guidance conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Barb Pak, Director of Investor Relations. Thank you. You may now begin.

Thank you, and welcome to our fourth-quarter earnings conference call.

Before we begin, I would like to remind everyone that certain matters discussed on this conference call contain forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to several assumptions, risks, and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Please refer to the forward-looking statement section of the earnings release issued yesterday.

Today, management will be making some prepared comments related to the proposed merger of Essex and BRE Properties. At the advice of counsel, management will not be taking questions related to the proposed merger, given that the merger is subject to approval of both Essex and BRE stockholders. Comments related to possible financing sources, such as property sales and joint ventures, are in a preliminary stage, and we cannot assure you that they will be consummated.

Essex has filed a joint proxy statement plus prospectus with regard to the proposed merger with the SEC on January 29. We refer investors to the information in the joint proxy statement regarding the merger and related transactions, and any other relevant information that we may file with the SEC. The question-and-answer session at the end of the call will be limited to matters related to the fourth-quarter earnings results and the 2014 guidance assumptions and outlook provided for Essex on a stand-alone basis.

I'll now turn the call over to our President and Chief Executive Officer, Mike Schall.

Thank you, Barb.

I'd like to start by welcoming you to our fourth-quarter earnings call. Mike Dance and Erik Alexander will follow me with comments. John Eudy and John Burkart are available for Q&A. I'll cover the following two topics on the call: fourth quarter and annual results on our outlook for 2014; and secondly, the update on the merger integration process.

On to the first topic. Yesterday we were pleased to report continued strong operating results for the fourth quarter and full year ended December 2013. The core FFO per share result for 2013 represents 11% growth from the prior year and is $0.05 per share above the midpoint of the initial 2013 guidance range. In the three-year period from the 2010 recessionary trough, we have grown core FFO per share by 51%.

We ended 2013 with 6.3% same-property revenue growth near the high end of the initial guidance range, led by our Northern California region. Southern California was the only region that performed below the midpoint of our original 2013 revenue guidance range, missing by 15 basis points. With respect to Southern California, our expectation of slow, but steady improvement in revenue growth proved accurate in 2013, as each of the four quarters generated slightly higher sequential growth, with Q4 achieving a respectable 4.7% revenue growth rate. Looking back over the past several years, however, Southern California has fallen short of our higher expectation for rental revenue.

With respect to job growth, 2013 remains strong, and at 2.1% in our target markets, was just above our initial forecast, with each MSA, except Oakland and Los Angeles, beating our estimate.

Turning to 2014, our overall market outlook is reflected on page F16 of the supplement and is based on US job growth of 1.8% and 2.8% US GDP growth, both of which are near the middle of the range estimated by our economics data vendors. This information is materially consistent with our three-year outlook at our Investor Day presentation in November.

Our 2014 revenue guidance is very similar to our original 2013 estimates. Overall, the midpoint of our revenue guidance range of 5.6% is only 15 basis points below the comparable estimate for 2013, and each of our three primary regions are assumed to generate rental growth within 50 basis points of the comparable 2013 estimate. Overall, 2014 multifamily supply is estimated to be 1.1% of stock, up from our estimate of 0.8% for 2013. The higher level of supply in 2014 is offset by higher job growth, consistent with an improved US economy, leading us to expect that the overall demand-supply relationship remains favorable to landlords.

Apartment demand continues to be anchored by job growth, demographic factors, and limited and expensive alternative to rental housing. Medium priced homes are expensive on the West Coast with median prices ranging from $389,000 in King County, Washington, to $813,000 in San Francisco County. In addition, for-sale housing values are increasing substantially faster than apartment rents, making apartments more affordable, relative to homes.

We believe that Southern California will continue to report good job growth and solid results. The dilemma of Southern California jobs versus rent growth is depicted in an Axiometrics chart for Los Angeles that we've reproduced with permission, as page F17 of the supplement. While we believe that Southern California has the potential for higher rental growth, we don't see the catalyst for that to incur in 2014 and, thus, it assumes the continuation of solid, but relatively flat revenue growth rates.

We completed approximately $462 million in acquisitions in 2013, down from nearly $800,000 in 2012. Overall, we expect to acquire approximately $400 million again in 2014, with emphasis on well-located B property and on Southern California, financed in a way that maximizes accretion.

We have 11 development communities that are under construction or in the initial leasing phase. Going forward, we'll continue to be selective for new apartment development opportunities. There are many development deals being discussed, and most of the merchant builders need equity to satisfy lender requirements. Other impediments to new apartment construction include concerns about the economy, future rent growth expectations, construction cost increases, and the need for concessions from reluctant local governments. With this in mind, we continue to believe that new apartment deliveries will peak in late 2014 to early 2015 in Seattle and in Northern California.

