Feb 1, 2013
Executives
Michael J. Schall – President and Chief Executive Officer John F.
Burkart – Executive Vice President, Asset Management Michael T. Dance – Executive Vice President and Chief Financial Officer John D.
Eudy – Executive Vice President, Development Erik J. Alexander – Senior Vice President, Operations
Analysts
David Toti – Cantor Fitzgerald & Co. Alex Goldfarb – Sandler O'Neill Ross Nussbaum – UBS Securities LLC David Harris – Imperial Capital, LLC Eric Wolfe – Citigroup Jana Galan – Bank of America Merrill Lynch Omotayo Okusanya – Jefferies & Co.
Buck Horne – Raymond James Karin Ford – KeyBanc Capital Markets Richard Anderson – BMO Capital Markets Michael Salinsky – RBC Capital Markets Paula Poskon – Robert W. Baird & Co.
David Bragg – Zelman & Associates Michael Bilerman – Citigroup
Operator
Greetings and welcome to the Essex Property Trust Incorporated Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
Statements made on this conference call regarding expected operating results and 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.
Michael J. Schall
Thank you. I’d like to start by welcoming you to our fourth-quarter earnings conference call.
Mike Dance and Erik Alexander will follow me with comments; John Eudy and John Burkart are available for Q&A. I'll cover the following two topics on the call, fourth quarter results and the outlook for 2013 and cap rates and the investment market.
So on to the first topic. Yesterday, we reported core FFO per share of $1.81, an increase of 20% over the prior year and near the high end of the guidance range that we presented last quarter.
For the year, we exceeded the high end of our initial 2012 guidance range for core FFO by $0.02 per share. We’re very pleased with these results which require the relentless and disciplined execution from the entire Essex team.
I both congratulate and thank the E-team for this accomplishment. Our economic research discipline is designed to creating investment thesis that we utilize to guide our acquisition, development and disposition activities.
We backed half our conclusions when we later received the actual data to evaluate the process and look for insights that can improve future investments. We believe the success in the real estate business requires timing and execution, which are aided by the research effort.
A significant accomplishment over the past couple of years was predicting the surge in tech employment, which precipitated a greater portfolio rating in Northern California and Seattle. We've been rewarded for that insight.
However, there was room for improvement with respect to our forecast for Southern California, which lagged behind our recovery forecast largely because of the implicit assumption that the recovery from the great recession would be similar to prior recoveries, that is the trajectory of the recovery period would resemble the rate of decline. That clearly didn't happen.
The recovery was slow and lumpy with muted growth from a few sectors including tech. As a result, Southern California, which is a more diversified economy without an abundance of tech, has underperformed to our expectation.
However, as I will discuss in a moment, that appears to be changing. What does this mean for 2013 and beyond?
Our overall market outlook is on the page S16 of the supplement and is based on U.S. job growth of 1.6% and 2.3% U.S.
GDP growth, both of which are at the high end of the range provided by our data vendors. This information updates the same document that was part of our Q3 2012 supplement, although it generally assumes greater job growth consistent with that reported over the last six months and more apartment deliveries.
We continue to see tech, life sciences, energy as leading sectors in 2013. Throughout 2012, we saw the breadth of the jobs recovery increasing as more economic sectors contributed to job growth.
Private-sector job growth is now broad-based with jobs being added in trade, business services, leisure and hospitality. The consumer, especially those at higher income levels are rebuilding their balance sheets, are gaining confidence.
We are in a world with a growing disparity between workers with skills at education and those without, and that will affect the types of jobs being created and the potential income. That’s the good news.
Lagging sectors in the recovery have been manufacturing and government, both of which will continue to have less employment in 2013 as compared to the pre-recession period. Many economists believe in the resurgence of manufacturing in the U.S.
following huge losses suffered during the great recession. While that may occur, we believe that the impact for manufacturing will be muted in the Coastal California and Washington markets with perhaps a few exceptions like Boeing near Seattle.
There are other factors that have a bearing on our market forecast such as benefit from demographic factors including an aging population that requires housing without necessarily having a job, the estimated 23 million young adults living with parents they would like to become renters, and the trend of postponing marriage in children. Finally, we are not seeing the strong resurgence for for-sale construction in the Essex investment market although the medium priced home has increased 21% in San Francisco, 25% in San Jose, 13% in Seattle, and 15% in Los Angeles.
Large increases in housing prices will lead to more for-sale housing down the road, but it also makes the transition from a renter to a homeowner more difficult. Apartments and home building can coexist without major problems absent artificial demand created by lax mortgage lending standards and other anomalies.
We conclude that new apartment deliveries will be absorbed with moderating but still strong rental growth. Once again, we expect the best job growth to be at North California and Seattle.
New jobs and supply deliveries may not align perfectly throughout the year leading to some volatility in rents in areas with the greatest apartment supply principally downtown Seattle and North San Jose. Our outlook for Southern California continues to improve.
This expectation is supported by the continued acceleration in job growth. In the second half of 2012, the Los Angeles MSA produced twice the number of jobs as compared to the first half of the year, the best since 2009 and outpaced the U.S.
with 1.8% job growth. Again, the growth was broad-based led by business services, leisure hospitality, education and health services.
Los Angeles also has the least amount of new supply of housing compared to all of the ethics MSAs projected to be only 0.2% of stock in 2013. San Diego also reported a significant improvement in job growth.
The remaining Southern California MSAs have less job growth and more supply and that's lower expectations for rent growth. Erik will comment further on each of these submarkets.
While we remain confident in our outlook, it should be noted that economic and political uncertainty has greatly widened the range of outcomes that are possible for all businesses and the U.S. economy.
A shock from the Middle East or a new chapter in the euro debt crisis could derail the scenario that we just outlined. Now on to my second topic, which is cap rates and investment markets.
Cap rates ranged from 4% to 4.25% for A quality property in A quality locations and in the mid 4% to low 5% range for B quality property in A quality locations. Cap rates increased from there for lesser locations and property quality.
To add value, we have become more targeted with our acquisitions looking for submarkets with rental growth rates that exceed the average growth rate of our portfolio. Our preference is finding value add opportunities.
As always, market selection and timing is critical to accretive investment. We completed approximately 800 million in acquisitions in 2012 and expect solid transaction volumes in 2013.
With cap rates increasing, we hope to find sellers desiring OP trade transaction. As we enter 2013, we expect around 400 million in acquisitions with greater emphasis on well located B property and on Southern California.
Our development pipeline is now mostly under construction. We will likely start two additional development projects in 2013 aggregating from 200 to 300 apartment units.
