Essex Property Trust Inc (ESS) 2014 Q4 法說會逐字稿

Greetings and welcome to the Essex Property Trust Inc. fourth-quarter 2014 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the Company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC.

It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall, you may begin.

Thank you. I'd like to start by welcome everyone to our fourth-quarter earnings call. As usual, Mike Dance and Erik Alexander will follow me with comments. John Eudy, John Burkart, and Angela Kleiman are available for Q&A. I'll cover the following topics on the call. First, comments on Q4 and market conditions. Second, a merger integration update, and, third, investment activities.

So, on to the first topic. Yesterday, we were pleased to report continued strong operating results for the fourth quarter and full year ended December 2014. In the fourth quarter, core FFO per share increased 15.1% compared to Q4 2013. For the full year, core FFO was $0.29 per share above the midpoint of the initial 2014 guidance range.

In the four-year period from the 2010 recessionary trough, we have now grown core FFO per share by 70%, while tripling the total market capitalization of the Company to almost $19 billion. And we are about a year ahead of our strategic plan outlined in our November 2013 investor day. Mike Dance will comment on guidance in a moment, which anticipates continued momentum into 2015, supporting our expectation for strong rental markets and financial results.

The primary factors supporting these expectations include: number one, inadequate housing construction relative to demand. While new apartment deliveries have increased, for-sale housing construction continues to significantly lag. Total supply of housing, both rental and for sale, in our target markets will average 0.8% of stock. This is the fifth year that housing demand has exceeded supply, pushing rents higher as market occupancy levels increase. Going forward, the suburban markets benefit most from this process, notably the East Bay, which led the portfolio in rent growth.

Number two, we expect the US economy to improve modestly in 2015, with our assumed 2015 GDP up 2.8% -- I'm sorry, up to 2.8%. If that GDP assumption is achieved, our target markets are expected to produce 2.5% job growth, significantly above the US average.

Number three, California is different from Seattle on the supply side. In Seattle, where higher rents and for-sale prices have led to more housing supply, rent growth expectations have moderated. However, in coastal California, supply has been muted by other factors, including a long entitlement process, nimbyism, and large equity requirements for construction loans.

In addition, a new factor has emerged, resulting from new laws designed to reduce greenhouse emissions -- notably California's AB 32 and SB 375, both of which are described in considerable detail on state websites. These laws attempt to focus housing development in proximity to office and retail venues, creating urban clusters that are accessible by public transit systems. Pursuing California's massive proposed high-speed rail line, instead of fixing clogged and failing roads, demonstrates this change in direction in California.

It is not coincidental that nearly all of our investment activity is in the urban core or near public transit. We believe that these factors will continue to constrain housing development in our coastal California markets, and these conditions will not change materially for at least several years.

On to the second topic, merger integration. During the quarter, we made significant progress on merger integration and, as expected, we are nearing the end of the first of three phases in the integration process. That first phase includes onboarding over 500 BRE employees, consolidating offices, moving all employees on to one HRIS system, migrating all properties on to one property management and accounting platform, and consolidating pricing under one system.

As part of Phase I, we also improved occupancy and pricing practices, resulting in higher revenues from the legacy BRE portfolio, and we temporarily discontinued the BRE redevelopment program to prepare individual property assessments and rehab plans. There are still many details to complete in connection with Phase I, although most of the heavy lifting is done. I thank all the E-team members for their relentless effort.

We kicked off Phase II of the BRE integration last month which includes extending resource management, which seeks to lower energy and water consumption, and the redevelopment programs to the legacy BRE portfolio. As discussed on prior calls, we will also continue to implement refinements to pricing, including the amenity pricing and reducing turnover rates. Finally, we expect a new website to be implemented early in the second quarter.

Our planning efforts related to the third integration phase is in full swing and is intended to transform the combined Company, changing how we deliver our services with greater ease and efficiency, utilizing technology, and changing our highly decentralized structure, especially where we have significant concentrations of property.

The goals of Phase III include integrating and simplifying systems, improving reporting and accountability, establishing greater flexibility and responsiveness to customers, customer relationship management, centralizing procurement, creating a regional management structure for maintenance functions, and a variety of human resource projects focused on management training and fast tracking high-achieving associates. Phase III is expected to be financially positive with respect to both revenues and expenses.

Finally, on to my third topic, investments. We sold two properties in Phoenix that were acquired in the BRE merger at a cap rate of approximately 5.7%. This completes our exit from the Phoenix market, a market with a CAGR of rent growth of less than 1% over the last 15 years. Given recent increases in our stock price and low debt costs, we continue to be able to add cash flow and NAV per share through external growth.

We completed approximately $641 million in acquisitions in 2014, up from $461 million in 2013. Overall, we expect to acquire approximately $500 million in 2015, or more if we can find suitable transactions emphasizing coastal California.

