Essex Property Trust (ESS) Q4 2013 Earnings Call January 31, 2014 1:00 PM ET
Operator
Greetings, and welcome to the Essex Property Trust Fourth Quarter 2013 Financial Results and 2014 Guidance Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Barb Pak, Director of Investor Relations. Thank you. You may now begin.
Barb Pak
Thank you, and welcome to our fourth quarter earnings conference Call. Before we begin, I would like to remind everyone that certain matters discussed in this conference call contain forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to several assumptions, risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Please refer to the forward-looking statements section of the earnings release issued yesterday. Today, management will be making some prepared comments related to the post merger of assets of BRE properties.
At the advice of counsel, management will not be taking questions related to the proposed merger, given that the merger is subject to approval of both Essex and BREs stockholders. Comments related to possible financing sources such as property sales and joint ventures are in a preliminary stage, and we cannot assure you that they will be consummated. As attached file, a joint proxy statement/prospectus with regards to the proposed merger with the SEC on January 29. We refer investors to the information inventory proxy statement, regarding the merger and related transactions, and then other relevant information that we may file with the SEC.
The question-and-answer session at the end of the call will be limited to matters related to the fourth quarter earnings results, and the 2014 guidance, assumptions and outlook provided for Essex on a standalone basis.
I'll now turn the call over to our President and Chief Executive Officer, Mike Schall.
Michael J. Schall
Thank you, Barb. I would like to start by welcoming you to our fourth quarter earnings call. Mike Dance and Erik Alexander will follow me with comments. John Eudy and John Burkart are available for Q&A. I'll cover the following 2 topics on the call: Fourth quarter and annual results and our outlook for 2014; and secondly, the update on the merger integration process.
So under the first topic: Yesterday, we were pleased to report continued strong operating results for the fourth quarter and full year ended December 2013. The core FFO per share result for 2013, represents a 11% growth from the prior year and is $0.05 per share above the midpoint of the initial 2013 guidance range. In the three-year period from 2010 -- from the 2010 recessionary trough, we've grown core FFO per share by 51%. We ended 2013 with 6.3% same-property revenue growth near the high-end of the initial guidance range, lead by our Northern California region. Southern California was the only region that performed below the midpoint of our original 2013 revenue guidance range missing by 15 basis points.
With respect to Southern California, our expectation of slow but steady improvement in revenue growth proved accurate in 2013, as each of the four quarters generated slightly higher sequential growth, with Q4 achieving a respectable 4.7% revenue growth rate.
Looking back over the past several years, however, Southern California has fallen short of our high expectation for rental revenue. With respect to job growth, 2013 remains strong. And at 2.1% in our target markets was just above our initial forecast, with each MFA, except Oakland and Los Angeles, beating our estimate.
Turning to 2014. Our overall market outlook is reflected on Page S16 of the supplement and is based on U.S. job growth of 1.8% and 2.8% U.S. GDP growth. Both of which are near the middle of the range estimated by our economics data vendors. This information is materially consistent with our 3-year outlook at our Investor Day presentation in November. Our 2014 revenue guidance is very similar to our original 2013 estimates. Overall, the midpoint of our revenue guidance range of 5.6% is only 15 basis points below the comparable estimate for 2013. And each of our 3 primary regions are assumed to generate rental growth within 50 basis points of the comparable 2013 estimate.
Overall, 2014 supply is estimated to be -- multifamily supply is estimated to be 1.1% of stock, up from our estimate of 0.8% for 2013. The higher level of supply in 2014 is offset by higher job growth, consistent with an improved U.S. economy, leading us to expect that the overall demand-supply relationship remains favorable to landlords.
Apartment demand continues to be anchored by job growth, demographic factors and limited to an expensive alternative to rental housing. Medium priced homes are expensive on the West Coast with median prices ranging from $389,000 in King County, Washington and $813,000 in San Francisco County. In addition, wholesale housing values are increasing substantially faster than apartment rents, making apartments a more affordable -- making apartments more affordable relative to homes.
We believe that Southern California will continue to report good job growth and solid results. The dilemma of Southern California jobs versus rent growth is depicted in an AXIOMetrics chart for Los Angeles, and we've reproduced with permission as Page S17 of the supplement. While we believe that Southern California has the potential for higher rental growth, we don't see the catalyst for that to incur in 2014, and thus, it assumes the continuation of solid, but relatively flat revenue growth rates.
We completed approximately $462 million in acquisitions in 2013, down from nearly $800,000 2012. Overall, we expect to acquire approximately $400 million again in 2014, with emphasis on well located B property, and on Southern California, but adds in a way that maximizes accretion. We have 11 development communities that are under construction or in the initial leasing phase. Going forward, we will continue to be selective for new apartment development opportunities. There are many development deals being discussed and most of the merchant builders need equity to satisfy lender requirements.
Other impediments to new apartment construction include concerns about the economy, future rent growth expectations, construction cost increases and the need for concessions from the reluctant local governments. With this in mind, we continue to believe that new apartment deliveries will peak in late 2014 to early 2015, in Seattle and in Northern California.