We have become more selective for new apartment development opportunities and are looking for locations that we expect to improve with rent that have strong growth potential. There are many deals being discussed although many of the merchant builders need equity to satisfy vendor requirements.
Other impediments to new apartment construction include concerns about the economy, future rent growth expectations, construction cost increases, and concessions from reluctant local governments that are needed for projects to achieve financial hurdles. With this in my mind, we believe that new apartment deliveries will peak in 2014 and return to muted levels thereafter.
Development cap rates based on current market rents continue to be in the 5% to 5.5% range or around 6.25% upon stabilization. Before turning the call over to Eric, I want to note that the press release summarizes the sale of $74.4 million in marketable securities represented the strategic investment that I referred to on the Q3 2012 earnings call.
The decision to sell followed communications with the company that enabled us to conclude that we could not expect to achieve our strategic objectives. Thank you for joining the call today.
I will now turn the call over to Erik.
Erik Alexander
Thank you, Mike. Operations performance during the quarter was solid as expected.
We enjoyed strong demand in all of our markets, continued to grow scheduled rent on robust renewal activity and we finished the period in a favorable occupancy position and are poised for another year of strong performance. New lease of renewal activity remained strong during the seasonally slow fourth quarter.
2013 is off to a good start with rents in occupancy improving each week throughout the month of January. Combined rents in January generated 7.8% growth over January 2011.
Renewal rates in January were 5% above expiring rates while expectations for February, March and April, are anticipated nearby 5% as well. We also expect pricing on new leases to continue to rise on strong demand and limited availability.
As of yesterday, the portfolio was 96.9% occupied. So while we expect the overall rent growth to moderate this year, we see acceleration in Southern California and expect strong job growth in all of our markets to drive revenue gains for Essex throughout 2013.
Turnover was within expectations and we ended the year with a portfolio wide ratio of 52%. The reasons given for move out by residents were consistent with last quarter’s results, with affordability accounting for 13% of our move outs and home purchases representing 12% of move outs.
Home purchases were slightly up for the quarter, but flat compared to the fourth quarter of 2011. We expect these rates of move out to increase modestly in 2013, but manageable and well within historical levels.
With several submarkets introducing new products, we do expect to see turnover rates increase to the mid 50% range for 2013. Some of this turnover will be related to expanding our interior renovation program in an effort to meet market demand for fresh product and new features.
Expo remain our only active lease up during the quarter. Our early delivery continue to pay dividend as leasing remained strong throughout the period.
Leasing activity remain ahead of plan and Expo now stands at 55% occupied and 64% lease. We are also pleased to see that many new competitors in this lively submarket are leasing apartments at a brisk pace as well.
As called out in our economic forecast, we anticipate strong job growth to continue in Seattle and be more than sufficient to absorb the increase in new supply this year. We look to stabilize our occupancy at Expo at 95% during the second quarter.
Now I'll share some highlights for each region beginning with Seattle. We are calling for an overall market rent growth of 6.5% in 2013.
However, our expectations are segmented. We expect growth of 2% to 4% in downtown Seattle and 7% to 9% in Bellevue in the Eastside.
This is important distinction given that 70% of the new supply will be delivered in the city of Seattle, while 80% of our portfolio lies outside the Seattle CBD including more than 50% on the Eastside. The jobs picture in the region continues to be strong and shows no signs to learning up.
We increased our outlook for 2013 from 2.3% to 2.8% job growth. Amazon continues to hire new employees at a furious pace, Boeing is ramping up production in an effort to reduce their backlog and Microsoft currently has 3,400 job openings for computer scientists and engineers.
Office construction in the region continues to be about 1% of total inventory, but the pipeline is very large in major projects that we previously commented on including Amazon’s expansion downtown remain on track. Turning to Northern California, we believe that this region will again lead the way in rent growth for Essex in 2013.
The primarily reason is the job growth expectations continue to be strong in the Silicon Valley with 2.7% projected at 2013 and a healthy 2.4% for the broader Bay Area. Office absorption in Silicon Valley also remained strong as 800,000 square feet was absorbed during the quarter with another 850,000 square feet leased in San Francisco, Oakland and on the peninsula.
So all total more than 6 million square feet of office space was absorbed during 2012 or nearly 3% of inventory. Vacancy for the region is below 15% and nearly 4 million square feet of office is under construction or renovation.
Partly due to timing, our multifamily supply projection for San Jose has increased slightly for 2013, but the total new housing supply for this submarket and the region remain below 1% of total stock. As we continue to make timely progress on the development of Epic in North San Jose, competing new projects are reporting strong absorption, stable pricing, and normal concession activity for lease-ups.
We continue to believe that a impressive job growth in the region will support the delivery of all of these projects and thereby there is a sell as the property continues to perform well. In Southern California, we expect Los Angeles to lead the results for the region.
Already in January, we are occupied above 96.5% in new lease rates or 6.5% higher than last January. The jobs picture in Southern California continues to improve in all submarkets as new employment accelerated during the second half of the year; hospitality, professional, business and health services led the way.
So there were also gains in entertainment during the past year with total jobs for this sector nearly returning to 2008 levels. Additionally, unemployment in Orange County fell below 7% for the first time in five years, while personal income growth in Los Angeles and San Diego reached nearly 4% during 2012.
Job growth expectations for the region are ahead of the national average with Los Angeles and Orange County approaching 2% rate of growth for 2013. Office space absorption for Southern California remains modestly positive with nearly 400,000 square feet leased during the fourth quarter.
The West Side and Tri City areas continue to see the most activity. Office vacancy is hovering around 17% for the entire region and there is nearly 2 million square feet of space under construction or under renovation, mostly split between Orange County and San Diego.
The region continues to plan for further growth as both the Los Angels International Airport and the Port of Los Angeles have advanced their expansion plans. Both transportation hubs saw increased traffic during 2012 and are expecting further growth in volume in 2013.
Downtown Los Angeles and the West Side remain the best locations for us in Southern California; but Orange County continues to show improving rent levels. So consistent with our view last quarter, we remain confident about growth and performance for 2013.
Seattle and the Bay Area will still lead the way for Essex, but Southern California will be a more significant contributor to our overall results this year. Thank you for your time.
And I’ll now turn the call over to Mr. Dance.
Michael T. Dance
Thanks, Erik. Today, I will highlight some of the key assumptions for our 2013 forecast.
Our detailed assumptions are on page five of the press release and S14 of the supplement. For 2013, we expect consolidated same-property NOI to grow by 7% at the mid-point.