Now, on to my second topic, the merger integration update, since signing the agreement to merge Essex and BRE on December 19, 2013, both Companies have worked with great focus and effort to make the transition as smooth as possible. Earlier this week, we filed Form S4 with the SEC in connection with the proposed merger and necessary shareholder votes from both Essex and BRE shareholders. If the process proceeds without delay, we could close the merger in March.

We have enjoyed working with Connie Moore and her team as we seek our common objective of forming a preeminent West Coast apartment REIT. We appreciate the incredible effort of both the Essex and BRE employees in realizing this vision and offer them our continued thanks.

Merger integration planning remains in full swing and significant progress has been made. The merger agreement provides for a cash component of $12.33 per BRE share, or roughly $1 billion dollars. The financing of the cash component is supported by a $1 billion financing commitment from UBS and Citigroup, which can be relied upon if our preferred funding sources, which are a combination of institutional joint ventures, property sales, and borrowings, does not occur.

We currently have non-binding term sheets related to the formation of institutional joint ventures involving properties valued at between $800 million and $900 million. In addition, we believe that $100 million to $200 million in property sales could occur before or shortly after the merger, and that most of the cash required to close the merger could be generated by these activities.

We realize that the market desires greater visibility into our long-term expectations for the merger, and has asked for additional information. As noted on the call, following the announcement of the merger, we cannot provide the details of our underwriting and assumption as advised by our attorneys. We refer everyone to the investor presentation previously filed with the SEC and posted on our website and to the Form S4 recently filed for details of the transaction.

We have recognized the importance of articulating our vision with respect to the merger. Recall from the conference call announcing the merger that our baseline financial assumptions were that the merger would be NAB-neutral, accretive to core FFO in the range of $0.05 to $0.08 per share in the year following the merger closing, and that the annual synergies will approximately equal the impact to Prop 13.

In the Q&A, we noted that the vast majorities of the assumed synergies are in the expense side, of which property and corporate level expense reductions were roughly similar amounts. We continue to believe these assumptions are achievable.

A key question is what opportunities are available over and above the baseline scenario outlined above. As previously noted, we are in the midst of evaluating these opportunities and so conclusions have not been reached. However, we'd like to share with you our list of priorities related to synergies and efficiencies to be pursued following merger consummation as follows.

First, we will reconcile pricing philosophies, which are materially different despite our geographic and portfolio of similarities. Based on that reconciliation, we will adopt one Company-wide standard best practice to include the renewal process, targeted turnover rates and costs, traffic and traffic sources, amenity charges, and occupancy/availability ranges.

Second, we will look for opportunities to improve the financial structure of the combined Companies from the perspective of risk/reward, cost of capital, and core FFO accretion. This could, for example, involve new institutional co-investment relationships for development communities and possibly existing properties.

Third, we will implement best practices identified during the merger integration process, detailed recommendations and opportunities have been compiled as we evaluate each functional area to be the basis for action plans. For example, we expect to implement BRE's [rubs] reimbursement methodology, website, and procurement practices at Essex communities. Similarly, we expect to implement Essex's approach to Craigslist promotion, resource management, redevelopment, and asset management plans at BRE communities.

Fourth, we'll use our larger footprint and community proximity to negotiate lower cost relationships with vendors, create onsite operating and savings, and revenue management synergies.

And fifth, we will kickoff a major human resource initiative focused on creating career paths that will develop talent from within the Company, improve hiring practices, and provide greater regional coordination of staff and related topics. We believe that these areas will significantly improve the overall efficiency and results of the combined entity.

That concludes my comments. Thanks for joining the call today. I'll now turn the call over to Erik.

Thank you, Mike.

A strong fourth quarter in operations helped Essex cap off another good year and set us up for continued growth in 2014. The Bay Area and Seattle continued to record strong economic growth, which resulted in healthy demand throughout the period. Leasing activity met or exceeded expectations in all of our markets, highlighted by strong renewal activity, improving occupancy, and better than expected schedule rent growth.

For the quarter, renewal rates grew at 5.5% over expiring rates, while January renewals improved to 6%. With higher expiring rate comps ahead, February and March renewals are expected to achieve rent growth around 5.5% for the portfolio. Given our low availability and improving demand, we should see strong, sustainable rent growth for new lease activity in all markets.

Turnover remained low and within expectations during the quarter. But we did see a seasonal pick-up in move-outs due to home purchases during the quarter, as this metric hit 12.2%. However, this is consistent with the last two years.

Solid fundamentals helped sequential scheduled rent growth improve, and we believe our tempered focus on occupancy during the period allowed us to realize scheduled rent growth, double that of December 2012. We are off to a good start in the new year, as scheduled rent in January outpaced December's growth and occupancy stands at 96.6%, with a 5.4% net availability for all stabilized assets.