Now to my second topic, the merger integration update. Since signing the agreement to merge Essex and BRE on December 19, 2013, both companies have worked with great focus and effort to make the transition as smooth as possible. Earlier this week, we filed Form S4 with the SEC, in connection with the proposed merger and necessary shareholder bolster from both Essex and BRE shareholders. If the process proceeds without delay, we could close the merger in March. We have enjoyed working with Coney Moore [ph] and her team as we seek our common objective of forming a primitive West Coast apartment REITs.
We appreciate the incredible effort of both the Essex and BRE employees in realizing this vision and offer them our continued thanks. Merger integration planning remains in full swing and significant progress has been made. The merger agreement provides for a cash component of $12.33 per BRE share, of roughly $1 billion. The financing of the cash component is supported by $1 billion financing commitment from UBS and Citigroup, which can be relied upon if our preferred funding sources, which are a combination of institutional joint ventures, property sales and borrowings does not occur.
We currently have nonbinding term sheets related to the formation of institutional joint ventures, involving properties valued at -- between $800 million and $900 million. In addition, we believe that $100 million to $200 million in property sales could occur before or shortly after the merger, and that most of the cash required to close the merger can be generated by these activities. We realized that the market desires greater visibility into our long-term expectations for the merger, as asked for additional information. As noted on the call following the announcement of the merger, we cannot provide the details of our underwriting and assumption, as advised by our attorneys. We refer everyone to the investor presentation, previously filed with the SEC and posted on our website, and to the Form S4 recently filed for details of the transaction.
We recognize the importance of articulating our vision with respect to the merger. Recall from the conference call and answering the merger that are baseline financial assumptions where that the merger would be NAV neutral, accretive to core FFO in the range of $0.05 to $0.08 per share in the year following the merger closing, and that the annual synergies will approximately will impact of Prop. 13.
In the Q&A, we noted that the vast majorities of the assumed synergies are on the expense side of which property and corporate level expense reductions were roughly similar amounts. We continue to believe these assumptions are achievable. Our key question is what opportunities are available over and above the baseline scenario outlined above.
As previously noted, we are in the midst of evaluating these opportunities, and so conclusions have not been reached. However, we like to share with you our list of priorities related to synergies and efficiencies to be pursued following merger confirmation as follows:
First, we will reconcile pricing philosophies, which are materially different despite our geographic and portfolio similarities. Based on that reconciliation, we will adopt one company-wide standard best practice to include the renewal process, targeted turnover rates and costs, traffic and traffic sources, amenity charges and occupancy/availability ranges.
Second, we will look for opportunities to improve the financial structure of the combined companies from the perspective of risk, reward, cost to capital and core FFO accretion. This could, for example, involve new institutional co-investment relationships for development communities, and possibly, existing properties.
Third, we will implement best practices identified during the merger integration process. Detailed recommendations and opportunities have been compiled as we evaluate each functional area to be the basis for action plans. For example, we expect to implement BRE's RUBS reimbursement methodology, website and procurement practices at Essex communities. Similarly, we expect to implement Essex's approach to Craigslist promotion, resource management, redevelopment and asset management plans at BRE communities.
Fourth, we will use our larger footprint and community proximity to negotiate lower cost relationships with vendors, create on-site operating savings and revenue management synergies.
And fifth, we will kickoff a major human resource initiative focused on creating career path that will develop talent from within the company, improve hiring practices, provide greater regional coordination staff and related topics. We believe that these areas will significantly improve the overall efficiency and results of the combined entity.
That concludes my comments. Thank you for joining in the call today. I'll now turn the call over to Erik.
Erik J. Alexander
Thank you, Mike. The strong fourth quarter in operations helped Essex cap off another good year and set us up for continued growth in 2014. The Bay Area in Seattle continued to report strong economic growth, which resulted in healthy demand throughout the period. Leasing activity met or exceeded expectations in all of our markets, highlighted by strong renewal activity, improving occupancy and better than expected schedule of rent growth. For the quarter, renewal rates grew at 5.5% over expiring rates, while January renewals improved to 6%.
With higher expiring rate comps ahead, February and March renewals are expected to achieve rent growth around 5.5% for the portfolio. Given our low availability and improving demand, we should see strong, sustainable rent growth for new lease activity in all markets.
Turnover remained low and within expectations during the quarter. But we did see a seasonal pickup in move outs due to home purchases during the quarter as this metric hit 12.2%. However, this is consistent with the last 2 years. Solid fundamentals helped sequential scheduled rent growth improve, and we believe our tempered focus on occupancy during the period allowed us to realize schedule rent growth double that of December 2012.
We are off to a good start in the new year and scheduled rent in January outpaced December's growth and occupancy stands at 96.6% with a 5.4% net availability for all stabilized assets. Activity at our lease-up projects, Epic at San Jose and Connolly Station at Dublin, reflects strong market conditions. Both projects are leasing ahead of expectations and are expected to be stabilized in September and March respectively.
Leasing activity at the new developments in the broader market also demonstrates strong demand. And the average monthly absorption for all projects of North San Jose was 38 units per month for 2013.