A dearth of transactions in the past quarter provides little guidance on cap rates. Given great liquidity and lower capital costs, cap rates could be up to 25 basis points lower than those discussed on our last call. Our best estimate is that the highest-quality properties and locations trade around a 4% cap while B-quality property and locations trade around a 4.5% cap rate. Lesser-quality property trades at higher cap rates, and periodically a trophy property trades in the high 3% cap-rate range.

With respect to development, we continue to make great progress completing and leasing up our development pipeline, detailed on S-9. We have three projects scheduled to start this year, and are working on a fourth project that could possibly start toward the end of 2015. Falling oil and commodity prices should reduce the risk of significant cost increases for construction materials -- a positive, given our concern about construction cost increases.

That concludes my comments. Thank you for joining our call. I'll now turn the call over to Erik.

Thank you, Mike. I can't thank the Essex team enough for another strong quarter. Achieving the kind of results that Essex has posted this period while expanding responsibilities, learning new programs, and converting our management system is impressive and a testament to the focus of the dedication of our team.

After closing the occupancy gap last quarter, we were able to maintain parity between the portfolios with respect to financial occupancy, and both portfolios moved up 32 basis points during the final period of 2014. Also consistent with our strategy, we were able to keep turnover between the portfolios at the same rate, and average lease terms are virtually identical.

Given the physical occupancy between the portfolio is currently about 50 basis points apart, we expect some difference between the portfolios at the end of the first quarter. This is the result expected, given the overexposure of lease expiration in the BRE portfolio that were discussed on our last call.

Our markets were in line with expectations during the quarter. The Bay Area continues to set the pace for Essex, followed by Seattle, and an accelerating Southern California. The thing that was different between the portfolios in the fourth quarter was that the Essex portfolio exceeded revenue projection. The main drivers for this improvement were the continued benefits of higher scheduled rents due to our profitable renovation activity and greater portfolio weightings in strong submarkets like Santa Clara County.

Additionally, the underperformance of three BRE assets in Los Angeles, coupled with differences in delinquency and other income items as a result of our systems conversion, all contributed to a wider revenue gap in the fourth quarter. However, with the BRE portfolio operating at a higher occupancy and reduced turnover, we believe that we are in good position to grow scheduled rents this year.

These efforts will be aided by implementing our renovation plan in the BRE portfolio and completing the migration to a unified revenue management system for more consistent pricing and renewal practices. Predictably, market rent levels abated from their summer highs, but we saw less of a decline from peak rents compared to prior periods, and year-over-year gains in market rents were stellar.

Led by San Jose, Oakland, and Fremont, the Bay Area experienced double-digit market rent growth in 2014. We expect these same submarkets to repeat as the strongest markets this year, and, collectively, the Bay Area should enjoy economic rent growth north of 7% in 2015.

Submarket details of our forecast can be found on S-15 of the supplement. Also encouraging was the continued improvement in Southern California, especially in Orange County and San Diego. While our plan for 2015 calls for 4.5% to 5.5% market rent growth in Southern California, with Los Angeles leading the way, improving jobs and low supply could help Orange County and San Diego surprise to the upside.

Once again, we expect renewal activity to support strong revenue results. Offered rates on renewals through March are in the low 6% range for Essex and in the mid 5% range for the BRE portfolio. Earlier this week, physical occupancy in the Essex same-store portfolio was 96.5%, with a net lease of 4.8%. The BRE same-store portfolio was at 96%, with a net lease of 5.1%.

Now I will share some highlights from each region, beginning with Southern California. Los Angeles experienced the biggest revenue gap between the portfolios during the fourth quarter. Where we came up short was that three of our four largest revenue producers in BRE Los Angeles portfolio generated meager year-over-year revenue growth of 1.3%. We expect two of those assets, The Stuart and 5600 Wilshire, to rebound nicely in 2015 because we completed disruptive exterior renovations at The Stuart last year, and we traded revenue growth at 5600 Wilshire for stronger absorption at nearby Wilshire La Brea, Dylan, and Huxley.

Given the success of those lease-ups we believe this was a reasonable trade. The third asset, Alessio, has faced a number of operational challenges predating the merger. We were aware of those items and continue to work through some of the asset planning and resident profile issues that will take some additional time to resolve. Given that the West LA submarket is performing well overall, I am confident that we can narrow the revenue gap at Alessio this year.

The employment picture continues to improve in Los Angeles. The unemployment rate has dropped 130 basis points year over year, with the information, and professional and business, service sectors combining to produce 35% of all jobs added in 2014. This is important because these are high-paying jobs and represent a larger renter contingent. Motion picture job growth was also up 5% year over year.