Activity at our lease-up projects Epic in San Jose, and Connolly Station in Dublin, reflect strong market conditions. Both projects are leasing ahead of expectations and are expected to be stabilized in September and March, respectively. Leasing activity at the new developments in the broader market also demonstrates strong demand, as the average monthly absorption for all projects for North San Jose was 38 units per month for 2013. Next quarter, I will comment on Avery, Dylan, Huxley, and Mosso, as we begin pre-leasing activities for all four projects over the next several weeks.

Now I'll share highlights from each region, beginning with Seattle. While new buildings continue to come to market in the region, we believe that slower absorption and moderating rents are more a function of seasonality than too much supply. Deliveries are largely concentrated downtown, and we remain vigilant in our strategy to maximize revenues by meeting market expectations and proactively managing lease expiration.

Economic rents on the East Side, the North End, and the South End of Seattle, where the majority of our portfolio is located, held up better than downtown during the fourth quarter, and we expect these submarkets to outperform the downtown in 2014. Employment growth in the region improved to a year-over-year rate of 3% in December, with unemployment below 5%.

The most important employment news of the quarter was the labor resolution between the machinists and Boeing that will allow the world's largest airplane manufacturers to keep 20,000 direct and indirect jobs in Seattle working on the 777 Dreamliner for the next decade. Office absorption moderated during the fourth quarter, with 313,000 square feet leased, but 2.9% of total stock was leased for the full year. Office vacancy remains low and deal flow continues to be brisk, including Amazon's purchase of yet another significant property in downtown.

Turning to Northern California, with the year-over-year job growth of 3.4% in San Jose, and 2.2% for the broader region, the Bay Area continues to lead the way for Essex with the highest growth in rental rates and revenue for the portfolio. Office leasing and development continues to be strong in virtually all parts of the Bay Area, with another 1.5 million square feet absorbed during the quarter. Additionally, other significant build-to-suit projects, like Apple's 2.8 million-square foot headquarters and Netflix expansion began construction during the quarter.

Investment in transportation and infrastructure also continued to grow. The new Eastern span at the Bay Bridge and the fourth bore of the Caldecott Tunnel opened in the latter part of 2013. BART's Oakland Airport Connector is set to open later this year, and the first phase of the Transbay Terminal remains on schedule to open in 2017. All of these projects and others will continue to help fuel economic growth in the Bay Area.

Finally in Southern California, Southern California continues to grow at a more moderate pace compared to Seattle and the Bay Area, but Orange County and Ventura have shown signs of accelerating. Overall, job growth in Los Angeles was 1.2% during December. Orange County job growth was 2.4%, and Ventura hit 2%. Orange County boasts the lowest unemployment in Southern California at 5.2%, but Los Angeles has dropped below 9% for the first time since November 2008.

Encouraging news is that the 1.4% year-over-year decline in employment in Los Angeles -- unemployment in Los Angeles, was due to employment growth and not shrinkage in labor force. The impact of the military in San Diego essentially remains unchanged, with our resident exposure hovering around 13%. However, with federal funds flowing again, there has been an increase in shipyard activity and military contract work.

Commercial leasing activity in the region was positive during the fourth quarter, with another 850,000 square feet absorbed, mostly in Los Angeles. Orange County was flat. However, Hyundai and [Pimco] delivered their headquarter facilities during the period.

So overall, economic and rental market conditions remain strong across the portfolio, and a solid December and January give us good reason to be confident about 2014.

Thank you for your time, and I will now turn the call over to Mike Dance.

Thanks, Erik.

Today, I'll provide some color to the assumptions behind our 2014 guidance and provide a brief update on the proposed merger with BRE. For more details on our guidance assumptions, please read page 6 of the press release. And on S14 of the supplemental package, we have provided a detailed road map how these assumptions are expected to impact our 2014 financial results. The assumptions and projections are for Essex on a stand-alone basis, and exclude any impact from the proposed BRE transaction and the merger-related costs associated with the deal.

For 2014, we expect consolidated same-property net operating income to grow by 6.5% at the midpoint, driven by a 5.6% increase in same-property revenues. The 2014 same-property portfolio will increase by over 2,000 apartment homes and will exclude the six properties that were acquired in 2013 and those undergoing major redevelopment. We expect our same-property operating expenses to increase 3.5% at the midpoint.

The biggest factor driving our expense growth is higher property taxes. Our budget assumes property tax increases by $3.7 million, or 7%. This tax increase relates to higher assessed values in Seattle, which are 18% higher than last year's assessed value.

In California, we still have favorable Prop 8 adjustments in 2013, totalling $1.2 million in taxes savings, and we expect $600,000 of additional California property taxes in the second half of 2014 as a result of losing these Prop 8 savings on July 1. The controllable expenses for the same-property portfolio are expected to grow by less than 2%.