Next quarter, I will comment on Avery, Dylan, Huxley and Mosso, as we begin pre-leasing activities for all 4 projects over the next several weeks. And I'll share some highlights from each region beginning with Seattle. While new buildings continue to come to market in the region, we believe that slower absorption and moderating rents are more a function of seasonality than too much supply. Deliveries are largely concentrated downtown and would remain vigilant in our strategy to maximize revenues by meeting market expectations and proactively managing lease explorations. Economic rents on the east side, the north end and the south end of Seattle, were the majority of our portfolio is located, held up better than downtown during the fourth quarter, and we expect these submarkets to outperform the downtown in 2014.
Employment growth in the region improved to a year-over-year rate of 3% in December with unemployment below 5%. The most important employment news of the quarter was the labor resolution between the Machinist and Boeing that the allow the world's largest airplane manufacturers to keep 20,000 direct and indirect jobs in Seattle working on the 777 Dreamliners for the next decade.
Office absorption moderated the fourth quarter with 313,000 square feet lease, but 2.9% of total stock was leased for the full year. Office vacancy remained low and deal flow continues to be brisk, including Amazon's purchase via another significant property in Downtown.
Turning to Northern California. With the year-over-year job growth of 3.4% in San Jose, and 2.2% for the broader regions, the Bay Area continues to lead the way for Essex, with the highest growth in rental rates and revenue for the portfolio. Office leasing and development continues to be strong in virtually all parts of the Bay Area with another 1.5 million square feet absorbed during the quarter. Additionally, other significant Bellevue's projects like Apple's 2.8 million square foot headquarters, and Netflix expansion began construction during the quarter.
Investment and transportation and infrastructure also continues to grow. The new Eastern span at the Bay Bridge and the fourth floor of the Colvaca tunnel opened in the latter part of 2013. Barge open airport connector is set to open later this year and the first phase of the Transbay Terminal remains on schedule to open in 2017.
All of these projects and others will continue to help few economic growth in the Bay Area. Finally, in Southern California. Southern California continues to grow at a more moderate pace compared to Seattle and the Bay Area, with Orange County and Ventura have shown signs of accelerating. All overall job growth in Los Angeles was 1.2% during December. Orange County job growth was 2.4% and Ventura hit 2%. Orange County bows the lowest unemployment in Southern California at 5.2%, but Los Angeles has dropped below 9% for the first time since November 2008.
Encouraging news is that the 1.4% year-over-year decline in employment in Los Angeles -- unemployment in Los Angeles was due to employment growth and not shrinkage in labor force. The impact of the military in San Diego essentially remains unchanged with the resident exposure hovering around 13%. However, with federal funds flowing again, there has been an increase in shipyard activity and military contract work.
Commercial leasing activity in the region was positive during the fourth quarter with another 850,000 square feet absorbed mostly in Los Angeles. Orange County was flat, however, Hyundai and Pemco delivered their headquarter facilities during the period. So overall, economic and rental market conditions remain strong across the portfolio, and a solid December and January give us good reason to be confident about 2014. Thank you for your time, and I'll now turn the call over to Mike Dance.
Michael T. Dance
Thanks, Erik. Today, I will provide some color to the assumptions behind our 2014 guidance. Then provide a brief update on the proposed merger with BRE. For more details on our guidance, assumptions, please read Page 6 of the press release. And on S-14 of the supplemental package, we have provided a detailed roadmap, how these assumptions are expected to impact our 2014 financial results. The assumptions and projections are for Essex on a stand-alone basis and exclude any impact from the proposed BRE transaction and the merger-related costs associated with the deal.
For 2014, we expect consolidated same-property net operating income to grow by 6.5% at the mid point, driven by a 5.6% increase in same-property revenues. The 2014 same-property portfolio will increase by over 2,000 apartment homes and will exclude the 6 properties that were acquired in 2013 and those undergoing major redevelopments. We expect our same-property operating expenses to increase 3.5% of the midpoint. The biggest factor driving our expense growth is higher property taxes. Our budget assumes property tax increases by $3.7 million or 7%. This tax increase relates to higher assessed values in Seattle, which are 18% higher than last year's assessed value.
In California, we still had favorable Prop 8 adjustments in 2013, totaling $1.2 million in tax savings. And we expect $600,000 of additional California property taxes in the second half of 2014, as a result of losing these Prop 8 savings on July 1. The controllable expenses for the same-property portfolio are expected to grow by less than 2%.
Now, I'll provide an update on the proposed BRE merger. Assuming the merger closes in March, we expect to benefit from the operating efficiencies of adopting the best practices that Mike outlined in his prepared remarks after a six-month integration period. The operating platform accretion will begin to add accretion to our 2014 core FFO guidance in Q4, and continuing into 2015.
In connection with our financing plans for the cash components of the proposed merger, we expanded our unsecured credit facility from $600 million to $1 billion at the end of January, and added an important feature pursuant to which we have the flexibility to expand to $1.5 billion. We reduced the pricing on the expanded facility by 12.5 basis points to 95 basis points of the LIBOR.
In addition, we renegotiated the pricing on our $350 million term loan reducing the spread over LIBOR by 15 basis points. We believe, this demonstrates some of the initial costs of capital advantages we can achieve with the larger platform.