Commercial activity remained consistent, with all four coastal counties recording positive net absorption, with the greatest contribution coming from Orange County. However, activity in Los Angeles generated the most positive news in the tech world. Google purchased 12 acres in Playa Vista, which is zoned for 900,000 square feet of commercial development, and soon they are expected to announce a lease for the adjacent 300,000-square-foot Howard Hughes hanger. Additionally, Yahoo signed a long-term lease for 130,000 square feet in the neighboring Collective Campus development.

This emerging technology cluster should bode well for the 2,100 apartments that Essex operates within just a few miles of this employment hub. So, the bottom line is that we are bullish on Los Angeles, and we believe the combined portfolio will produce stronger results in 2015.

The broader region continues a path of steady recovery. Orange County and San Diego exceeded job growth expectations in 2014 and pushed Southern California above 2%. We look for these counties to be strong again in 2015. San Diego is expected to perform well this year, but this region has the highest level of lease expirations among the BRE assets in the first quarter, so we are likely to see some difference in the revenue results between Essex and BRE for Q1. Again, this is a short-term issue that is consistent with our plan and solved in part by operating a single-revenue management program and centralizing renewal activity.

We are excited about Orange County and have recently seen greater improvement in the performance of many of our A assets. It's too early to determine if this will be a trend throughout 2015, but we are optimistic about the results at these high-quality communities. So, as the overall economy continues to improve, and supply remains muted, we look for Southern California to be a valuable contributor to our 2015 results.

Turning to the Bay Area, the Bay Area continues to post impressive job gains and be the catalyst for the Company, leading revenue growth. The December year-over-year job growth in San Jose and San Francisco was 4% and 3.7%, respectively. Once again, information and professional business services accounted for more than half of those new jobs in 2014, and we see much of the same for 2015. Commercial activity continues to be strong in an effort to support new companies and expansions.

During 2014, nearly 5 million square feet was absorbed in San Francisco, the Peninsula, and Silicon Valley. These same submarkets have over 8 million square feet of office under construction, which is enough to support up to 40,000 new jobs. Economic rent levels remain strong and were up 12% on a year-over-year basis at the end of the fourth quarter. These markets had little trouble absorbing new supply, and our own lease-up properties continued to perform ahead of plan.

Mosso averaged 33 market rentals per month during the fourth quarter. Even working from a trailer and a heavy construction zone, MB360 secured over 50 leases during the quarter. Park 20 has recorded more than 60 leases since opening in mid-November, and we've not even occupied the leasing office yet. With such strong results throughout the holidays, it is evident that demand continues to comfortably outpace supply. So you can see why we look forward to opening Emme, Epic, and One South Market this year.

Now for Seattle. Employment growth for the region remains very strong, and, in December, posted a 3.1% year-over-year gain. Amazon and Microsoft continued to be big drivers of this growth, and we have not seen any impact from Microsoft's change in policies for contract workers.

However, the software giant does have a new neighbor. SpaceX received $1 billion in funding from Fidelity and Google, and has opened an office in Redmond, with plans to employ 1,000 people within the first few years of operation. Amazon continues to march towards occupying 10 million square feet in Seattle by 2019, and office absorption in Seattle region overall was 2 million square feet in 2014 and is expected to reach similar levels in 2015.

Our rent growth forecast is tempered by the impact of increased deliveries in 2015, but robust job growth will help these developments get absorbed. We continue to like our portfolio composition in Seattle and we expect it to produce solid revenue gains this year, especially on the east side and south end.

I am very glad to have come through 2014 with only a few more gray hairs, though we still have some important integration items to complete. I believe we are well poised to take advantage of the opportunities that our strong markets are presenting.

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

Thanks, Erik. Before I begin my comments on 2015 guidance, I, too, want to especially thank the Essex accounting, IT, and HR teams that worked countless hours in 2014 to successfully plan, execute, and complete the integration of accounting and HR information systems.

I will now highlight the key assumptions behind our 2015 guidance. Many of these assumptions are found on page 5 of the press release and on S-13 of the supplemental package. The first point to emphasize on the 2015 guidance is to reiterate Mike's earlier comment that the midpoint of our core FFO guidance range is predicated on achieving 2.5% job growth in our markets. Continuation of the current Goldilocks economic recovery provides ample job growth to absorb new supply and perpetuates the chronic shortage of well-located housing in our markets.

Next, I will explain why the first quarter midpoint for core FFO guidance of $2.22 per diluted share is $0.02 lower than the results achieved in Q4 of 2014. In late 2014 and early 2015, we sold two Phoenix assets. These Phoenix dispositions offset the increase in net operating income from the same property portfolio and the continued lease-up of our development communities. The remaining shortfall results from the first-quarter issuance of equity to match fund our external growth pipeline.