Now, I'll provide an update on the proposed BRE merger. Assuming the merger closes in March, we expect to benefit from the operating efficiencies of adopting the best practices that Mike outlined in his prepared remarks after a six-month integration period. The operating platform accretion will begin to add accretion to our 2014 core FFO guidance in Q4 and continuing in to 2015.

In connection with our financing plans for the cash component of the proposed merger, we expanded our unsecured credit facility from $600 million to $1 billion at the end of January, and added an accordion feature pursuant to which we have the flexibility to expand to $1.5 billion. We reduced the pricing on the expanded facility by 12.5 basis points to 95 basis points over LIBOR. In addition, we renegotiated the pricing on our $350 million term loan, reducing the spread over LIBOR by 15 basis points. We believe this demonstrates some of the initial costs of capital advantages we can achieve with the larger platform.

At the closing of the merger, the net debt-to-EBITDA of the combined Company will increase by one turn as the result of creating the joint venture, which will fund the cash component of the deal. At this time, we do not expect to use the $1 billion bridge loan to close the merger. We expect the debt-to-EBITDA ratio will return to approximately 7 times in the first half of 2015 through growth in net operating income and stabilizing the development pipelines of both Companies.

As a result, after the merger, we will maintain the strength of our balance sheet and will be opportunistic when considering alternative sources of capital, including asset sales, additional joint ventures, unsecured debt, and common equity to finance the build-out of the development pipeline.

As disclosed in our press release, our Board of Directors declared a first-quarter dividend of $1.21 per share to shareholders of record on March 14. The timing of the first-quarter dividend is coordinated with BRE's first-quarter dividend pursuant to the merger agreement. The Board will review any increase to the annual dividend during its February Board meeting and an increase, if any, approved by the Board will be effective for the second-quarter dividend payment.

I will now turn the call over to the operator for questions.

(Operator Instructions)

David Toti, Cantor Fitzgerald.

Hi, guys. Good afternoon. That was a pretty thorough presentation.

I just have one question with regard to the Company's philosophy on disposition. The forecast for the year looked relatively light compared to volumes that some of your peers have been disposing of. If we think about your capital needs broadly, and where we are in the pricing cycle on apartment assets, especially in your market, why not dispose of more? What's the rationale for keeping that relatively limited?

Hi, David. It's Mike Schall.

The main rationale is trying finding the right source for putting capital to work. We tend to be very focused in terms of what we buy or what we build. Therefore, we don't have a large portfolio of assets that we want to dispose of, as a general statement.

We're looking for arbitrage. We're looking for if we sell these assets, what do we do with the money? What's the best source of funding the development pipeline in a variety of things, and we will become more aggressive at selling assets when that becomes the most favorable source of capital to fund other future activities.

Effectively, it sounds like the cost of that capital is still too high in your mind?

Exactly.

Okay. Then I just have one follow-up question maybe for Erik, and I might have missed this. But what's the occupancy assumption embedded in the revenue forecast for the year?

Hi, David. This is Erik.

It's a range across the portfolio, similar to what we experienced in 2013, so I would say that goes from the high 95%s to the mid-96.5%, depending on submarket.

So am I hearing sort of flattish for the year?

Yes.

In aggregate, okay. Great. Thanks for the detail today.

Alexander Goldfarb, Sandler O'Neill.

Hi, good morning out there.

Good morning.

First question is as you guys laid out the strategy for this year in integrating BRE, it seems like the core business is business as usual. There's a lot of activity, lot of investment activity, and such. Do you feel like what we're going to see on the core is what we would normally see from core Essex?

Or is your intention to dial it back to make sure that more of the resources are focused on the integration, and the angle that we're coming at is over the past year or two, we've seen one or two situations of company mergers, where a part of the operation was dropped as a company acquired or integrated various platforms, so just want to get your take on that.

Alex, it's Mike Schall. Certainly, we expect to continue with business as usual throughout our portfolio, so we don't expect a drop-off. Obviously, we haven't been through this process before, and so there's a certain amount of uncertainty there. But all of us are confident that we will be able to work together to basically continue the business as it's run now.

I think one key factor here is that we are so similar as to geography, as to staffing ratios, as to a lot of the systems and processes, that I think it's going to perhaps make this a little bit easier to integrate relative to some of the other transactions you're referring to.

Okay. The second question is looking at Southern California, some of the other partner folks that we've heard from were more bullish on Southern California than previously throughout last year. You guys, obviously, spoke about Orange County and Ventura picking up. Has something occurred more recently in the past few months that people are a little more positive on Southern California? Or it's pretty much consistent with what you guys expected, but the fact that it's now seeming to pick up is just a positive refreshment that everyone's focused on?