At the closing of the merger, the net debt-to-EBITDA of the combined company will increase by one turn as the result of creating joint venture which will form the cash component of the deal. At this time, we do not expect to use the $1 billion bridge loan to close the merger. We expect the debt-to-EBITDA ratio will return to approximately 7x in the first half of 2015 to grow the net operating income and stabilizing the development pipelines for both companies. As a result, after the merger, we will maintain the strength of our balance sheet and will be opportunistic when considering alternative sources of capital, including asset sales, additional joint ventures, unsecured debt and common equity to finance the buildout of the development pipeline.
As disclosed in our press release, our Board of Directors declared a first quarter dividend of $1.21 per share to shareholders of record on March 14. The timing of the first quarter dividend is coordinated with BRE's first quarter dividend pursuant to the merger agreement. The board will reveal any increase to the annual dividend during its February board meeting, and an increase if any approved by the board will be effective for the second quarter dividend payment.
I'll now turn the call over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is coming from the line of David Toti with Cantor Firzgerald.
David Toti - Cantor Fitzgerald & Co., Research Division
I just have -- those are pre-thought [ph]. I just have one question with regard to kind of the company's philosophy on dispositions, and the forecast for the year looked relatively light compared to volumes that some of your peers have been disclosing of. And if we think about your capital needs broadly and where we are in the pricing cycle on apartment assets, especially in your markets, why not dispose of -- what's the rationale for keeping that relatively limited?
Michael J. Schall
Hi, David. It's Mike Schall. The main rationale is just trying to find the right source for putting capital to work. We tend to be very focused in terms of what we buy or what we build. Therefore, we don't have a large portfolio of assets that we want to dispose of, is a general statement. And so we're looking for arbitrage. We're looking for, if we sell these assets, what we do with the money, what's the best source of funding the development pipeline and a variety of things. And we will be become more aggressive at selling assets when that becomes the most favorable source of capital to fund other future activities.
David Toti - Cantor Fitzgerald & Co., Research Division
So actually, it's sounds like the cost of that capital is still too high in your mind?
Michael J. Schall
Exactly.
David Toti - Cantor Fitzgerald & Co., Research Division
Okay. And then I just have one follow-up question for -- maybe, for Erik, and I might have missed this. What's the occupancy assumption embedded in the revenue forecast for the year?
Erik J. Alexander
Hi, David. This is Erik. It's a range across the portfolio similar to what we experienced in 2013. So I would say, then that goes from the high 95s to the mid 96.5 depending on the submarket.
David Toti - Cantor Fitzgerald & Co., Research Division
So am I hearing sort of flattish for the year?
Erik J. Alexander
Yes.
David Toti - Cantor Fitzgerald & Co., Research Division
In aggregate. Okay.
Operator
The next question is coming from the line of Alexander Goldfarb with Sandler O'Neill.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
First question is as you guys look at the -- as you guys laid out the strategy for this year in integrating BRE, it seems like the core business is sort of business as usual. There is a lot of activity, a lot of investment activity in such. Do you feel like what we're going to see on the course. What we would normally see from core Essex or have you guys sort of -- is your intention to dial it back to make sure that more of the resources are focused on the integration. Just and the angle that we are coming at is over the past year or 2, we've seen 1 or 2 situations of company mergers where a part of the operation was dropped as a company acquired or integrated various platforms. So just want to get your take on that.
Michael J. Schall
Alex, it's Mike Schall. Certainly, we expect to continue with business as usual throughout our portfolio. So we don't expect a drop off. Obviously, we haven't been through this process before. And so there's a certain amount of uncertainity there. But all of us are confident that we will be able to work together to basically continue the business as it's right now. I think, 1 key factor here is that we are so similar as to geography, as to staffing ratios, as to a lot of the systems and processes that I think it's going to perhaps make this a little bit easier to integrate relative to some of other transactions you are referring to.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Okay. And the second question is in Southern California, some of the other parts [ph] that we heard from where more bullish on Southern California than previously throughout last year. You guys obviously spoke about Orange County inventory picking up. Has something occurred more recently in the past few months that people are a little more positive on Southern California? Or it's pretty much consistent with what you guys expected, but the fact that it's now sort of seeming to pickup is just a positive refreshment that everyone is focused on?
Erik J. Alexander
Alex, this is Erik. I think there has been some pickup in Southern California in areas, and I didn't comment on San Diego. But we've seen some improvements there as well and spots in Los Angeles. I think it's -- we've always done is tie this to what our economic forecast is, the jobs picture and so, until we see that sustain in the meaningful way. I think it's hard to be too bullish, we have seen that before where we have had [ph] -- we think that has taken off and then sort of find up. So we will see, but right now, we're feeling pretty good.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
So what you've described is sort of broad-based throughout the region. It's not just 1 industry or 1 geography. I mean, it seems pretty positive that it should continue, right? Or if you feel that there is something that could be relative?
Erik J. Alexander
That's right. I think it's our view -- across Southern California is positive.