For 2015, we expect same-property net operating income to grow in the Essex portfolio by 8.5% at the midpoint, driven by 6.75% increase in same-property revenues. We will be including the BRE properties that were stabilized at the time the merger closed on April 1 in the same-store portfolio at the beginning of the second quarter. For the last three quarters of 2015, we expect the legacy BRE same-property revenues to grow at 6% at the midpoint.

The primary difference between the Essex and BRE same-store growth rates in 2015 is attributable to the restarting of the renovations in 2015 in the BRE portfolio. At the beginning of a renovation program the increase in vacancies are not offset from the higher-scheduled rents. It typically takes three quarters before the increase in monthly scheduled rents from a renovated home begins to exceed the loss in occupancy.

Our guidance assumes a 3% increase in operating expenses at the midpoint for both portfolios. The biggest factor driving expense growth is higher property taxes. Our budget assumes property taxes increase 5% in the Essex portfolio, driven by a 10% increase in Seattle taxes and the expected loss in California of over $1 million in successful 2014 tax appeals that are not expected to be replicated in 2015.

We expect our controllable expenses to grow by less than 2% for the year for the combined portfolio. The 2015 general and administrative expenses before merger and integration, cyber and acquisition-related cost, is expected to increase by approximately 6% over the run rate we had in the last three quarters of 2014.

The increase is a result of filling several open corporate positions, including a new Chief Accounting Officer and a new Chief Technology Officer, both recently hired, plus annual wage increases. Our 2015 cash flow projections for our ownership interest in the development pipeline will be approximately $285 million plus $150 million in revenue-generating capital expenditures to renovate units and add amenities to the stabilized portfolio.

We plan to refinance the $95 million of maturing secured financing and the $200 million outstanding on our revolving line of credit with a new issuance of unsecured bonds during the first half of the year. We will continue our disciplined matched funding of equity and long-term debt to finance our external growth capital requirements.

I will close with a quick reference to the half-turn improvement from Q3 to Q4 and our net debt-to-EBITDA credit metrics, disclosed on S-6. Most of the improvement in this metric is the result of the accelerated lease-up from the BRE development pipeline and the strong NOI growth in the portfolio. And 15 basis points of the improvement is attributable to an update in the calculation of the ratio from total indebtedness to net indebtedness to be consistent with the reporting of our REIT peers.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Nick Joseph with Citi.

Thanks. Mike, you mentioned cap rates potentially compressing meaningfully since your last call. Do you attribute that to interest rates falling, or are you seeing increased demand for assets?

Nick, I think it's a couple things. I think it's lack of activity, lack of listed properties out there on the marketplace.

So in other words there is a supply and demand for property out there and supply driven by people listing their properties, demand driven by investor dollars searching for those properties. And they can become -- those forces can become out of wack just like any other supply and demand force. As a result of that what we're seeing is less property coming on to the market and still considerable demand for multi-family assets. And we think that the combination of those two in addition to overall lower capital costs may push cap rates down a little bit.

So do you think that the buyer's underwritten IRR has come down as well?

I do. Not materially. And as I said in my comments, there's really been very few transactions this last quarter, and so I think that we are interpreting the tea leaves perhaps a little bit here. And so what I'm talking about is I think more of an anticipation than a reality at this point in time.

Okay thanks, appreciate that. And then for the BRE renovation program, can you talk about the scope of what they were doing and the returns that were being achieved, and then compare that to how you think about renovation going forward?

This is Mike S again and John Burkart is here. He may want to add to it. In effect we just had a different set of objectives. Our objective is to generate returns and overall improve our properties.

The BRE redevelopment program was focused on trying to generate the same unit everywhere. So our view is depending upon geography you need to customize the rehab program to the asset you're dealing with and try to find things. And John has done a great job with our redevelopment program because they have a whole list of potential amenities, from backyards to other site amenities and interiors that really reflect the opportunity in the marketplace as opposed to trying to create more of a one size fits all type of approach. So ours is a customized approach and BRE's was different from that.

I recall at one of the first meetings we had in Las Vegas where we were looking at -- all the Management team was there. We were looking at returns from redevelopment efforts on the BRE side. Again because they were trying to go to product consistency as opposed to investment return they had some very low-yielding redevelopment projects. And essentially that's what we're trying to correct or to improve.

Thanks. And then just finally on the Walnut Creek development. It looked like the estimated total cost went up about $7 million. What caused that?

This is John Eudy. A combination of two things, Nick. We had some environmental issues that we had during the course of the excavation. We believe we have recovery from Atlantic Richfield and a couple of others, but we're not putting that in the number. We're assuming we don't. That constituted about $2.5 million of the total.

And then there were some structural issues related to the build out on the design of the units. We made some changes and there are other issues that came up. And we went to the high end number; I think it's going to be a little bit less than what we reported the increase, but we wanted put everything on the table worst case. Big surprise.

Great, thanks for the details.

