Essex Property Trust, Inc. (ESS) Q4 2014 Earnings Report, Transcript and Summary

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 would like to start by welcoming 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, 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 mid point of 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 U.S. economy to improve modestly in 2015 with our assumed 2015 GDP upto 2.8%. If that GDP assumption is achieved, our target markets are expected to produce 2.5% job growth, significantly above the U.S. average. Number three, California is different from Seattle on the supply side. In Seattle, where higher rents and for sale prices have lead 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 green-house emissions, notably California’s AB-32 and SB-375, both of which are described at 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’re nearing the end of the first of three phases in the integration process. That first phase includes on boarding over 500 BRE employees, consolidating offices, moving all employees under one HRIS system, migrating all properties on to one property management and accounting platform, and consolidating pricing under one system. As part of phase 1, 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 1, 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 amenity pricing and reduce 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 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 rate. Given rate liquidity and lower capital cost, cap rate could be up to 25 basis points lower than those discussed in 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 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 S9. We have three projects schedule to start this year and are working on a fourth project that could possibly start towards 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 will now turn the call over to Erik.

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 GAAP 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. Even 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, with the result expected given the overexposure of lease expirations in the BRE portfolio that were discussed on our last call. The 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 projections. The main drivers for this improvement was the continued benefits of higher scheduled rents due to our profitable renovation activity and greater portfolio weightings in strong submarkets like Santa Clara town. 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 GAAP 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 the summer highs, but we saw less of a decline from peak brands 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 the 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. Sub-market details of our forecast can be found on S15 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 Angelis leading the way, improving jobs and low supply could help Orange County and San Diego surprise for the upsize. 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 the net lease of 4.8%. The BRE same-store portfolio was at 96% with the 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 the 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 Whilshire to rebound nicely in 2015, because we completed disruptive exterior renovations at The Stuart last year, and we traded revenue growth at 5600 Whilshire 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 pre-dating 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’s 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 sq. ft. of commercial development, and soon they are expected to announce the lease for the adjacent 300,000 sq. ft. Howard Hughes hanger. Additionally, Yahoo signed a long-term lease for a 130,000 sq. ft. in the neighboring collective campus development. This emerging technology cluster should bode well for the 21,000 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 that 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’s 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 are seeing much of the same for 2015. Commercial activity continues to be strong in an effort to support new companies and expansion. During 2014, nearly 5 million sq. ft. was absorbed in San Francisco, the Peninsula, and the Silicon Valley. The same submarkets have over 8 million sq. ft. of office under construction which is enough to support upto 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 have little trouble absorbing new supply, and our own leased up properties continue perform ahead of plan. Mosso averaged 33 market rentals per month during the fourth quarter. Even working from a trailer and 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 have not even occupied the leasing office yet. With such strong results throughout the holiday, it is evident that demand continues to comfortably outpace supply, so you can see why we look forwarding 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 3.1% year-over-year gain. Amazon and Microsoft continue to 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 neighbour, SpaceX received $1 billion of 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 storage occupying 10 million sq. ft. in Seattle by 2019 and office absorption in Seattle region overall was 2 million sq. ft. 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. The robust job growth will help these developments get absorbed. We continue to like our portfolio composition in Seattle, and we expected 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 grey hairs, though we still have some important integrations 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’ll now highlight the key assumptions behind our 2015 guidance. Many of these assumptions are found on page 5 of the press release and on S13 of the supplemental package. The first point emphasized on the ‘15 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 result achieved in Q4 of ‘14. In late ‘14 and early ’15, we sold two Phoenix assets. These Phoenix dispositions offset the increased net operating income from the same property portfolio and the continued lease of our development communities. The remaining shortfall results from the first quarter issuance of equity to match fund our external growth pipeline. For ’15, we expect same property net operating income to grow in the Essex portfolio by 8.5% off 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 ’15, we expect the legacy BRE same property revenues to grow at 6% of the midpoint. The primary difference between the Essex and BRE same store growth rates in ‘15 is attributable to the restarting of the renovations in ‘15 in the BRE portfolio. At the beginning of the renovation program, the increase in vacancies are not offset from the high risk scheduled risks. It typically takes three quarters before the increase in monthly schedule rents for the renovated homes 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 to increase 5% in the Essex portfolio driven by a 10% increase in Seattle taxes and the expected loss in California of over $1 million and 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 ‘15 general administrative expenses before merger and integration, cyber and acquisition related costs, is expected to increase by approximately 6% over the run rate we had in the last three quarters of ’14. The increase was 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 ‘15 cash flow projections for our ownership interest in the development pipeline will be approximately 285 million plus a 150 million in revenue generating capital expenditures to renovate units and add amenities to the stabilized portfolio. We plan to refinance the 95 million on maturing secured financing, and the 200 million outstanding on our revolving line of credit with the 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 the quick reference to the half turn improvement from Q3 to Q4, and our net debt to EBITDA credit metrics disclosed on S6. 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 to the improvement is attributable to an update in a calculation of ratio from total indebtedness, the 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. We will now be conducting a question and answer session. [Operator Instructions] And our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