Operator
Our next question is coming from the line of Richard Anderson from BMO Capital Markets.
Richard C. Anderson - BMO Capital Markets U.S.
So I don't know to what degree you can respond, but I wish to ask and you could say, "shut up", if you want, but when you kind of started this process and when it became known to everybody in November, December timeframe, a lot of moving -- lot of things were going on at that time and [indiscernible] with all the moving parts inside and outside of the transaction. But when you look at it now, having couple of months under your belt, can you say if the merger analysis looks even better to you now or maybe about the same or you're feeling more -- even more confident about the opportunity here?
Michael T. Dance
Hi, Rich. It's Mike. I think I need to steer clear of that question. I was expecting that some one would ask hypothetical, just general merger related questions, how do we look at things, et cetera, et cetera, which we -- maybe can center down that road, but I think anything is related to this merger, we've been told by our attorneys that we are not allowed to discuss...
Richard C. Anderson - BMO Capital Markets U.S.
My apologize, I won't take it any further then. I guess, maybe, if you could, when you look at the kind of the 3 markets, is there anything specific about Essex or BRE that is a standout in Northern California, Southern California or Seattle, or is it like you said so similar that it's just kind of doubling down on those 3 areas?
Michael J. Schall
Once again it's Mike Schall commenting. I think it's very similar. We made that comment before, that more than half of BRE's communities are located within 2 miles of an Essex community. And so we think that there are a number of good positive things that can happen as a result of that, which I outlined on my comments.
Richard C. Anderson - BMO Capital Markets U.S.
Okay, and then when you think about that issue about being so close to one another, the assets, how do you manage situations where 1 asset wants to do well from a bonus comp perspective and assume that it's better to have this kind of synergy situation, but there could also be some inciting amongst folks, do you -- how do you manage that process, so that it actually is a win-win for everybody? In other words, if one asset is doing well and the other...
Michael J. Schall
Richard, it's tough for me to talk about any Essex/BRE type of activity because again our advice is that if it is in the S-4, it's important to put it in the S-4 and everything in the S-4, basically represents the balance of which we can talk about. So if you want to talk more generically, just talk more generically about the competition in the marketplace between us and someone else.
Richard C. Anderson - BMO Capital Markets U.S.
Okay, then let's take it there. I don't mean to push too hard on this. I just wanted to see if there could be anything about, a general view about how the 2 companies would look once it's all set and done, but...
Michael J. Schall
Okay, let me take a step back because I think, the point -- one of the points in my prepared remarks was intended to address this, that every competitor within the marketplace has a different view of the world. The price optimizer software is a generic statement, approaches it in a number of ways, but there's 100 switches or 1000 switches within that, that allows you to customize how you look at things. Different companies pursue marketing in a variety of different ways, and a lot of that is becoming much more sophisticated over time. I think back of 20 years ago when it was a moment of top that we're operating a lot of these buildings. So it is really very sophisticated set of circumstances now. So everyone is different. And really what our objective is, and I think that the -- yes, this is both generic and very real in the marketplace, is to try to find the right balance of different marketing programs. I know that we excel, for example, at Craig's list. Others excel at other things. Mobile is becoming more important as time goes on and the technology surrounding the web at drawing traffic through the web is changing dramatically. And so our view is that you need to have some scale here to make the investments you need to make, in order to maximize that marketing effort and the traffic to your buildings. So going back to the original premise, if you are larger organization and you can make the right investment, I think you can draw traffic to some of the smaller organizations that can't afford to make the investments might have. And I think that the other piece of this is what impact does that have on future investments. While our hope here is that the -- on the merger related call, I talked about a 30 basis points sort of average accretion number over our cost of funds, while the hope is that if we can drive down our cost that -- between the cost reduction and cost to capital reductions that we can be more competitive with respect to transactions and actually generate more accretion from the investments that we make going forward. So that's the big picture philosophy.
Richard C. Anderson - BMO Capital Markets U.S.
That's perfect. And then just quickly on the joint venture, would you say, I think you probably said this at some place, but would you say that the nature of the assets might be on the older, kind of, redevelopment variety or core or some combination?
Michael J. Schall
I can't say, how do I answer this. You may want to look at some of the 8-K filings that the BRE has made, and that will give you some idea.
Operator
The next question is coming from the line of Omotayo Okusanya with Jefferies.
Omotayo T. Okusanya - Jefferies LLC, Research Division
I just wanted to narrow in on Seattle for a little bit, again, I think your assets -- BRE's assets having slightly different market in Seattle, I'm just kind of giving you comments about supply in Downtown, I was just kind of curious how your kind of thinking about both portfolios and synergies between both going forward, especially in that market?
Michael J. Schall
Hi Omo. It's Mike Schall. Actually, we think that we are very similarly located in Seattle as well. I would agree with you that the Downtown has most of the development, and therefore, it has most of the supply coming onto the market, and it will be most affected by that new supply. So in another words, our belief is that the east side and the area surrounding Seattle, the suburban markets will outperform for the next couple of years in the Downtown. Overall, I think that everything I said earlier about the physical locations, they are very similar. We have significant exposure in the Downtown urban market. We also have a significant exposure in the suburban markets. We don't view it as much different.