Thanks, Nick.

Thank you.

(Operator Instructions)

Our next question comes from the line of Nick Yulico with UBS.

Hi, everyone. Mike Schall, I was wondering if you could talk a little bit more about the acquisition environment. Your guidance gives some acquisitions in it, but there's not a ton of FFO benefits. Sounds like you might balance that off with some sales. How are you looking at maybe using the ATM some more to do acquisitions this year? Seems like you guys are one of the few multi-family REITs that could actually drive some extra earnings growth by doing acquisitions.

Right. No, I totally agree with you. I think that cost of capital has improved since we submitted our business plan to the Board, which is where the accretion number came from. Obviously we sold the two Phoenix assets at a relatively high cap rate, and so we have to overcome the dilution related to that from new acquisitions.

I think that this year is one of the most difficult years to project what's going to happen primarily because there's such a dearth of transaction activity out there right now. However having said that most of the transactions are bunched into the peak leasing season as sellers have learned to try to get the benefit of the peak leasing season. If rents are up another $100 obviously that inures to their benefit and the valuations of their properties. And so there is likely to be more transactions beginning in let's say the second quarter through the third quarter. We just have a hard time predicting what that might look like.

So we would love to do more. Again, I think cost of capital has only moved in our favor since our initial accretion numbers that were presented to the Board, and so I think there is some upside opportunity. We're just not sure about how deep the opportunity set is going to be on the acquisition side.

Okay, that makes sense. And then just one other question; as I look at your market forecast this year, the S15 in the supplemental, you give a forecast for job growth which looks like it's slowing down a bit this year versus I had like 2.7% job growth in December for your markets and you have rent growth as well slowing down.

It seems like the rent growth is almost slowing down similarly between these areas of Seattle, Northern California, and Southern California when I would have thought that maybe the impact would have been more so in say San Jose, Seattle where maybe there's more supply. So could you just maybe talk a little bit about your thoughts on these forecasts and how much supply and job growth is impacting them?

Of course. So we're on S15 for everyone that's trying to follow this discussion, where we produce a job forecast and forecast residential supply. It's intended to be a scenario. So if US GDP grows at 2.8% and the US gets 2% job growth, we think that the West Coast markets on average will outperform that. We have 2.5%. You made the point that, that appears to be a deceleration, but I want to note that in 2014 we did the same exercise and what happened was we ended up doing better in terms of jobs than our initial forecast. So I think that there is a chance that we can beat these numbers.

I note that as Erik also commented on, San Jose's job growth December over December 2014 was 4% and San Francisco was 3.7%. We have those numbers decelerating to 3.2% and 3%. So this is not a perfect science. We tried to do a pretty good job of trying to have an economic scenario and an economic rent growth forecast.

There is an element perhaps of being somewhat conservative because we don't know what factors may face us in the new year and certainly we hope to move ahead. I think the other force that I refer to in the call which is in coastal California, the lack of for-sale housing production and the fifth year of demand over supply imbalance, are also really important considerations. We're not sure exactly how those will play out. It could be that once again it just pushes occupancies that much further, and we actually get another really fantastic year of rent growth. So there is an element of not knowing here, and we probably interpret that to be a little bit more conservative than we could.

I think specifically there's upside to the southern California numbers, given again very limited supply of housing and improving economies. We see it in certainly in downtown LA and West LA, in West Hollywood, in Hollywood certainly and to a lesser extent other areas like in Warner Center we have very limited growth rate and have seen very limited growth for several years. So I think that LA has the opportunity, the LA metro area has the opportunity to outperform and northern California again the conditions are great, but we have a pretty high expectation there certainly relative to Axiometrics and some of the other numbers.

So again it's not a perfect science and there's a certain art to this. And we think this is a reasonable scenario given what we expect the US economy to do and US job growth.

Thanks, Mike.

Our next question comes from the line of Jana Galan with Bank of America.

Thank you. Maybe following up on that, I was curious how you think about the macro risks to job and wage growth given the stronger dollar and lower energy prices? Does that get us to the lower end of your guidance, or do you think the type of job growth in your markets is less impacted than the national average?

Jana, that's a good question. I think Mike's analogy to the Goldilocks economy is a good one because even though I would say that a strong dollar would hurt global companies in general, I think that there's enough momentum here especially in the tech world to continue with really good job numbers. And again we have some deceleration forecast. If you look at what we achieved in 2014 versus what we projected, I think if you look at December over December 2014 jobs we were up 2.8%, as a portfolio we're projecting 2.5%. I think that's a reasonable expectation given what's happening in the job world and with macroeconomics. So we feel pretty comfortable with that.

Thank you. And then you mentioned the lower oil helping a little on development commodity prices. Is there any benefit you can realize in your expenses?