For 2013, same-property portfolio will include the five properties we acquired in 2010 which require substantial lease up activity, as great properties acquired in 2011 and the Via development in Sunnyvale. Our acquisition strategy focuses on allocating capital to the markets we believe will have the highest rental growth.
The acquisition property is being added to the 13 of same-property portfolio are forecasted to grow net operating income by 8% compared to the average of 7% for the entire same-property portfolio. Operating expenses during the fourth quarter and for the year ended were at the low end of our guidance.
Over the last four years, the same-property operating expenses have not grown by more than 2%. Clearly our portfolio benefits from the 2% limits on property tax increases in California.
However, for the 2013 midpoint, the same-property operating expenses. We are estimating property taxes will increase by $2.2 million or a 5% increase.
This estimate is based on new assessed values in Seattle and in California we’ve assumed the temporary Proposition 8 benefits will lapse and property taxes will revert back to their Proposition 13 valuation.
We expect we will receive between $3 million and $6 million of promote income in the fourth quarter. During 2013, we plan to begin leasing at Epic and the Dublin, California development and complete the lease up of Expo.
The net increase in dilution from the developments in 2013 compared to 2012 will be $1.8 million related to these projects. This dilution is the result of expensing all operating expenses once we begin operation and the cessation of capitalizing interest as apartments become available for rent, and down to the extent our lease-up incentives include free rent, it is our accounting policy to start recognizing rental income after the free rent period is complete.
Expo is expected to contribute to FFO in the second half of 2013 when it yields approximately 7% in Q4. We are forecasting a 5% increase in general and administrative expenses including acquisition costs due to general wage increases and additional hiring as a result of the growth of the company over the past few years.
That ends my comments. Operator, we are now ready for questions.
Operator
Thank you. (Operator Instructions) Our first question comes from David Toti with Cantor Fitzgerald.
Please proceed with your question.
David Toti – Cantor Fitzgerald & Co.
Good morning guys. I have a couple of just – couple of small detailed questions.
Looking at the metrics for Santa Barbara in the quarter, it appears you had pretty good occupancy gain and rent growth was pretty flat. Was that a deliberate effort to build up occupancy and if so, why so aggressive in that particular market?
Erik J. Alexander
This is Erik. Yes, it was.
Basically that building is a student dominated building and so the leases that you see in the fourth quarter are essentially the leftover from the pre-leasing done during the summer. So the sooner we get those, the better we are for the rest of the year.
David Toti – Cantor Fitzgerald
Okay. So that just depends on the specifics to that market, not an overall expectation for the portfolio in general?
Erik J. Alexander
No, no, absolutely.
David Toti – Cantor Fitzgerald
Okay.
Erik J. Alexander
The total specific to University of Santa Barbara.
David Toti – Cantor Fitzgerald
Okay. Going back to NAREIT, you guys were talking about capping or potentially capping rent increases in Northern California.
That doesn’t seem to have happened. Are things continue to improve above expectation (inaudible)?
Erik J. Alexander
Yeah, this is Erik. We actually do cap the rents at the majority of the properties to stabilize the assets including Northern California.
Michael J. Schall
On renewals.
Erik J. Alexander
Yeah, thank you. On the renewals and so but again depending on what the resident chooses for a term, we’ll dictate what the rent increase for the rate is.
David Toti – Cantor Fitzgerald
Okay. And then I suspect you are not going to give us too much detail on the investment that was made.
But can we expect more of those going forward. Is there something we will see this year?
Michael J. Schall
This is Mike. I assuming that you are referring to the strategic investment and yes, I really want to prevent this from being a discussion, a lengthy discussion about strategic investments.
We do not expect many of them through over time. We've not had many of them over our history.
And but I do maybe want to add one additional thought, which is that we promised the investment community that we would be disciplined throughout that process, starting from the accumulation of the position, and essentially the decision and execution of the sale, when these strategic objectives were not considered possible. So from our view that closes the chapter on that discussion, and again I’m not going to make a lot of comments about what happened and the blow-by-blow type of stuff, because I just think it would be inappropriate to do so.
So I'd like to move on. We have a lot of great things happening, internally, we need to focus our effort on the things that we can control and that what's we are doing internally and we'd like the call to sort of follow that same pattern.
David Toti – Cantor Fitzgerald & Co.
Okay great. Just one last quick one.
The land parcel that you sold in Palo Alto; what was the thought process there given the ramp up in development overall?
Michael J. Schall
I didn't hear the last part of your question, I'm sorry?
David Toti – Cantor Fitzgerald & Co.
In the context of rising development agenda, what was the rationale behind them selling that (inaudible) parcel?
Michael J. Schall
It was a great location obviously, but it was very small. It was only 50 units, and we were offered a price that made sense and we executed on it.
David Toti – Cantor Fitzgerald & Co.
Self storage, operator, potentially. Thanks guys, I appreciate the detail.
Michael J. Schall
Thanks David.
Operator
Our next question comes from Alex Goldfarb with Sandler O'Neill. Please proceed with your question.
Alex Goldfarb – Sandler O'Neill
Good morning out there. Mike, I appreciate your comments not want to make the investment a big part of the call, but just one question, because it's something that you have constantly came up with investors.
If you guys were to do this again, how would you weigh just putting out to public, like a public bid? Do you think that would be helpful?
Do you think that would accelerate a process or as you look at what happened, you guys are pleased with how it went, its sort of a Monday morning quarter-back thing, if you will?
Michael J. Schall
Alex, I think that every situation is a little different, and to make any generalized comments about what we might do differently, will depend, I think, on the situation, these things happen once every five years, let's say, and each scenario is a little bit different. They all have periods of activity perceiving them and then the activity itself, and it really depends.
Your strategy is going to depend on that whole sequence of activity. So, I think it would be really difficult to make a generic statement about what might be different in the future.
And again, what I'm hoping we don’t do is turn this discussion into about the strategic investments, because – again from our perspective we need to focus our efforts on the things that are really important to us and we have a lot going on and we have a lot of opportunity in front of us. So rather than talk about something that is closed chapter in the book, we’d really rather focus this forward on the things that we are doing and the results and 2013 all the stuff that's happening out here.
Alex Goldfarb – Sandler O'Neill
Okay, and that segues well into my second question then. You guys have made a number of recent deals including Pacific Electric.
Were any of these deals sourced through your [mezz] portfolio and then as you guys look at making new mezz or financing investments at this stage in the cycle, is your view that those are more loan to own, the hope that you do get the property or at this point in the cycle most of those are more just getting attractive financing where you assume that you will probably just be paid off in the end?