Omotayo T. Okusanya - Jefferies LLC, Research Division
I was a little impressed that BRE had a little bit more Downtown exposure, but I might be wrong?
Michael J. Schall
Yes, maybe a little bit more, but again, looking at the broader portfolios, we think they are pretty similar.
Operator
[Operator Instructions] Our next question is coming from the line of Michael Salinsky with RBC Capital Markets.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Just in the guidance for '14, can you talk about what's your development assumption in CapEx, assumption with regard to '14? And also does that change materially with BRE introduced, I'm not asking for specific guidance, but is there -- does that BRE make a significant impact on that and that into the portfolio?
Michael T. Dance
Very slightly, but not much. This is Mike Dance. Hi, Mike. Good question on the CapEx. They are spending very similar amounts for dollar. So I don't -- of the recurring CapEx, I don't see that changing. And then on a combined basis, the timing of it is a little bit different. Some of their properties are in front of ours and some are behind. So we're not seeing a major change in our results as -- from bringing that on. They do some things like straight lining concessions. We'll probably adopt that accounting policy, that's GAAP. So there'll be things like that, that -- we look at accounting practices about companies and pick the practices that are mostly corporate or aligned to GAAP as a part of this process.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Okay, just a clarification there. So you are talking about changing accounting policies to move to a straight lining as opposed to expensing of concessions upfront, do that -- did I hear that correctly?
Michael T. Dance
Yes, that's correct. So we'll start adopting, that's GAAP, we have that on our list of things that we monitor from a GAAP versus a non-GAAP compliance standpoint. So that is something that we're likely to adopt. So as part of the process as Mike reviewed, we're also going to be reviewing best practices in accounting policies.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Okay. That was -- I also asked about the development strategy, I don't think you addressed that for '14, it's on the dock?
John D. Eudy
I didn't understand the question. This is John Eudy, Mike. For 2014, right now, what you see in the S-9 is, is it. We don't have anything anticipated beyond it. And their portfolio as well is possible -- a couple of other deals that I don't want to get into. We quick start, but we can't comment at this time.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Okay. Fair enough. Just Mike, as my follow-up question is right on the [indiscernible] looking at raising JV capital, any change in IRR targets from your joint venture partners at this point?
Michael J. Schall
Mike, this is Mike Schall again. No, I don't think so. In fact, I think, cap rates for the most part have remained within a pretty narrow band over the last year. And I'd say that maybe there is -- there are fewer institutions that maybe they were a year ago that are interested in JV activity, but I don't think the thresholds have changed materially.
Operator
Our next question is coming from the line of Brian Bennett with Zelman & Associates.
Unknown Analyst
Just want to chill down just on the acquisitions of $300 million to $400 million that you mentioned in the release. In turn, I think last call you had talked about some opportunities with developers in your regions for potential acquisitions, I was wondering how that was tracking, what other more deals kind of like Slater 116 in pipeline?
Michael J. Schall
Brian, this is Mike Schall. There are deals that are similar to that. I'm not sure that those will be the ones that we are able to do, but sure, I mentioned in my prepared remarks that we will have a Southern California bias this year, and we will try to pick the best funny mechanism for the deal, but I would say, if anything, it's a Southern California focus and we do run across transactions that we recently developed by someone and they need to be -- they need liquidity and it becomes a great opportunity for us. And in fact, in San Diego, we announced the acquisition of Domain, which is exactly a brand new property condo-mapped solid market and a price that we thought was attractive to us. So we continue to see that. I'm not sure how much of that will be -- will represent our $400 million plus or minus in acquisitions this year. I hope it's a lot.
Unknown Analyst
And then in terms of the disposition assets that you might be targeting. Just how does it look in terms of your expectations for NOI growth for those assets and the potential pricing that you gain transaction market today versus where your stock is trading, given, I guess, that you sold some stocks around 162 last quarter?
Michael T. Dance
I'm sorry, could you repeat one more time, Brian, sorry about that.
Unknown Analyst
Sure. So I was just wondering how you weighted the acquisition opportunities versus the cost of capital, specifically the assets that you have, potentially lined up for dispositions, how do they look on an NOI growth basis and potential cap reach it could get for those assets versus where your stock is trading at today?
Michael T. Dance
Yes, in terms of where the stock is trading at today, we believe that the co-investment joint venture capital is more attractive. And so we would gravitate there as opposed to issuing more stock and you're right, the stock issuances were at a higher price, which -- that's what we're trying to do. We believe that tracking the different sources of capital, which would include dispositions, JV capital or on balance sheet capital, is sort of fundamental to making money in the business, and those relationships are constantly changing. And so our model for how to acquire is constantly changing depending upon those variables.
Unknown Analyst
Got. And then last question. I'm not sure, if you'll be able to address this, but in the S-4 filing, I guess, the payout estimates that you guys had, had of BRE now on 2015 basis, and you look fairly bullish, and I guess, basically, I'm more curious what that kind of a corporate is for your overall view for Southern California in 2015 and what sort of acceleration you guys are thinking about right now. It's, obviously, early, but it looks like you do have some sort of view on the acceleration in these markets?