I don't think that we've specifically targeted that as an expense element. There might be something, Jana. I think in the scheme of things, I think Mike talked about property taxes being the driving force here. And so yes, I don't see anything material. I'm sure there's something, because obviously oil costs affect delivery costs in a variety of materials and that could have some impact, but I don't think it's material.

Thanks.

The next question comes from the line of Dan Oppenheim with Zelman & Associates.

Thanks very much. I was wondering how you think about the growth in terms of wages for the tenants and to the ability to pay these higher rents? And I think if we look at the lack of supply and the difficult affordability in the markets it's tough to argue what the rent's worth forecast unless we see something change in terms of employment. But how much do you think we'll see some movement, whether it's from Dublin further out on I-580 or in Southern California from Orange to Riverside that would lead to higher turnovers? So the rent numbers may come through but the expenses end up being a bit higher.

I think that we have the expense growth numbers that we think are prudent as we go through our budgeting process, which is essentially a ground up type of process. And Erik can probably talk about what that assumption is with respect to our budgets. But in general I think the driving force of personal incomes are these tech companies and business services that are actually doing very well. I note that I think this is BLS data doesn't forecast the personal income growth, and they have San Francisco at 6.6% estimated for 2015, Seattle at 5.6%, San Jose 6.8%. So very healthy numbers on the personal income side, and that of course drives the rent to median income ratio, which still are within ratios that we consider to be sustainable. So we feel good about that.

Now having said that, I think that not everyone obviously is getting these wage growth. And so there is a transition going on within the portfolio. So if you're coming in, taking a new job that's a high end job, you can afford to pay the higher rent. Someone perhaps is being priced out of that scenario and may have to move further out, and I think that you see that phenomenon occurring within our portfolio because you see for example, the East Bay, Alameda County, and Contra Costa County growing faster than San Francisco. I think that represents people that are being priced out of the market, looking for a suitable house that's typically on a transit node outside of the city. So there is a transition going on and I think that's healthy for the marketplace.

Great, thank you.

Our next question comes from the line of Dan Weissman with Credit Suisse.

Hi, good afternoon. It's actually Ian Weissman. I just want to talk a little bit about your relative outperformance in California and across your core markets. Obviously the West Coast continues to dominate, but your performance is materially better than your peers. So I just want to understand whether that's a bit of submarket exposure, suburban concentration, or just operational outperformance.

I think a big part of it is redevelopment. And we have really worked hard to perfect that. We produce less than 1% of housing stock a year out here in our core coastal markets. That means that over 20 years you're producing somewhere around 20% of stock, that means 80% of the stock is more than 20 years old, and realizing that the real opportunity is in the redevelopment area. And certainly it's a focus within acquisitions to try to find value add transactions. I think that, that is a big driver.

I also think that our submarket selection is good and our capital allocation process, which involves ranking 30-some-odd submarkets and deploying capital appropriately ahead of growth, I think all of those things work together. I note that one of the transactions we bought last year, Apex -- Craig our Senior Acquisition guy was noticing that between the time that the deal was listed and the time it actually got through the best and final was like a 45 day lag, something like that.

In that period of time he noticed that rents had moved up significantly, and he went from sort of number three in that process to number one by increasing his bid a little bit and ends up with a superior transaction. So I think it's a variety of things, but how we look at the world from capital deployment and allocation to the opportunity represented by the rehab program I think really drive that outperformance.

Okay, helpful. And just as a follow-up on the IRR comment you made earlier in terms of IRR compression. Where would you put IRRs today in your markets? And also how much have land prices increased year-over-year?

Maybe John will you do the land price and then I'll do the --

Sure.

Go ahead.

Ian, this is John Eudy. It's hard to define exactly on the land price increase, but the ask is much higher than last year I'd say by probably 10% to 15%. Those that are actually transacting at that level I can't directly speak to. I can say that our shadow pipeline is about $1.3 billion fixed deals and they were all conceptualized on an average about four years ago that are set to close in part this year and next year. We have a very difficult time paying the freight on land prices that are being quoted today. So I don't know if that answers your question.

It does, thank you. And then the IRRs?

Yes, the IRRs. I think unlevered IRRs on acquisitions, I think the expectation is in the 7.5% range for acquisitions. So you'd need significant amount of growth to get there. And on the developments I think they're in the 8%s.

But on an unlevered basis?

Unlevered, yes.

Okay, thank you.

Thanks.

Our next question comes from the line of George Hoffmann with Jefferies.

Just a couple of questions. First on the Alessio property, can you give a little more color on what the issues are at that property?

Yes, this is Erik. I think they're primarily resident profile. We have a much higher delinquency and incidence of eviction there. So just by way as example, the fourth quarter we experienced 29 either evictions or encouraged move outs due to non-payments of rent. That would compare to something that's more like 7 or 8 in a quarter and under normal conditions. So we think we're working through those. We had some abatement of that activity in the third quarter, but we saw it returned.