Hey, Alex. This is Erik. I think there has been some pick-up in Southern California in areas, and I didn't comment on San Diego. But we've seen some improvements there, as well, and spots in Los Angeles.

I think as we've always done, is tied this to what our economic forecast is, or the jobs picture. Until we see that sustain in a meaningful way, I think it's hard to be too bullish. We've seen that before, where we've had spurts of we think it's taken off and then it flattens out. So we'll see, but right now we're feeling pretty good.

But what you've described is sort of broad-based throughout the region. It's not just one industry or one geography. It seems pretty positive that it should continue, right? Or is there fear there could be something relative?

That's right. I think that our view across Southern California is positive.

Okay. Thank you.

Rich Anderson, BMO Capital Markets.

Thanks. Good morning out there.

Hi, Rich.

I don't know to what degree you can respond, but I'll just ask and you can say, shut up, if you want. When you started this process and became known to everybody in November-December timeframe, a lot of things were going on at the time. I didn't envy you with all the moving parts inside and outside of the transaction. But when you look at it now, having a couple months under your belt, can you say if the merger analysis looks even better to you now? Or maybe about the same, or are you feeling even more confident about the opportunity here?

Hi, Rich. It's Mike.

I think I need to steer clear of that question. I was expecting that someone would ask hypothetical, just general merger-related questions, how do we look at things, et cetera, et cetera, which we maybe can venture down that road. But I think anything related to this merger, we've been told by our attorneys that we are not allowed to discuss.

Okay. My apologies. I won't take it any further then.

Okay.

I guess maybe if you could, when you look at the three markets, is there anything specific about Essex or BRE that is a stand-out in Northern California, Southern California, or Seattle? Or is it, like you said, so similar that it's just doubling down on those three areas?

Once again, it's Mike Schall commenting.

I think it's very similar. We've made that comment before that more than half of BRE's communities are located within two miles of an Essex community. We think that there are a number of positive things that can happen as a result of that, which I outlined on my comments.

Okay, and then when you think about that issue about being so close to one another, the assets, how do you manage situations where one asset wants to do well from a bonus comp perspective, and I assume that it's better to have this kind of synergy situation. But there could also be some in-fighting amongst folks. How do you manage that process so that it actually is a win-win for everybody? In other words, if one asset is doing well and the other -- go ahead.

Rich, it's tough for me to talk about any Essex/BRE type of activity because, again, our advice is that if it's in the S4, if it's important, put it in the S4. Everything in the S4 basically represents the balance of which we can talk about. If you want to talk more generically, talk more generically about the competition in the marketplace between us and someone else (inaudible).

Okay, then. Let's take it there. I don't mean to push too hard on this. I just wanted to see if there could be anything about a general view about how the two Companies would look once it's all said and done.

Okay. Let me take a step back because I think the point, one of the points in my prepared remarks was intended to address this, that every competitor within the marketplace has a different view of the world. The price optimizer software is a generic statement, approaches it in a number of ways. But there's a hundred switches or a thousand switches within that that allow you to customize how you look at things.

Different companies pursue marketing in a variety of different ways, and a lot of that is becoming much more sophisticated over time. I think back 20 years ago when it was a mom and a pop that were operating a lot of these buildings, and it is really a very sophisticated set of circumstances now. Everyone's different.

Really, what our objective is, and I think that this is both generic and very real within the marketplace, is to try to find the right balance of different marketing programs. I know that we excel, for example, at Craigslist. Others excel at other things.

Mobile is becoming more important as time goes on, and the technology surrounding the web and drawing traffic through the web is changing dramatically. Our view is that you need to have some scale here to make the investments that you need to make in order to maximize that marketing effort and the traffic to your buildings.

Going back to the original premise, if you're a larger organization and you can make the right investments, I think you can draw traffic that some of the smaller organizations that can't afford to make the investments might have. I think of the other piece of this is what impact does that have on future investments?

Well, our hope here is that on the merger-related call, I talked about a 30-basis point average accretion number over cost of funds. The hope is that if we can drive down our costs, that between the cost reduction and cost of capital reductions, that we can be more competitive with respect to transactions and actually generate more accretion from the investments that we've made going forward. That's the big picture philosophy.

That's perfect. Then just quickly on the joint venture, I think you probably said this someplace, but would you say that the nature of the assets might be on the older, redevelopment variety, or core, or some combination?

How do I answer this? You may want to look at some of the 8K filings that BRE has made. That will give you some idea.

Okay. Thanks very much.

Tayo Okusanya, Jefferies.

Hi, yes. I just wanted to narrow in on Seattle for a little bit. Again, I think your assets, BRE's assets, are in slightly different markets in Seattle. Just given your comments about supply in downtown, I was curious how you're thinking about both portfolios and synergies between both going forward, especially in that market.