Michael J. Schall
Again, this is Mike Schall commenting. Our belief is, if you look at the relative relationships from this point going forward, the Southern California is still attractive. If you look at the cost per unit, their relationship between rents in those marketplaces versus the pretty incredible rents that we've seen in the north, we think that there will be an opportunity over the next couple of years to -- for Southern California to do better. We think that Northern California and Seattle, depending on what happens with the tech world. There will be some deceleration and -- but we also recognized that if tech continues to be as robust as it has been, it still -- you still don't want to discount the possibility that if the boom in Northern California and Seattle will continue for several more years. So we're trying to play the best of both worlds. Our overall belief is from a -- just a pure value basis, Southern California represents a better value. And therefore, we will likely focus more of our acquisition timing effort and ultimately development on Southern California, all things being equal.
Operator
[Operator Instructions] Our next question is coming from the line of Paula Poskon with Robert W. Baird.
Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division
Just one question on a totally separate topic. The national press, obviously, has been covering the severe weather in various parts of the country, including the severe drought that you all are experiencing out there. Is that causing you to manage the properties differently or even, perhaps, dictating or adjusting how you think about where to invest in certain submarkets or greater markets?
Erik J. Alexander
Hi, Paula. This is Erik. I don't know that it changes the way that we manage, other than using the tools that we have developed through resource management, which focuses on consumption. So where we have opportunities, reduced irrigation, for example, we're going to continue to do that. Something like a drought, if there were things put in place that made it more difficult to use or access water, or it costs more, maybe we'll reduce some improvements, capital improvements, consistent with what we've done before. As to investment, I don't think it plays a role in what we are looking at.
Operator
Our next question is coming from the line of David Harris with Imperial Capital.
David Harris - Imperial Capital, LLC, Research Division
Any view or any update on where we stand with the rent control across California?
Michael J. Schall
Hi, David. It's Mike Schall commenting on this. Really, it's been quiet on the rent control front. And we've done, as I've reported in the past, some things to work with some of the local government entities, the California Apartment Association and a variety of other groups, to try to mediate issues that may come up from time to time. So all is quiet on the rent control front at this point.
David Harris - Imperial Capital, LLC, Research Division
Yes, just to put a detail on that. Is that been more of an issue historically in Northern California than Southern California?
Michael J. Schall
No, I would say that it's an issue everywhere in California. Where ever rents are high and housing values are high, and therefore, choice of housing with respect to housing is limited, I think, the political environment is to be -- something that we should be concerned about.
David Harris - Imperial Capital, LLC, Research Division
And then this is a question related to opportunity cost and your time around the BRE transaction. My question is this, is that how many times, if at all, have you said, "Come back and see me in 2 or 3 months time" to your development or redevelopment colleagues?
Michael J. Schall
You mean the one sitting right across to me, Mr Eudy, for example?
David Harris - Imperial Capital, LLC, Research Division
Yes. I mean, can you... I mean, I guess, another way of asking the question is, is how much can you continue to run business as usual whilst you're putting all the time and effort you are into moving forward with the BRE merger?
Michael J. Schall
Actually, I will answer that. This is Mike Schall again. We've actually been able to continue, I think, business as usual on the investment side reasonably well to this period of time. I know that we, even though we are -- our 2014 starts will be limited, we have been active in terms of looking at future development sites. And in fact, during the last couple of months, we have committed to pretty significant development on the Peninsula. So we have not abandoned our existing external activities at all from my perspective. Practically speaking, we're all working a lot harder and a lot... how I can give you that? But I think that we're -- yes, we're pretty excited about the opportunities both -- because this gives us a variety of other portfolio management opportunities, but at the same time, I think with can still remain active in the marketplaces looking at new opportunities. So I don't think it's been a big cost at this point.
Operator
Our next question is coming from the line of Haendel St. Juste with Morgan Stanley.
Haendel Emmanuel St. Juste - Morgan Stanley, Research Division
So, Erik, I guess for you. Can you talk a bit more about your outlook for San Diego? The market where we've seen, I guess, few head picks there in recent years, and any compare/contrast comments that you can drive for San Diego versus Orange County, and maybe LA too?
Erik J. Alexander
Hi, Haendel. I wouldn't be at all shocked if there are head picks again in San Diego. I think I've ranked the -- those areas in Southern California before about expectations for growth in San Diego with either third or fourth in the comparison. I still hike Orange County and Los Angeles the best ventures, seems to be more stable and growing as of late. We've had good results in the last couple of months in San Diego. But we're going to need continued job growth there that is helpful to maintaining occupancies and lowering availability and driving price. So again, we like San Diego. We've seen some good months. But I'm going to wait to see some more months before I get too excited.
Haendel Emmanuel St. Juste - Morgan Stanley, Research Division
Fair enough. One more. As -- A property assets tend to underperform these later in the cycle. So I mean, you've seen -- supported in recent AXIO data. So if you look at your portfolio in the revenue growth outlook for 2014, how are you thinking about the relative performance of your As versus Bs, and where do you think that gap can be most meaningful or most widened? How does that potentially play into your thoughts on that category?