Michael J. Schall
We did not source that through the mezz portfolio and the purpose of the mezz portfolio was legally and practically is to get the rate of return that we expect on the loan or whatever form it might take. Having said that, it does lead to the discussion, I mean you have relationship with the owner and that could lead to a transaction down the road and in a number of cases, it has at least led to a negotiation about whether we wanted to acquire the property.
In all of those cases, part of the sort of strategic aspect of that is to make loans on things that we would like to own that satisfy our broader criteria and therefore we have had some situations where we’ve been engaged in a discussion about buying a property. But up to this point, we’ve not been able to actually make that acquisition.
Alexander Goldfarb – Sandler O'Neill
Okay. And just last thing is, as you guys ramp up the renovation program, are there any changes, are there any differences in tenant taste, this time maybe more price sensitive now versus pre-credit crisis or are the renovations sort of what we were seeing pre-credit crisis as far as like the granite and stainless and all that stuff.
Erik J. Alexander
Yeah, I mean I think people want nice new modern finishes and in a number of these communities, we are also adding the washer and dryer which I think is important, is an enduring feature. So again, modest changes and taste, but there doesn't seem to be any pricing pressure.
People want to pay for the nice units in the nice locations.
Alexander Goldfarb – Sandler O'Neill
Great. Thanks a lot.
Erik J. Alexander
Thanks, Alex.
Operator
Our next question comes from Ross Nussbaum with UBS. Please proceed with your question.
Ross Nussbaum – UBS Securities LLC
Hi guys, good morning out there.
Michael J. Schall
Hey, Ross.
Ross Nussbaum – UBS Securities LLC
I'm going to ask one quick one on the strategy front.
Michael J. Schall
I knew you would. I remember what happened last call, go ahead.
Ross Nussbaum – UBS Securities LLC
Now that the whole thing is over, can you actually tell us what company was in?
Michael J. Schall
No.
Ross Nussbaum – UBS Securities LLC
Is that because you are subject to a configure an NDA or you are just choosing not to?
Michael J. Schall
This is to go a slippery slope, isn't it Ross? Just no comment.
Ross Nussbaum – UBS Securities LLC
Okay, I’ll move on.
Michael J. Schall
Sorry.
Ross Nussbaum – UBS Securities LLC
Prop 13, on Camden’s call an hour ago, Rick decided to throw Prop 13 on the table as a risk if the State of California can’t get its together. What’s your view at this point?
Michael J. Schall
I’m little surprised that Rick had that position. California given Prop 13, just got what was estimated is $6 billion in additional revenue and there have been recent statements that the State of California actually may have a surplus, which I tend to discount personally, but that's what's out there.
Now, also with respect to the political reality, I go back to some of the conversations we've had with California Apartment Association and others who – they have a process that traced upon moderate Democrats that are concerned about business, as far as their endorsement, the candidates that they support. And there are actually several or many moderate Democrats and so the presumption that just because there is exactly two-thirds Democratic control of both parts of the government, it doesn't necessarily mean that the moderate Democrats are going to vote in favor of a Prop 13 overhaul.
So, I guess I wouldn't agree with Rick on that. I think that there'll be there will be less support for that than you can imagine, given the number of moderate Democrats that are out there.
And I also think that the voters sort of given the politicians (inaudible), which is fix the state budget problems and they've given $6 billion to do so. And I think that they expect that to be sufficient for the time being, not that there won't be some other proposals for tax increases and other things, but that go back to Prop 13 has been here for 13 years, and it's been challenged in a number of different ways, all the different ways you could imagine from judicial to legislative and other, and has pretty much survived that period of time.
So I think that there will be more resistant than you might think.
Ross Nussbaum – UBS Securities LLC
Okay. Yeah, to be fair to Erik.
I think his point was that if the surplus goes away, that there is increased risk to Prop 13 gets revisited?
Michael J. Schall
Yeah, I guess I would agree with that. But there is other discussions about vehicle license fees going up.
There is a variety of discussions that are candidly easier to accomplish perhaps than a Prop 13 overhaul.
Ross Nussbaum – UBS Securities LLC
Okay. Next question is San Francisco related and I think your comments on the office construction and the jobs picture is particularly relevant.
I'm curious we are certainly a resurgence in the South of market area and we've certainly seen more tech companies going downtown than really we saw in the last tech cycle, if you will. How does that influence your view of where you want to be invested over the next five to 10 years within San Francisco?
Does it push you to say we want to put more dollars downtown?
Michael J. Schall
It does. We think San Francisco is a place that we need to be.
We, for many years, had a very small presence there given the difficulty of finding property there that satisfied our broader criteria. But we have been more active.
We bought a couple of deals in the SOMA District and actually other parts of San Francisco and our interest continues there. So, over the 20 year horizon the CAGR of rent growth in San Francisco is highest in our portfolio and so the difficult has been trying to find transactions that hit our yield thresholds than our overall return thresholds while recognizing it's a very strong rent growth market.
Ross Nussbaum – UBS Securities LLC
Okay. And last question from me.
Are you able to give us some sense of what the IRR on Fund II is going to end up there both to you as well as your partners and as I recognize those would be different numbers?
John F. Burkart
Yeah. This is John Burkart.
We are in the 10% down on that, this 2004 through 2013 overall.
Ross Nussbaum – UBS Securities LLC
To Essex?
John F. Burkart
Overall for the fund.
Ross Nussbaum – UBS Securities LLC
Overall, so your numbers would be a little higher than with decent amount?
John F. Burkart
Yeah, of course.
Ross Nussbaum – UBS Securities LLC
Okay. So 10%, okay, got it.
Thank you.
Michael J. Schall
Thank you.
Operator
Our next question comes from David Harris with Imperial Capital. Please proceed with your question.
David Harris – Imperial Capital, LLC
Hi. If I look at the year-end balance sheet, it is got $93 million of marketable securities.
$20 million went out after the year-end. So, if I am doing the math right, $73 million left on the balance sheet today, plus or minus.
Could you cut the comment as to what those marketable securities are today if the strategic stake is going?
Michael T. Dance
Hi, David. This is Mike Dance.
David Harris – Imperial Capital, LLC
Hi, Mike.
Michael T. Dance
After Katrina, we started a captive insurance company. That insurance company has over $30 million in marketable securities.
That has worked out very well for us. And then back in 2009/2010, we made some investments in the Freddie Mac type of a mortgage back securities and that are also in those numbers.
So that’s the bulk of it.
David Harris – Imperial Capital
Okay. Is that number likely to stay fairly stable now as we go forward?