Tayo, it's Mike Schall.

Actually, we think that we are very similarly located in Seattle, as well. I would agree with you, that the downtown has most of the development and therefore, it has most of the supply coming onto the market, and it will be most affected by that new supply. In other words, our belief is that the East Side and the areas surrounding Seattle, the suburban markets, will outperform for the next couple of years the downtown.

Overall, I think that everything I said earlier about the physical locations, they're very similar. We have significant exposure in the downtown urban market. We also have significant exposure in the suburban markets. We don't view it as much different between Companies.

All right. I was under the impression that BRE had a little bit more downtown exposure, but I might be wrong.

Maybe a little bit more, but again, looking at the broader portfolios, we think they are pretty similar.

Okay. Thank you.

(Operator Instructions)

Michael Salinsky, RBC Capital Markets.

Good afternoon, guys. Just in the guidance for 2014, can you talk about what your development assumption and CapEx assumption are for 2014? Does that change materially with BRE introduced? I'm not asking for specific guidance, but does that BRE make a significant impact on that, adding that into the portfolio?

Very slightly, but not much. This is Mike Dance.

Hi, Mike.

Good question. On the CapEx, they're spending very similar amounts per door of the recurring CapEx. I don't see that changing. Then, on a combined basis, the timing of it's a little bit different. Some of their property are in front of ours, and some are behind. We're not seeing a major change in our results as problems bringing that on.

They do some things like straight-lining concessions. We'll probably adopt that accounting policy. That's GAAP. There will be things like that, that we look at accounting practices of both Companies, and pick the practices that are mostly corporate or aligned to GAAP as a part of this process.

Okay. Just a clarification there. So you're talking about changing accounting policies to move to a straight-lining as opposed to expensing of concessions upfront? Did I hear that correctly?

That's correct. We'll start adopting GAAP. We have that on our list of things that we monitor from a GAAP versus a non-GAAP compliance standpoint. That's something that we are likely to adopt. As part of the processes that Mike reviewed, we're also going to be reviewing best practices in accounting policies.

Okay. I also asked about development starts. I don't think you addressed that for 2014 within the docket.

I didn't understand the question.

Development starts for 2014?

For 2014? Right now, what you see in the S9 is it. We don't have anything anticipated beyond it.

And on their portfolio--

Their portfolio as well. It's possible, a couple of their deals that I don't want to get into, we could start. But we can't comment at this time.

Okay. Fair enough. Just Mike, this my follow-up question. As you're on the (inaudible) looking at raising JV capital, any change in IRR targets from your joint venture partners at this point?

Mike, this is Mike Schall again. No, I don't think so. In fact, I think cap rates for the most part have remained within a pretty narrow band over the last year, and I'd say that maybe there are fewer institutions than maybe there were a year ago that are interested in JV activity. But I don't think the thresholds have changed materially.

Thank you much.

[Bryan] Bennett, Zelman and Associates.

Hi, good morning. I just wanted to drill down just on the acquisitions with $300 million to $400 million that you mentioned in the release. I think last call you had talked about some opportunities with developers in your regions for potential acquisitions. I was wondering how that was tracking, and whether there are more deals like Slater 116 in the pipeline.

[Bryan], this is Mike Schall. There are deals that are similar to that. I'm not sure that those will be the ones that we are able to do this year. I mentioned in my prepared remarks that we will have a Southern California bias this year and we will try to pick the best funding mechanism for the deal. But I'd say if anything, it's the Southern California focus and we do run across transactions that were recently developed by someone, and they need liquidity and it becomes a great opportunity for us.

In fact, in San Diego we announced the acquisition of Domain, which is exactly that, a brand-new property, condo mapped, solid market, and a price that we thought was attractive to us. So we continue to see that. I'm not sure how much of that will represent our $400 million plus or minus in acquisitions this year. I hope it's a lot.

All right. Then in terms of the disposition assets that you might be targeting, just how does this look in terms of your expectations for NOI growth for those assets, and the potential pricing that you gain in the transaction market today versus where your stock is trading at, given I guess that you sold some stock around [$1.62] last quarter?

I'm sorry. Could you repeat one more time? [Ryan], sorry about that.

Sure, I was wondering how you weighted acquisition opportunities versus the cost of capital, specifically the assets that you have potentially lined up for dispositions? How do they look on NOI growth basis and potential cap rates you could get for those assets versus where your stock's trading at today?

Yes, in terms of where the stock is trading at today, we believe that the co-investment joint venture capital is more attractive, and so we would gravitate there, as opposed to issuing more stock. You're right. The stock issuances were at a higher price. That's what we're trying to do. We believe that tracking the different sources of capital, which would include dispositions, JV capital, or on-balance sheet capital is fundamental to making money in the business. Those relationships are constantly changing. Our model for how to acquire is constantly changing depending upon those variables.