Now the nice thing is of all of the evictions that we have processed in the last five months, 80% of those were existing residents. So we think we're making headway on the underwriting of the people that are coming in. And even of the 20% that we've already moved in and moved out, some of those are related to fraudulent activity. So again, that gives us another opportunity to tighten up some of the screening process there. So that's a big part of it because when you don't have -- it's the same equation. When you don't have the strength in occupancy it's difficult to push the pricing on the new side. And clearly with all the information that's out there it then becomes difficult to push the renewals. So we have to get that stabilized.

And then I'd say a second piece is we're still figuring out what opportunities may exist at the property specifically for capital improvements given that the overall submarket is so strong. So there are some things that we may be able to do, but under our normal discipline we're going to have to prove that we think they're profitable before we just pull the trigger and start building fancy pools and gyms and stuff.

Okay, thanks. And then so on the acquisition development front, since the fundamentals in the East Bay are so strong right now and you're having that spill over from San Francisco, would this be an area you guys would be targeting for more acquisitions? And I know you have the two developments in Pleasanton, but do you envision going out any further than that sort of I-680 corridor?

This is Mike and generally no. We generally don't like being beyond the I-680 corridor primarily because it brings you too close to over the hill in Tracy where you can buy a house for a couple hundred thousand dollars. So we like this transition from a renter to a homeowner to be a very difficult one, and so part of our broad strategic objective is to be in places where for-sale housing is very expensive, making the transition from a renter to a homeowner a challenging one.

Thanks.

The next question comes from the line of Alex Goldfarb with Sandler O'Neill.

Yes, hi, this is actually Ryan Peterson here for Alex. As the cost of equity has come down, has JV capital come down commensurately? Or have you seen kind of a gap between those two making maybe cost of equity more -- or equity funding more attractive than JV funding?

This is Mike S. In general we constantly monitor the two and we're trying to find the best accretion solution given all the arrows in the quiver with respect to capital without taking greater risk on the balance sheet. So at this point in time with the movement in the stock and the rally in the debt markets I think the preference will be to grow on balance sheet.

There will be perhaps some limited exceptions on the development side because that is a little bit different in that we're committing to a cap rate today and we fund it over the next couple years. So our batch funding ability is more limited there. But I would say we haven't marketed many acquisitions to the institutional market recently given what I just said about our on balance sheet cost of capital, but I suspect that their yield targets have not changed all that materially. Maybe come down a little bit relative to a year ago.

Okay, great. And then just one other quick question. How much of the 2015 redevelopment spend is for the BRE portfolio versus the legacy Essex portfolio?

This is Mike Dance. Roughly one-third of it will be targeted for the BRE portfolio.

Okay, great. That's it for me, thank you.

Thanks, Ryan.

Our next question comes from the line of Michael Salinsky with RBC.

Good afternoon. John, just to go back to the development. In terms of starts for 2015 I think you mentioned a $1.4 billion shadow pipeline. What's the size and scope of the starts plan in 2015? And then just given the positive commentary about leasing in the fourth quarter where is the expected stabilized yield on that pipeline staying currently?

First off on your comment on the shadow pipeline of $4 billion, I think that's the total pipeline which includes the $2.5 billion that we've got plus the $1.5 billion that is in the shadow that we haven't started, just to clarify that. As far as yields overall in the mid 6% to 7% range is where we're landing our stabilization at. And about half the pipeline that currently is in will be stabilized here in the first couple of quarters, and then half the balance by the end of the year and then going into 2016.

And maybe just to add one specific item that I think you asked which is the 2015 starts are somewhere in the $800 million range projected. Of the $1.3 billion shadow pipeline.

Okay, that's helpful. And the second question just for Erik. Do you have loss of lease stats on the portfolio currently? And if you could break that out between what you're seeing for the Essex legacy portfolio as well as the BRE portfolio, just in light of the 5.6% market [rancor] that you guys have forecasted?

Yes, at the end of the quarter it was 3% for Essex and a little less than that for the BRE, like the 2.5% range.

Just one quick comment. December 31 represents the low point of loss to lease within our portfolio given seasonality. So just keep that in mind. So I think if you went back to July. July is typically the high point and it was in the 6% to 7% range, and so just keep that in mind. That's a little bit -- needs to be put into context which I was trying to do.

Okay that's helpful, thank you.

Our next question comes from the line of Tom Lesnick with Capital One Securities.

Hi, thanks for taking my questions. Just curious, how are you thinking about schools like Orange Coast College and the growth prospects for apartments surrounding similar tier universities in California? Is that something that you guys are opportunistically looking at growing your footprint around?