Michael T. Dance
There is some accrual of interest on the trade securities, so that will grow just as we accrue interest on it. But and we get about $4 million a year in payments that the operating properties pay for the captive insurance, so that grows $4 million to $5 million a year with premiums and investment returns, so probably growth on the magnitude of $10 million a year.
David Harris – Imperial Capital
Okay. If I look back this time last year, we are a couple of weeks away from you declaring what your dividend is.
Seems to be you've said it for the year on your first quarter. I mean you are one of the few REITs that did not cut in the downturn, so your dividend record is obviously quite outstanding.
But could you give an indication as to what the level of growth we might look for this year or you might be recommending to the Board shall I say?
Michael T. Dance
Sure, David. It’s Mike.
We do our dividend increase as part of the next upcoming Board meeting and so that will be a topic for discussion. We expect that we will make a recommendation in the 8% to 12% range.
I’m sure there will be a discussion, but we are confident that it will lie somewhere within that range.
David Harris – Imperial Capital
How much of that is discretionary and how much of that is being driven by rising net taxable income, Mike?
Michael T. Dance
It's pretty much – I would say, most of its discretionary. We had a return of capital this last year, so most of it will be discretionary based on cash flows.
David Harris – Imperial Capital
Okay.
Michael T. Dance
Apartment REITs get a much shorter life on depreciation, but we have much more of our income sheltered by depreciation expense.
David Harris – Imperial Capital
Okay. I think you’ve got one of the heaviest stock prices in this sector, and I know this is a subject that’s come up before.
But any thought as to splitting the stock to make it a little bit more manageable for [folk]?
Michael T. Dance
Yeah, David, again it’s Mike. We’ve evaluated that several times over the last couple of years and we conclude that with the very high institutional ownership that and typically the Southern stock is on a per share basis, the commissions or whatever are on a per share basis.
And the listing fees and ongoing fees at the New York Stock Exchange make it unlikely that we are going to split the stock.
David Harris – Imperial Capital
This is (inaudible).
Michael T. Dance
Not exactly.
David Harris – Imperial Capital
All right. Thank you guys.
Michael T. Dance
Thank you.
Operator
And your next question comes from Eric Wolfe with Citigroup. Please proceed with your question.
Eric Wolfe – Citigroup
Hey guys.
Michael T. Dance
Hey Eric.
Eric Wolfe – Citigroup
So forgetting about the strategic investment for a little while and I guess maybe thinking about M&A more broadly, most of the multifamily stocks really haven’t performed very well over the last year, so your stock has obviously been one of the bright spots. But wondering if you think the fact that your peers are trading at sizable discounts NAV makes public-to-public M&A more likely or maybe less likely or public-to-private M&A, just wanted to get your thoughts on that?
Erik J. Alexander
Yeah. Broadly speaking, I think the sector has an issue with M&A because there is just very little that you can do to make transactions work.
You have I think a combination of impediments with respect to the tax rules that affect M&A. You have relatively similar pricing, some premium – small premium or discount to NAV, all the stocks trading within a band that really doesn’t allow large premiums and you don’t have – I don’t think you have motivation in some cases with the management teams and boards.
So I think you have a variety of impediments that really prevent M&A transactions from happening. So, I don’t see anything changing that in the near term and thus I would say our appetite for M&A is pretty limited, because it seems like a bit of a feudal effort.
Eric Wolfe – Citigroup
Right. So it doesn’t really I mean, I guess the answer then is, it really doesn’t matter what the stocks are trading, because the same issues are going to be there, no matter what.
Michael J. Schall
Those are pretty much generic issues from our perspective. Yeah.
Eric Wolfe – Citigroup
Okay. And then just changing topics, one of your strategies over the last couple of years has been to buy condos that were trading before at least at big discounts, replacement costs (inaudible) under rental, now that you have seen condo prices increase pretty significantly in a number of your markets, people sort of kind of clamoring to buy in certain areas.
Could you see yourself selling any of these assets or are you better up holding in this multifamily?
Michael J. Schall
Yeah, Eric, it's Mike. No, the intent was to acquire condo properties at apartment prices and when a condo premium, which throughout my career, I would say is close to 40% over a comparable apartment property that we would intent to try to realize that benefit in the case of Skyline, which is probably the largest and most notable example.
It's really a lot better condo than it is an apartment building. And when you have wine lockers and snake-skinned couches, it's just really not an apartment building.
So we would definitely seek to try and realize the gain on that from that investment activity when time is right and when you have, it's amazing how quickly the median price home has moved on the coast. When you have 20 plus or minus percent increases in the median-priced house, you become, it get you closer to that day, I don’t think we are quite there yet, but I think it gets you closer.
Eric Wolfe – Citigroup
Got you. I mean would you could you venture a guess as to how long away you are from that or is that not, sort of not worth [the effort]?
Michael J. Schall
I think we are in a position that is, we have two good outcomes in life. If you have scenarios where you have a choice, both of which are good for you, that’s – it gets no better than that right?
And so I think in this case, it’s exactly that and we have two good outcomes and we’re just going to wait for the right moment. And it could vary from property-to-property or situation-to-situation because they are not all alike in the case of Skyline for example I think there is great potential.
And actually it’s optionality because we have the ability to convert one tower and not necessarily the other tower in a variety of choices along the way. So I think it’s just a great business problem to have and we will look to realize or maximize the proceeds and on those transactions and we are very excited about them.
Eric Wolfe – Citigroup
Great. Thank you.
Operator
Our next question comes from Jana Galan with Bank of America. Please proceed with your question.
Jana Galan – Bank of America Merrill Lynch
Thank you. Good morning.
Michael J. Schall
Hi, Jana.
Jana Galan – Bank of America Merrill Lynch
I was wondering if you could comment on your expectations for your development yields and the Expo project came in nicely under budget or if there is opportunity for some of the other projects to have some construction savings.
Michael J. Schall
On Expo, I think Mike mentioned the stabilize will be in the 7% range in the fourth quarter this year. And in the balance of the pipeline, as you know we built over the last two years before we did spike in the land cost and before construction cost started moving up, we expect the entire thing to stabilize in that 7% range, $930 million that we have on our construction currently.
Jana Galan – Bank of America Merrill Lynch
Okay. And when I look at your same-store revenue guidance midpoint at 5.75% and compare that with your estimated rent growth forecast for the markets overall at 6.1%.
I am just curious are you expecting occupancy declines or are these numbers not really comparable?
Michael J. Schall
Actually this is Mike speaking. I think our loss-to-lease was somewhere in the 4% range when we are going through that final budgeting process.