Got it. Then last question, I'm not sure if you'll be able to address this. But in the S4 filing, I guess they put out estimates that you guys had had for BRE on a 2015 basis, and they look fairly bullish. I guess I'm basically more curious what that incorporates for your overall view for Southern California in 2015, and what acceleration you guys are thinking about right now? It's obviously early, but it looks like do you have some view on the acceleration into those markets.

Again, this is Mike Schall commenting. Our belief is if you look at the relative relationships from this point going forward that Southern California is still attractive. If you look at the cost per unit, their relationship between rents in those marketplaces versus the pretty incredible rents that we've seen in the North, we think that there will be an opportunity over the next couple of years for Southern California, to do better.

We think that Northern California and Seattle, depending upon what happens with the tech world, there will be some deceleration. But we also recognize that if tech continues to be as robust as it has been, you still don't want to discount the possibility that if the boom in Northern California and Seattle will continue for several more years.

We're trying to play the best of both worlds. Our overall belief is from just a pure value basis, Southern California represents a better value. And therefore, we will likely focus more of our acquisition time and effort, and ultimately development, on Southern California, all things being equal.

Okay, thanks.

(Operator Instructions)

Paula Poskon, Robert W. Baird.

Thanks very much. Just one question on a totally separate topic. The national press obviously has been covering the severe weather in various parts of the country, including the severe drought that you all are experiencing out there. Is that causing you to manage the properties differently, or even perhaps dictating or adjusting how you think about where to invest in certain submarkets or greater markets?

Hi, Paula, this is Erik.

I don't know that it changes the way that we manage other than using the tools that we have developed through resource management, which focuses on consumption. Where we have opportunities to reduce irrigation, for example, we're going to continue to do that. Something like a drought, if there were things put in place that made it more difficult to use or access water or cost more, maybe we would do some improvements, capital improvements, consistent with what we've done before. As to investment, I don't think it plays a role in what we're looking at.

Thanks very much.

David Harris, Imperial Capital.

Yes, hello. I have an old favorite. Any update on where we stand with rent control across California?

Hi, David. It's Mike Schall commenting on this.

Hi, Mike.

Really, it's been quiet on the rent control front, and we've done, as I've reported in the past, some things to work with some of the local government entities, the California Apartment Association and a variety of other groups, to try to mediate issues that may come up from time to time. All is quiet on the rent control front at this point.

Just a point of detail on that, is that been more of an issue historically in Northern California than Southern California?

No, I would say that it's an issue everywhere across California. Wherever rents are high and housing values are high, and therefore choice of housing with respect to housing is limited, I think that the political environment is to be something that we should be concerned about.

Okay, and then this is a question related to opportunity cost and your time around the BRE transaction. My question is this. How many times, if at all, have you said, come back and see me in two or three months time to your development or redevelopment colleagues?

You mean the one sitting right across from me, Mr. Eudy, for example?

Yes. I guess another way of asking the question is how much can you continue to run business as usual whilst you're putting all the time and effort you are into moving forward in the BRE merger?

Actually, I'll answer that. This is Mike Schall again.

We've actually been able to continue, I think, business as usual on the investment side reasonably well through this period of time. Even though our 2014 starts will be limited, we have been active in terms of looking at future development sites and in fact, during the last couple of months, we have committed to a pretty significant development on the Peninsula. We have not abandoned our existing external activities at all from my perspective.

Practically speaking, we're all working a lot harder and a lot more hours, I'll give you that. But I think that we're pretty excited about the opportunities, both -- because this gives us a variety of, know, other portfolio management opportunities, but at the same time, I think we can still remain active in the marketplaces, looking at new opportunities. I don't think it's been a big cost at this point.

Okay, great. Thank you.

Haendel St. Juste, Morgan Stanley.

Hi, guys. Erik, can you talk a bit more about your outlook for San Diego? It's a market where we've seen a few head fakes there in recent years. Any compare and contrast comments that you can drive for San Diego versus, say, Orange County and maybe LA, too?

Yes, hi, Haendel. I wouldn't be at all shocked if there are head fakes again in San Diego. I think they've ranked those areas in Southern California before about expectations for growth in San Diego was either third or fourth in the comparison.

I still like Orange County and Los Angeles the best. Ventura seems to be more stable and growing as of late. We've had good results in the last couple months in San Diego, but we're going to need continued job growth there that is helpful to maintaining occupancies and lowering availability and driving price.

Again, we like San Diego. We've seen some good months, but I'm going to wait to see some more months before I get too excited.

Fair enough. One more.