Hi it's Mike S. No, not really. We do operate some properties that are around a variety of schools, and there are some unique challenges with those properties. Namely that students don't treat your property very well and you need specialized systems and ways of dealing with them. And I think that there is some price sensitivity at some level, certainly with respect to students that are surrounding some of the major universities in the urban areas that are now very expensive. So it is not an area that we strategically are expecting to pursue. And I think that the growth rates that we're seeing on the properties that we typically target are generally better than the growth rates we see on the student dominated properties.

Okay, thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Dave Bragg with Green Street Advisors.

Thank you. Good morning. Michael Schall, you have long kept us updated on your thoughts on Prop 13. What are your latest thoughts on the prospects of that making it to the ballot next year?

That is a great question and I have to admit that I have not seen anything nor pursued any of the latest discussion. Once upon a time we had a lobbyist in Sacramento that was keeping us up to date, so I don't have anything new to report there, Dave, honestly. So I'll look into it and start commenting on that again in the future.

Okay. That's fine, thank you. And the second question is, well first thanks for the interesting long-term perspective on Phoenix. We understand the criteria that you look for in markets. One that you used to be in that we're curious about your latest thoughts on is Portland, which has put up a pretty good track record over the long term. And lately what extent do you consider reentering that market?

I was in Portland recently and we discussed it among the Senior group here. We in the past were more on the periphery of Portland and Beaverton, Hillsboro, et cetera, and we found that the impact of for-sale housing was just too great. And our original thesis surrounding Portland was that it was protected by an urban growth foundry that would be respected by the politicians. And when that failed, when essentially they expanded the urban growth boundary, built several thousand more homes, it changed our supply/demand balance materially and we exited Portland.

So our discussion recently has surrounded a more focused strategy on the downtown area in looking at rents and the opportunities there. I think that we get the similar type of exposure in Seattle, and so we're probably not likely to move there at this point in time. But I acknowledge that its been certainly in the downtown, certainly urbanization is having an effect there and we think it's a high quality market and improving.

Okay, thank you.

Our last question comes from the line of Buck Horne with Raymond James.

Hi, good afternoon. I want to go back to the supply outlook, some of your macro projections in terms of new deliveries into the markets. And I'm wondering a little bit longer term if you extended the forecast in terms of what you know now into 2016, what do you think the delivery pipeline looks like for markets like San Jose and Seattle in particular? And does a potential supply surge in those regions affect how you think about deploying additional capital into either Seattle or Santa Clara County?

Yes, I think the recent Axio data on Seattle had a big spike in permitting activity that concerns us, but not to the extent that we would sell assets because there's also very robust demand in Seattle. In California I think that 2016 is going to be a continuation of the same forces that we've had before, which is tech continues to do well, tech and life science, that drives job growth at somewhere in the 2.5% plus or minus range, and you have -- we just don't produce enough housing to take care of that demand. And as a result of that I think we have another very good 2016 at this point in time.

We also track, as you know, rent to median income levels and it's interesting. All of Southern California continues to be below the long term historical average for rent to median income. Seattle and San Jose are pretty much right at the long term historical average, and San Francisco and Oakland are a bit above, about 8% above the long term historical average. So we don't see an indication that affordability is an enormous issue here, but we recognize for example that the adults living with parents and that type of phenomenon probably doesn't unwind all that quickly given how high rents are in these marketplaces.

So we still feel very bullish about coastal California, and I would say that Seattle is more of a -- we're more uncertain about Seattle. We're still positive, but we're more uncertain about Seattle.

Very helpful. And lastly just on the equity issuance and the ATM, you seem to have stepped up and accelerated some activity in January. Do you think pretty much you're done with the ATM for the quarter? Or do you envision continuing to maybe accelerate use of the ATM later this quarter or into the first half of the year?

Yes, Buck it's Michael Schall again. We did jump ahead of it a little bit and we do have a transaction pipeline, and we are trying to match fund that. And so we did get ahead of that a little bit and we understand that, that produces some dilution in Q1. We thought it was still the appropriate tradeoff. And so we expect again to, given debt rates and where the stock is trading, to be pretty aggressive this year on the acquisition area.

And we think cost of capital and our ability to add NAV and cash flow per share is really great. So we hope the transaction markets cooperate with us. Again we do have a pipeline now. I'm not going to tell you how large it is, but we hope to add to that. And so we are stepping a little bit ahead of the transaction closings with respect to the ATM and capital raise.

Perfect. Thank you, gentlemen.

Thanks.

Thank you. This concludes today's question-and-answer session. I would like to turn the floor back to Mike Schall for closing remarks.

Great, thank you operator. In closing we appreciate and we thank you for your participation on the call. We're obviously very pleased with our results last year and look forward to another good year in 2015.

We look forward to seeing many of you at the Citi conference in about a month. Thanks for joining us. Good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.