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

I think it’s a couple of things. I think it’s lack of activity, lack of listed properties out there on the market place. 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 that -- 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 cost 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. Again, not materially, I mean as I said in my comments, there has really been very few transactions since 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?

Yes, 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 focussed 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 he has a whole list of potential amenities from backyards to other site amenities and interiors that really reflect the opportunity in the market place as opposed to trying and create more of a one size fits all type of approach. So, ours is a customized approach, and BRE was different from that. I recall at one of the first meetings we had in Las Vegas where we are looking at -- all the management team was there -- we were looking at returns from redevelopment efforts on the BRE site, 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 looks like the estimated total costs 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 are 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 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 little less than what we have reported, the increase, but we wanted to put everything on the table, worst-case.

[Operator Instructions] Our next question comes from the line of Nick Yulico with UBS, please proceed.

Mike Schall, I was wondering if you could talk a little bit more about the acquisition environment and your guidance gives some acquisitions in it, but you know there is not a ton of the FFO benefits, it sounds like you might be balancing it off for some sales, I mean, how are you looking at maybe using the ATMs some more to do acquisitions this year. It seems like you guys are one of the few multifamily 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 that are relatively high cap rate, and so we have had 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 is 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, whereas 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 evaluation of their properties, and so there is likely to be more transactions beginning and let’s say the second quarter through the third quarter, we just have a hard time predicting what that might look like. So we’d love to do more. Again, I think cost of capital is only moved in our favor since our initial accretion numbers came -- that were presented to the Board. And so, I think that 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 forecasts this year or any of the S15 in the supplemental, you gave 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; Seattle, Northern California and Southern California. When I would have thought that may be the impact would have been more so in say San Jose, Seattle or maybe there is more supply. So could you just maybe talk a little bit about your thoughts are on these forecasts and how much supply and job growth is impacting them?

Of course. So we are on S15. Anyone who is trying to follow this discussion, where we reproduce the job forecast and a forecast for residential supply, it intended to be a scenario. So if U.S. GDP grows at 2.8% and the U.S. 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 in our initial forecast. So I think that there isn’t a chance that we can beat these numbers. I note that, as Eric also commented on San Jose’s job growth over December ‘14 was 4% and San Francisco is 3.7%; we have those numbers decelerating to 3.2% and 3%. So this is not a perfect science. We try to do a pretty good job of trying to have a economic scenario and a 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 referred 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 are 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 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 that there -- specifically I think there is 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 and in Hollywood certainly and to a lesser extent other areas, like in Warner Center we have very limited growth rate and I’ve seen very limited growth for several years. So, I think that LA has the opportunity, the LA Metro area has 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 is a certain art to this and we think this is a reasonable scenario given what we expect the U.S. economy to do in U.S. job growth.

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

May be 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 is 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 14 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 macro economics. So we feel pretty comfortable with that.

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

I don’t think that we specifically targeted that as the expense element. There might be something, Jana. I think in the scheme of things you know 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 is something, because you know obviously oil cost affects delivery cost in a variety of materials and that could have some impact, but I don’t think it’s material.