A property assets tend to underperform Ds later in the cycle, something we've seen supported in recent Acxiom data. If you look at your portfolio revenue growth outlook for 2014, how are you thinking about the relative performance of your As versus Bs, and where do you think that gap can be most meaningful or most wide? And how does that potentially play into your thoughts on (inaudible)?

Hi, Haendel, it's Mike Schall. Our belief has not changed for many years. Our belief is that when the economy goes south, people make a more conservative choice, and as things pick up, they decide to be less conservative, and they rent more A-quality type units.

We think that that has mostly played itself out, and we think the Bs represent the value proposition within the apartment space, and ultimately they have a strong position in all markets. We still believe that well-located B property will represent most of what the Company will focus on, and it will from time to time focus on As, principally through development, We think that that's an attractive mix.

Great. One last one on that, if I may, maybe I missed it. I joined a bit late, but spot cap rates in your core markets for As and Bs today or in recent weeks?

It's Mike again, Haendel. We did not discuss that. I don't think cap rates have changed materially over the last year. I think A-quality product in very solid markets is still in the 4% to 4.25% cap rate range, and B, well-located B quality property are in the 4.75%, plus or minus cap rate range. And then, lesser quality lesser locations are above that.

Thank you.

Dave Bragg, Green Street Advisors.

Good morning. To what extent does this merger process cause you to reevaluate your existing portfolio? I was unclear on the points made earlier on JV conversations if you're considering including your existing assets in those conversations as well.

Dave, it's Mike Schall. At the Investor Day discussion, we talked about looking at the portfolio really in three components, the irreplaceable component, others call that gold. We have a variety of different ways to refer to this.

Then we have the middle category, which we call it tradeable enterprise, and we have then the final piece, which is we need to sell these assets eventually. It doesn't mean we're necessarily going to sell them any time in the near future.

We continue to look at the Company the same way, whether or not we're a bigger portfolio. We're going to look at those components. Roughly, say 40% to 45% we think is irreplaceable and around 40% is tradeable. We will look at the portfolio, irrespective of whether it was an Essex asset or a BRE asset or any other asset, with the one difference that Prop 13 is a material consideration in all transactions that we look at.

I don't think it changes how we look at the world at all. We've talked about, and again, at the Investor Day, we talked about the possibility of additional joint ventures as it relates to the well-located properties that are maybe a little bit higher cap rate assets. We'll continue to look at that.

But I wouldn't expect any dramatic change. We're not going to go out and joint venture a huge part of the Company by any means. We're just trying to look at what the right portfolio management is. It'll be applied to both companies.

Okay. Thanks for that. The second question is although we have seen some M&A over the last year, I believe that portfolios have been on the same revenue management platforms. Can you talk in general terms, if you'd like, about transitioning a large portfolio on LRO to YieldStar?

I don't think that the technology provider is really the key to that. I think the key is what I referred to in the first of the five points that become priorities going forward, is reconciling the entire process from what is the desired availability level at different points throughout the year, what's the relationship between traffic and the number of units that you have net to lease, and again, therefore what is the right renewal process? It's really a holistic approach to all the components.

I think that the technology is more the delivery mechanism than it is the strategy. Again, there's a thousand switches within both, and you can customize whatever you want out of them. I think the technology organizes the data and allows a good conversation between the price optimizing people, and the people that are active in the local marketplace, and the people that are meeting with the customer. But I don't think it's in and of itself, that's where the key is.

Thank you, Mike.

Thanks, Dave.

Nick Joseph, Citigroup.

Thanks. At your Investor Day in November, you guided the annual same-store revenue growth with the 4% to 6% for the next three years. How should we think about that relative to 2014 guidance of 5% to 6.2% with the top end range above that initial range?

Nick, it's Mike Schall. I think we'll both agree that we have greater confidence in the year that's right before us than we do in the out years. If you get further away from those numbers some changes could happen and we're not sure what to expect. We presented a scenario at the Investor Day, that if we end up getting decent, but not great GDP growth, and decent, but not great job growth, that we could sustain somewhere in that 4% to 6% range throughout that period of time.

Part of that belief is based on the relatively good recent outcome in information with respect to income growth and rent to median income, which we view as a core metric. I think that if we get the same growth that we had in 2013, that we believe continues into 2014, if we continue to see those same relationships, I don't see anything on the supply side that's going to interrupt that. I would expect a similar year in 2015 if that all happens. But remember, we have less confidence as you get further out from 2014.

Great, thanks.

Thank you.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any concluding comments.

Thank you, operator. In closing, we'd like to thank you for joining the call and appreciate your interest in the Company. We expect to have a busy and yet rewarding 2014, and we look forward to the closing of the merger and our call with you next quarter. Thanks again. Good day.

Thank you, ladies and gentlemen. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.