So, you start with the loss-to-lease back then, and effectively F-16 is a market forecast, so these are market rents. And obviously for a market rent to be converted into a scheduled rental or into cash flow, we need to sign a new lease in effect or renew someone or sign a new lease.
So there is a lagging part of the process there as we convert what happens at the market and to what is going on in the portfolio and so it's really just recognizing that lag.
Jana Galan – Bank of America Merrill Lynch
Thank you.
Operator
Our next question comes from Tayo Okusanya with Jefferies. Please proceed with your question.
Omotayo Okusanya – Jefferies & Co.
Yes, good afternoon. My question is focused really on Southern California, LA and Orange County.
You did make some very positive comments about that market turning around, but I think you also kind of mentioned that taken while for this to kind of happen in LA much longer than anticipated. I am just curious how confident you feel about LA really turning around or whether this is just a temporary thing and later on in the year there may be some downside risk to some of those forecasts?
Erik J. Alexander
Yeah, this is Erik. I think we are more confident this year than last and the year before that, and I think the reasons are because the acceleration of job growth in the second half, as Mike had mentioned is one factor.
The stability of occupancies and the rent levels, both on the renewal and the new lease side, is also a factor and over the last several weeks including part of December, we see improvements maybe a little stronger given the slow time of the year than we normally expect. I mean that’s not massive but again we are in a good spot.
I mean, we are almost 97% and so we have a lot of pricing power. We expect to be able to grow scheduled rent, particularly on the new side over the next couple of months and so I do have confidence and we are looking forward to hold up this year.
Omotayo Okusanya – Jefferies & Co.
Good. So what’s the key risk to LA slowing down again?
Erik J. Alexander
I think key risk is always jobs number one and supply number two, and since you have visibility or longer visibility on the supply given the numbers that we are looking at, we don’t see that as a big risk and so it would take some bigger decline in jobs for – to hurt us there.
Omotayo Okusanya – Jefferies & Co.
Okay. Thank you very much.
Erik J. Alexander
Thank you.
Operator
Our next question comes from Buck Horne with Raymond James. Please proceed with your question.
Buck Horne – Raymond James
Thanks. Good morning gentlemen.
Could you give us an update on your rent to income measures across the different kind of the three big markets there and relative to what’s normal or typical cyclical peak. And then I guess also are you seeing continued increases in terms of – are you seeing rising incomes in your new tenants versus the ones that are moving out, is the average income of the tenant base still increasing?
Erik J. Alexander
Yeah, this is Erik, and the answer to the second part of your question is, yes, we have seen incomes go up. It’s hard to measure the ones that are moving out, because I don’t know what they make up to move in, and they don’t share that with us.
However, the ones coming in, obviously we will have on the application data and those levels are higher in all three of our markets. As to the percentage of income relative to the rents, the relationships with all remain the same in Seattle, the exact number in front of me.
So I can't tell you that it is below 20%. It's like in the 17% to 19% range and in Northern California closer to that 24% range and then Southern California in between those two.
Buck Horne – Raymond James
Okay. And just for context – so how much further do you think that could be – could you go comfortably on some of those ranges in terms of your pricing power?
Erik J. Alexander
My opinion is, it can go a long way, particularly if we are doing our job and people like where they live. I think it's one of the more important decisions folks make about their life and where they spend their time, and when you look at some of the other markets in the United States where that ratio is much greater, that people choose to continue to be in those locations.
And I think we see that the most in San Francisco. So I gave you the feedback on the three major markets, but obviously, if you separate that out by sub-market, you're going to have people spending less percentage of their income in the East Bay compared to some of the people in downtown San Francisco, all things being equal on average.
I mean, again, you get some of these applications that come in and they have pretty phenomenal incomes and they could be spent than less than 10% on their rent. But I think there is – the point of your question, I think there is a lot of room to grow.
Buck Horne – Raymond James
Okay. Great.
Thanks guys.
Operator
Our next question comes from Karin Ford with KeyBanc Capital. Please proceed with your question.
Karin Ford – KeyBanc Capital Markets
Hi. Good morning.
Just remind me, on Prop 13, to make a modification to that, does that require a general election or is that just a legislature that can make changes to it?
Michael J. Schall
You can change it with a two-thirds vote of both parts of legislature, which is why the concern is out there now that the democrats control both legislatures by the two-thirds majority.
Karin Ford – KeyBanc Capital Markets
Got it. Okay, so no general election needed.
Michael J. Schall
No.
Karin Ford – KeyBanc Capital Markets
Okay. Second question is just on your expectations for rent growth in 2013.
It looks like renewal rates are continuing to stay relatively constant between 5% and 6%. New lease increases sort of peaked at like 8.7% last July.
Is your expectation that those new lease rates will peak back up around the same level, go higher and then do you also expect renewal rates to continue to stay in that same range?
Erik J. Alexander
Yeah. So this is Eric.
I expect it to follow the same pattern. We will see increases in those renewals and new leases as we go into the second and the third quarter.
I am pleased with where the renewals are now and as I mentioned earlier with the strong occupancy and limited availability we have helped pricing power in – for the foreseeable future that we are at March for certain. And so when we start sending out those increases for the next groups which would be the back half of April and May, those are likely to go up as the new lease or the offered pricing goes up.
Karin Ford – KeyBanc Capital Markets
Okay. Great.
Final question is just on Seattle. It looked like you lowered your rent growth forecast for the market from 3Q to 4Q, but Erik your comments were relatively bullish today on the call.
Do you see potential downside to the forecast in Seattle?
Michael T. Dance
Actually this is Mike. Let me just make a couple of comments, because we on the third quarter call we had fewer units in 2013, fewer delivery units.
I talked on the call about 10,000 units under construction in Seattle, but we thought we had I think somewhere around 4,000 to 4,500 in 2013. We ended up pulling a bunch of the 2014 deliveries into 2013 and that softened the rent growth expectations for the downtown and that's why you saw that change.
Karin Ford – KeyBanc Capital Markets
Okay. That makes sense.
Last question is just on San Diego, seems like we've gotten a couple of positive momentum trends out of that market from the public company reports recently. Do you feel like San Diego may have turned the corner?
Michael J. Schall
Hard to say, I mean I am not scared about it, but unlike Los Angeles or Orange County where you’ve seen some sustained momentum, it is probably early to call that for us. So I mean we are optimistic about it, but as the forecast shows we are looking for modest rent growth there.
Karin Ford – KeyBanc Capital Markets
Okay. Thank you.
Operator
Our next question comes from Richard Anderson with BMO Capital Markets. Please proceed with your question.