And the next question comes from the line of Dan Oppenheim with Zelman & Associates. Please proceed with your question.

I was wondering how you think about the growth in terms of wages for the tenants and the ability to pay these high rents and I think we look at the lack of supply and the difficult affordability in the markets, tough to argue the rent were as forecast unless we see something change in terms of employment but, how much do you think we will see some movement whether it’s from Dublin further out on 580 or in Southern California’s from Orange to Riverside, that would sort of lead to higher turnovers, so the rent numbers may come through, but the expense end up being a bit higher.

I think that we have the expense growth numbers that we think that are prudent as we go through our budgeting process which is essentially a ground-up type of process. I think Eric 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 think this is BLS data doesn’t forecast the personal income growth and they have San Francisco at 6.6% estimated for 2015, Seattle 5.6%, San Jose 6.8%; so very healthy numbers on the personal income side. And that of course drives the rent to immediate income ratio which still are within the 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 are coming and taking a new job that’s a high end job you could 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 you see that phenomenon occurring within our portfolio because you see for example the Eastbay, Alameda County and Contra Costa County growing faster than San Francisco. I think that that represents people that are being priced out of the market, looking for a suitable house that’s you know typically on a transit node outside the city. So there is a transition going on and I think that’s healthy for the market place.

Our next question comes from the line of Dan Weisman with Credit Suisse. Please proceed with your question.

I just wanted to talk a little bit about your relative out performance in California and across your core markets. Obviously the West Coast continued to dominate, but your performances materially bettered than your peers. I just wanted 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 costal markets. That means 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 is the focus within acquisitions to try to find value added transactions. I think that is a big driver. I also think that our submarket selection is good and our capital allocation process which involves ranking 30 somewhat submarkets and deploying capital appropriately ahead of growth. I think all 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 45 day lag, something like that, in that period of time he noticed that the rents have moved up significantly and he went from sort of #3 in that process to #1 by increasing his bid a little bit and ended up with a superior transaction. So, I think it’s a variety of things about how we look at the world from capital deployment and allocation to the opportunity represented by the rehab program I think really drives 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 market and also how much of land prices increase year-over-year?

May be John, you do the land price and then I’ll do the...

Sure. Yes, go ahead. It’s hard and 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 in our shadow pipeline it’s about a $1.3 billion fixed deals and they are 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.

And the IRR’s?

Yes, the IRRs, I think unlevered IRR’s on acquisitions, I think expectation is in the 7.5 range for acquisition, so you need significant amount of growth to get there, and on the development I think we are on the 8.

That’s again on unlevered basis?

Unlevered, yes.

And our next question comes from the line of George Hoffman with Jefferies; please proceed with your question.

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

Yes, this is Erik. I think they are primarily resident profile. We have a much higher delinquency and incidence of eviction there. So, just by way of example, in the fourth quarter we experienced 29 either evictions or encouraged move outs due to non-payment of rent. That would compare to something that’s more like 7 or 8 in a quarter under normal conditions. So we think we were working through those. We had some abatement of that activity in the third quarter that we saw returned. And the nice thing is that of all the evictions that we have processed in the last five months, 80% of those were existing residents. So we think we are 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 were related to fraudulent activity. 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 is the same equation when you don’t have the strength in occupancy, it is difficult to push the pricing on the new side and clearly with all the information that is out there, it then becomes difficult to push the renewal. So, we have to get that stabilized. And then I will 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 are going to have to prove that we think they are profitable before we just pull the trigger and start building fancy pools and gyms and stuff.

And then, so on the acquisition development front, since the fundamentals in the Eastbay are so strong right now and you’re having that spill over from San Francisco. Would this be an area you guys be targeting for more acquisitions and then again the two developments in Pleasanton, but you envision going out any further than that sort of 680 corridor?

This is Mike, and generally no. We generally don’t like being beyond the 680 corridor primarily because it brings you too close to over the hill in Tracy where you can buy a house for a couple of 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 homeowner a challenging one.

And our next question comes from the line of Alex Goldfarb for Sandler O'Neill, please proceed with your question.