Michael J. Schall
Hi, Haendel. It's Mike Schall. Our belief has not changed from many years. And our belief is that when the economy goes south, people make it more conservative choice, which, and as things pick up, they decide to be less conservative and they run more A-quality-type units. So we think that, that has mostly played itself out, and we think that the Bs represent the value proposition within the apartment space, and ultimately will -- they have a strong position in all markets. So we still believe that well-located B property is -- will represent most of what the company will focus on, and it will from time to time focus on As, principally through development, and we think that that's an attractive mix.
Haendel Emmanuel St. Juste - Morgan Stanley, Research Division
Great. And one last one on that, if I may. Have you talked about... Maybe I missed it. I joined a bit late. But spot cap rates in your core markets for As and Bs today or during -- in recent weeks?
Michael J. Schall
It's Mike again, Haendel. We have not -- we did not discuss that. I don't think cap rates have changed materially over the last year. I think that A quality product in very solid markets is still in the 4 to 4 1/4 cap rate range. And B, well-located B quality property are in the 4 and 3 1/4 plus or minus cap rate range, and then lesser quality, lesser locations are above that.
Operator
The next question is coming from the line of Dave Bragg with Green Street Advisors.
David Bragg - Green Street Advisors, Inc., Research Division
To what extent does this merger process cause you to reevaluate your existing portfolio? I was unclear on the points made earlier on JV conversations if you're considering including the existing assets in those conversations as well?
Michael J. Schall
Hi, Dave. It's Mike Schall. At the Investor Day discussion, we talked about looking at the portfolio really in 3 components. The -- given the sort of the irreplaceable component, others call that gold. We have variety of different ways to refer to this. Then we have the middle category, which is we call it tradable at a price. And we have then the final piece, which is, we need to sell these assets eventually. It doesn't mean we are necessarily going to sell them any time in the near future. And we continue to look at the company the same way, whether or not more bigger portfolio. And so we're going to look at those components. Roughly, say, 40% to 45% we think is irreplaceable and around 40% is tradable. So we will look at the portfolio irrespective of whether it was an Essex asset or a BRE asset or any other asset with the one difference that Prop 13 is the material consideration in all transactions that we look at. So I don't think it changes how we'd look at world at all. We've talked about... And again, at the Investor Day, we talked about the possibility of additional joint ventures as it relates to the well-located properties that are maybe a little bit higher-cap-rate assets. And we'll continue to look at that. But I wouldn't expect any dramatic change. We're not going to go out and joint venture a huge part of the company by any means. And we're just trying to look at what the right portfolio management is that will be applied to both companies.
David Bragg - Green Street Advisors, Inc., Research Division
Okay. Thanks for that. And second question is: Although we have seen some M&A over the last year, I believe that portfolios have been on the same revenue management platforms. Can you talk in general terms, if you'd like, about transitioning a large portfolio on LRO to YieldStar?
Michael J. Schall
I don't think that the technology provider is really the key to that. I think the key is, what I referred to in the first of the 5 points that become priorities going forward, is reconciling the entire process from what it is the desired availability level at different points throughout the year; what are -- what's the relation between traffic and the number of units that you have net to lease; and therefore, what is the right renewal process. So it's really a holistic approach to all the components. And I think that the technology is more the delivery mechanism that it is as strategy. That, again, is 1,000 switches within both and you can customize whatever you want out of them. So I don't think -- I think the technology organizes the data and allows a good conversation between the price-optimizing people and the people that are active in the local marketplace and the people that are meeting with the customer. But it don't think it's in and of itself that's what the key is.
Operator
We will take one additional question from the line of Nick Joseph with Citigroup.
Nicholas Joseph - Citigroup Inc, Research Division
At the Investor Day in November, you guided the annual same-store revenue growth of 4% to 6% for the next 3 years. How should we think about that relative to 2014 guidance of 5% to 6.2% with the top-end range above that initial range?
Michael J. Schall
Nick, it's Mike Schall. I think we both agree that. We have greater confidence in the year that's right before us than we do in the out year. So if you get further away from those numbers, that -- some changes could happen, and we're not sure what to expect. We presented a scenario at the Investor Day that if we end up getting decent but not great GDP growth and decent but not great job growth, that we could sustain somewhere in that 4% to 6% range throughout that period of time. Part of that belief is based on the relatively good recent outcome and information with respect to income growth and rent to median income, which we view as a core metrics. So I think that if we get the same growth that we had in 2013, that we believe continues into 2014, if we continue to see those same relationships, I don't see anything on the supply side that's going to interrupt that. I would expect a similar year in 2015, if that all happens. But remember. I mean, we have less confidence as we get further out from 2014.
Operator
We have reached the end of our question and answer session. I would now like to move floor back over to management for any concluding comments.
Michael J. Schall
Thank you, operator. In closing, we'd like to thank you for joining the call and appreciate your interest in the company. We expect to have a busy and yet rewarding 2014. And we look forward to the closing of the merger in our call with you next quarter. Thanks again. Good day.
Operator
Thank you, ladies and gentlemen. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.