Richard Anderson – BMO Capital Markets
Hey thanks. Good morning out there.
Sorry to keep you on, right. I do have a question Mike about the commentary you had on the earlier question about public to public merger.
It is a quite different tone from you when I asked the question first quarter 2012, same question, how would I thought – what you thought about M&A in the space and you’d say it is sounding interesting now. That was about nine months ago.
So what happened, what changed your tune to today?
Michael J. Schall
I think we both know, Rich.
Richard Anderson – BMO Capital Markets
I was trying not to laugh when I was asking that question.
Michael J. Schall
I think it’s really troubling me to use my own words against me. How dare you?
This has been a little bit of an evolution in terms of thought process, like, I still think that there are some things that make sense from a broader perspective. But actually realizing them and if we can – we can negotiate with ourselves all we want, but the real world comes into play.
So, I think you got me on that one Rich.
Richard Anderson - BMO Capital Markets
Okay. I’m sorry, I know you wouldn’t mind.
Back to some more relevant quick questions here. You talked about spending more time from an acquisition standpoint Southern California versus Northern California; did you provide a cap rate differential between those two markets if you had similar assets in similar location, in the north and the south what the difference would be?
Michael J. Schall
We haven’t, but we run essentially a model that price to look at the relationships between growth rate, our portfolio versus what we are acquiring cap rate or cash flow portfolio average versus what we are acquiring and our view on NAV, and that's what really drives our expectations. In this case, the really controlling factor typically has to do with the growth rate.
So for one of the top growth rate markets, we shared with you what we think they are. So you kind of know we will be pretty much weighted into those markets as it relates to opportunity.
We don't see a big difference in cap rate from Seattle to San Diego, and actually we see pretty significant differences in growth rate over that period of time. I think Seattle maybe has the lowest cap rate, just because there is some very wealthy people up there that like apartments.
So I think that the determining factor is typically and will be no different in 2013 is going to be where can we get the best growth rates projected out from few years.
Richard Anderson – BMO Capital Markets
Noticing that you’re going to do $400 million of acquisitions or whatever the number is and your acquisition cost line item says, call it $1.6 million. It seems like people are getting a lower number on that line item lately, have you been able to manage acquisition costs down from what I think as rule some being 1% of total cost, is that a process underway or am I just imaging things?
Michael J. Schall
Yeah, you know, it’s a little artificial to a certain extent because in that case, there was an – we agreed to pay a brokerage fee on a specific acquisition. Normally brokerage fees are paid by the sellers.
If it’s paid by the seller, it doesn’t show up in there. It shows up in cost, right, somewhere.
So, it’s really geography on the financial statement and yeah, we try to make it so doesn’t go in that line item. But in this case, we were unable to do that.
It won’t typically happen again.
Richard Anderson – BMO Capital Markets
Okay, last question. You said development returns starting at 5.25% and stabilizing at 6.25%.
What is the 100 basis point increase? Is that just trending rents once they stabilize or is that something else?
Michael J. Schall
That's comparing. You got it exactly right.
It is the – the 5.25% is based on rents today. The 6.25% is rents a couple of years from now.
So, it’s just the normal trend in a rent.
Richard Anderson – BMO Capital Markets
Does the 5.25% apply any concession?
Michael J. Schall
No, because the concessions, we think are pretty artificial. I mean the concession is really to get the volume during a lease-up.
Richard Anderson – BMO Capital Markets
Okay.
Michael J. Schall
To be two times the normal turn that you would have on a stabilized apartment building. So, we view that as essentially a cost of development.
Richard Anderson – BMO Capital Markets
Okay, great. That's all I have.
Thanks.
Michael J. Schall
Thank you.
Operator
Our next question comes from Michael Salinsky with RBC Capital Markets. Please proceed with your question.
Michael Salinsky – RBC Capital Markets
Good morning guys. Just going back to Prop 13, what is the Prop 13 exposure and the portfolio estimate today?
Michael T. Dance
It’s probably in the ballpark of $30 million to $32 million.
Michael Salinsky – RBC Capital Markets
$32 million, okay, helpful. Second of all, Mike, you talked about cap rates in the transaction market.
I just haven’t been so active right now. What are you seeing more in the Coastal California markets?
What kind of core or value-add type property and what is the buyer pool look like? I mean, has the competition increased in the last 12 months or you are seeing some people start to back off because of low cap rate?
Michael J. Schall
Mike, it’s a good question. These markets are big enough that you pretty much see a little bit of everything.
In the case of the Fund II sales, our Studio City asset had 50 something confidentiality agreements than other assets had. We had to actually mark it to get 10, so not that they were poorly located or anything else, it just varies by market.
The institutional investments and the REITs tend to be very focused on that. Super high-end location at the corner of Main and Broadway let’s say figuratively, and are willing to pay the price to get that.
And so we see the greatest competition there. I’d say as a general statement, cap rate spreads are pretty wide right now.
In other words, a very aggressive cap rate in the let’s call Main and Broadway type location. And then as you get further out in the periphery, it’s a pretty significant spread and the interesting part is when you look at it relative to the cost of debt for example, there is still positive leverage even that for cap relative to a ten-year loan or seven-year loan.
As you get out into the peripheral areas, you can have an enormous amount of cash and you can have a cash-on-cash return assuming interest only debt of somewhere in the 6.5 to 7.5 range. So, it’s a very unique period of time I think, but I’d say a lot of money is driven by the institutions.
The institutions are very focused on location and typically pretty willing to pay for it. So, our acquisition approach and development approach is to try to find the locations that you get appropriate balance between cap rate and growth.
We want most of the growth, but we want a little bit higher cap rate, and so we’re probably not going to be competitive at Main and Broadway; we’re going to be competitive somewhere else. We’ve used the example of Fremont in Northern California, for example, because you have so much rent growth in the North San Jose area, Fremont is five miles away, haven’t really experienced quite the same rent growth, and therefore, we target that as an acquisition opportunity.
That’s how we think of the world. That’s how we try to implement our acquisition strategy.
Michael Salinsky – RBC Capital Markets
That's very helpful. Final question, a little bit bigger picture.
When you think about JVs at this point, many of your peers have been reducing their JV exposure. You are in the process of unwinding one and you also I believe started at Wesco III there as well.
How do you think about JV allocation at this point? Is it more a function of where returns are versus where your cost of capital is today, or is it just at this point of the cycle, or just how do you look at that today?
Michael J. Schall
Yeah, exactly what you mentioned. We like having diversity of capital.