This is actually Ryan Peterson here for Alex. As your 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 the cost of equity funding more attractive than JV funding?

This is Mike S. In general we constantly monitor the two and we are trying to find the best accretion solution given all the arrows in the quiver with respect to capital without making greater risk in 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 would 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 funded over the next couple of 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.

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 a third of it will be targeted for the BRE portfolio.

Our next question comes from the line of Michael Zielinski with RBC, please go ahead with your question.

Can you just go back to the development, in terms the starts for ‘15, I think you mentioned 1.4 billion shadow pipeline. How much and what the size and scope of the starts plan in ‘15 and then just given the positive commentary about leasing in the fourth quarter, where is the expected stabilized yield in that pipeline stand currently?

First of all on your comment of shadow pipeline of 4 billion, I think that’s -- one pipeline which includes the 2.5 billion# that we got plus the 1.5 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 during the first couple of quarters and then half of the balance by the end of the year and then going into ’16. And maybe just to add one specific item that I think you asked which is the 2015 starts are somewhere in that $800 million range projected of the $1.3 billion shadow pipeline.

Okay, that’s helpful and a second question, just for Erik, do you have loss lease stats in the portfolio currently and if you could break that out between what you are seeing for the Essex legacy portfolio as well as the BRE portfolio, just in light of the 5.6% [indiscernible] you guys have forecasted?

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

Just one quick comment. December 31 represent 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 little bit -- needs to be put in to context which I was trying to do.

And our next question comes from the line of Tom Lesnick with Capital One securities, please go ahead with your question.

Just curious, how are you guys thinking about schools like Orange Coast College in the growth prospects for apartments surrounding similar tier universities in California, is that something that you guys are opportunistically looking at to growing your footprint around?

It’s Mike. 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 the property very well and you need specialized systems and ways of dealing with them and I think that there’s 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 are seeing on the properties that we typically target are generally better than the growth rates we see on the student dominated properties.

[Operator Instructions] Our next question comes from the line of David Bragg with Green Street Advisors, please proceed with your question.

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 into the ballot next year?

That is a great question and I have to admit that I have not seen anything nor pursued, any of these latest discussions. 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.

And the second question is, while 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 are curious about your related thoughts on is Portland which has put up a pretty good track record over the long-term and lately what extent do you consider re-entering 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 in Beaverton, Hillsboro etc. 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 boundary 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 is surrounded of 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 will probably not likely to move there at this point in time, but I knowledge that it has been certainly in the downtown, certainly urbanization is having an effect there and we think it is a high quality market and improving.

Okay, thank you.

And our last question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Good afternoon guys. I want to go back to the supply outlook for your macro projection in terms of new deliveries into the market and I am wondering a little bit longer-term if we -- if you guys 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 in 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.

The Axio data on Seattle had a big spike in permitting activity that concerns us but not to the extent that we would tell out of the wells also very robust demand in Seattle. In California, I think 2016 is going to be a continuation of the same forces that we have had before which is tech continues to do well tech and life science that drives the job growth at somewhere in the two and half 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 LA or 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% or above 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 phenomena probably doesn’t unwind all that quickly given the 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 more uncertain about Seattle but still positive but we are more uncertain about Seattle.

Okay. very helpful and lastly just on the equity issue and from the ATM, you guys seem to have stepped up and accelerated some activity in January. you think pretty much you are done with the ATM for the quarter or do you envision continuing to, may be accelerate use of the ATM later this quarter or into the first half of the year

Yes, we did jump ahead of it a little bit and we do have a transaction pipeline and we’re trying to match fund that and we did get ahead of that a little bit and we understand that produces some dilution in Q1. We thought it was still the appropriate trade-off and so we expect again to given our debt rates and where the stock is trading to be pretty aggressive this year on the acquisition area. And we think cost to capital and 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. And now I am 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 rates.

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

Thank you, operator. In closing we appreciate and we thank you for your participation on the call. We are obviously very pleased with our results last year and look forward to another good year 2015#. We look forward to seeing many of you at City 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.