It’s not like if you decide you want to have JVs after not having any JVs, you can just go out and quickly raise some money, and therefore having the relationship are important. We’ve been able to balance them with some other activities that are beneficial to the Company.
So, for example, as we’re trying to build our unencumbered pool on balance sheet, if we need to assume a loan we can do so in some of the JV formats which keeps our secured debt on balance sheet at a relatively low level. But the broader point is to have different types of capital so that as conditions in the economy change and we see opportunities we can react to it with different types of capital and which hopefully will help us create accretive investments.
Michael Salinsky – RBC Capital Markets
Fair enough. Thanks very much guys.
Operator
Over last question comes from Paula Poskon in with Robert W. Baird.
Please proceed with your question.
Paula Poskon – Robert W. Baird & Co.
Thanks very much. Two strategy questions also.
One, if outmigration accelerates, how inclined would you be to follow those folks to new markets outside California?
Michael J. Schall
Paula probably not real excited about following them principally because we are looking for a couple of things. The broader strategy of the Company and I think the success over time has been going to areas that have relatively expensive single-family housing, not a lot of housing production.
Over long periods of time, we like the constraints represented by mountains and waterways and difficult political structures and that type of thing. I think that that is what really creates the opportunity in California.
We like really expensive single-family homes so that the transition from a renter to home owner is a difficult one. And we ultimately like job bases.
I talked in my comments about the highly educated and highly skilled are doing very well in this economy and those that don't have those skills and education are not doing well. I think that the tendency is going to be to be the areas with the highly skilled jobs are going to continue to draw highly skilled people and high income people into those locations.
I don't think you are going to see for example a math executive, engineers leaving Silicon Valley because this is kind of the hub in collaboration among engineers and talent pools are so important in this world. So, I think that there are certain pieces of what we have here that are not easily replicated elsewhere, and so we're happy in these types of markets.
Now, if you ask me, are there some other markets that have the same price, same conditions or the same attributes as the coastal markets in California and Seattle, so I would yeah, there are some and they are typically on the East Coast.
Paula Poskon – Robert W. Baird & Co.
Thanks. And then, I guess that [ketch up] a segue to my second question, which is, given your comment in your prepared remarks about the growing income disparity, would you be more inclined to broaden or focused your product offering across price points?
Michael J. Schall
We are pretty open to broadening price points. I mean, we've become more active in As.
Again, if we get the location right, we want to earn from E or even B minus, so we can make into a B, to an A product. We have been pretty active developers to try, which will almost by definition, all be A in very high quality location.
And so, we have broadened a little bit on, again, the B versus the A side, again trying to get location right. The Cs are just tough because the issue there is you are dealing with, a variety of tenant issues and occupancy issues that we really want to avoid.
Paula Poskon – Robert W. Baird & Co.
Thanks very much Mike.
Michael J. Schall
Thanks.
Operator
One last question from David Bragg with Zelman Associates. Please proceed with your question.
David Bragg – Zelman & Associates
Hi, good morning. Just a follow-up on an earlier topic.
I think over 2011 and 2012, during the peak leasing season, your new move-in gains were about 150 basis points 200 basis points above that of renewals. But as this cycle matures should this continue or should that spread narrow as you start to work through new supply?
Erik J. Alexander
This is Erik. It can continue, I would expect again depending on the rate of growth that, you see some narrowing, as we capture that loss-to-lease, but clearly in areas where we expect higher growth like in the east side of Seattle and San Jose, and so forth.
I still think that you could have a decent spread there.
David Bragg – Zelman & Associates
Erik, one other one, just on your earlier comments on Seattle with the supply pressure downtown, and relative to East side, how competitive would that supply be with the East side over a longer time horizon? I think many of us have been to the market and the distance itself is not that significant.
Erik J. Alexander
Yes, maybe it’s a little hard to say, but I can tell you that we are tracking it all last year, and we track it from where the people are coming from at Expo, and we have nobody that we have put in a category of moving from the east side so far, yet not one person, they're all coming from out of the area to take their job at the Gates Foundation or Amazon or Nordstrom or any number of those places. Could that change I suppose.
Stuff became super attractive. But again I think there is a lifestyle issue that people want in downtown and there is a lifestyle situation that people want on the east side and they are different.
You are right. I mean, it’s short distance.
It’s not necessarily a short commute in the morning given the congestion. So, I think that plays a factor as well.
David Bragg – Zelman & Associates
That's interesting. Thank you.
Michael J. Schall
Thanks, Dave.
Operator
One last follow-up comes from Eric Wolfe with Citigroup. Please proceed with your question.
Michael Bilerman – Citigroup
Yeah, it's Bilerman speaking. So, I guess, you didn't get to the 5% threshold, did you?
Michael J. Schall
No, Michael, we didn't use derivatives either.
Michael Bilerman – Citigroup
All right. Just going back to just thinking about privatizations rather than public M&A.
If you go back to 2006 and even 2005, 2006, or 2007 timeframe, when you have the stocks trading at bigger discounts to NAV, so I can sort of appreciate your comment that, look, if two apartments are actually about trading at the same discount to NAV or one is a couple of percent higher than the other, it’s hard to negotiate that from a public-to-public perspective. But I would imagine that when you look across the spring at the apartment stocks given how they have performed combined with the increases in same store, isn’t that a recipe for privatizations in this environment?
Michael J. Schall
I think it could be and I think that might make sense. But I also think we had recent transaction here, the Archstone transaction.
I imagine that that was considered at some source. So, I think as these companies become larger and larger, I think you have a capacity issue to extent in terms of the transactions just require an enormous amount of money.
So, I think that it's probably difficult in that case, and I think that some of the other transactions would be difficult just because of their share size.
Michael Bilerman – Citigroup
I think the majority of the companies are in that $5 billion to $8 billion zip code and even some below versus…
Erik J. Alexander
Yes.
Michael Bilerman – Citigroup
A $17 billion company just it would seem as though the private market is still extraordinarily active, the debt financing market has only gotten better. Rates are extraordinarily low, and fundamentals continue to get better.
You have the publicly traded apartment sector trading almost to 6% implied cap rate. Something doesn't feel right about that.
Erik J. Alexander
Yeah no, I’ve totally agree with you. I think you are under something there for that more right size companies.
Yes.
Michael Bilerman – Citigroup
Okay. Thank you.
Michael J. Schall
Thanks.
Operator
At this time I will like to turn the call over to management for closing comments.
Michael J. Schall
Thank you, operator. So in closing we want to thank you for joining the call.
We appreciate your interest in the company. And you will really excited about 2013 and finally we look forward to speaking with you next quarter.
Thank you.
Operator
This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.