May 11, 2014
Executives
Mike J. Schall - President and CEO Erik J.
Alexander - SVP of Operations Mike T. Dance - EVP and CFO John F.
Burkart - EVP of Asset Management John D. Eudy - EVP of Development
Analysts
Nick Joseph - Citigroup Andrew Schaffer - Sandler O'Neill Dave Bragg - Green Street Advisors David Toti - Cantor Fitzgerald David Harris - Imperial Capital Michael Salinsky - RBC Capital Markets Tayo Okusanya - Jefferies & Company Haendel St. Juste - Morgan Stanley Karin Ford - KeyBanc Capital Markets
Operator
Greetings and welcome to the Essex Property Trust, Incorporated First Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.
Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs, as well as information available to the Company at this time.
A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC.
It is now my pleasure for introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust.
Thank you, Mr. Schall, you may begin.
Mike J. Schall
Thank you, Rob. I would like to start by welcoming you to our first quarter earnings call.
Mike Dance and Erik Alexander will follow me with comments. John Eudy and John Burkart are also in attendance.
On the call, I'd like to cover the following three topics, our first quarter results, an update on the merger with BRE, and our future priorities. On to the first topic, yesterday we were pleased to report continued strong operating results, consistent with the robust housing environment on the West Coast.
We reported 7.2% revenue growth, which matched our Q3 2012 for the highest same-property revenue growth achieved since the great recession, and represents a reacceleration of rental growth that began a year ago. The recovery from our seasonally weakest fourth quarter occurred faster than normal this year, allowing us to exceed the midpoint of the guidance range in each region and the high end of the guidance range in Northern California and Seattle.
The greatest outperformance was in Northern California, where our combination of factors has led to a substantial shortage of housing. Northern California has among the best job growth in America, recently reported at about 3.3% for the three primary metro areas surrounding the San Francisco Bay, with only 0.7% of existing housing stock expected to be delivered in 2014.
Further evidence of the housing shortage is reflected in the sales prices of medium-priced homes in the Bay area, which have increased by 13% to 27% year-over-year. Accordingly, although apartment rents are up about 9% year-over-year, the cost of housing alternatives has increased even more to the benefit of apartments.
A key management objective is converting same-property NOI into recurring cash flow or core FFO growth. Timing of financing transactions, repayments of preferred equity investments and net dispositions in Q1 created drag on core FFO per share reported at 8% growth for the quarter.
As you know, we formed three joint ventures in connection with the BRE merger detailed on page S14 of the supplement. These joint ventures have a Southern California focus, with 2,900 of the 4,175 apartments in these ventures located in Southern California.
As a result, our ownership weighted portfolio allocations changed less than previously expected from the merger, with Northern California declining from 37% for Essex standalone to 34% post-merger and Southern California increasing from 45% Essex standalone to 47% post merger. Recent regional job growth reports are more robust than currently reflected in our market forecasts included on page S15 of the supplement, which did not change from last quarter.
Notably, our thesis for slow and steady improvement in Southern California appears to be on track. Now to my second topic, a merger update.
We are very pleased that the merger with BRE was consummated materially as planned. Throughout the process, many people at both companies, now one E team contributed a relentless, focused and dedicated effort to make the merger a reality.
To those E team members listening today, please accept my warmest appreciation and thanks for a job well done. As a result of the merger, 523 BRE employees have joined the Essex team, including three executives, with two of the three accepting temporary assignments, 82 joining a corporate department and 438 representing property staff and their management.
Our baseline financial assumptions noted previously remain mostly intact and Mike Dance will update guidance in a moment. Most of the expense savings were accomplished by reductions in staff at the closing.
Going forward, we will continue to incur merger integration costs, as systems and processes are consolidated over the next 12 to 15 months. Through this process, additional synergies will be realized attributable to consultants employees hired with temporary contracts, excess office space, and duplicate license fees on a variety of systems and processes.
In just a few years, Essex has grown from $6 billion to $16 billion in enterprise value. As a result, we view the integration process as an opportunity to completely reexamine how we provide our basic service while carefully selecting the best practices from Essex, BRE and others.
And finally, my third topic, which is our future priorities. You all probably know that we run a relatively flat organization, and clearly this is an incredibly busy time for the Essex team, requiring us to be careful -- requiring us to carefully prioritize our activities, which I would like to quickly summarize as follows.
In the short to midterm, three key priorities. First, reduce the growth differential between Essex and BRE portfolios while taking advantage of current conditions as we navigate our peak leasing season.
Already, we made significant progress in reconciling pricing practices and have implemented changes to reduce turnover, increasing pricing power and occupancy. Erik will comment further on the progress made in pricing.
A reconciliation of the 1.6% revenue growth differential between Essex and BRE in Q1 has the following components. 25% of the 1.6% growth rate differential is due to sub-market portfolio allocations.
25% is due to redevelopment contribution and other management-related factors. 19% is due to declining quarter-over-quarter occupancy within the BRE portfolio, and 31% is due to increases in other income.
Our second priority, short midterm, is to vigorously pursue the integration of systems and processes for BRE and Essex. And our third priority is to ramp-up investment activity for the combined companies.
In the first quarter, as you know, we were a net seller of property. The substantial improvement in cost of capital since year end now allows us to add significant value through acquisitions and other external growth to continue for the foreseeable future.
And then, the priorities in the mid to long term are, again there are three of them. Number one, look for opportunities to improve the financial structure of the combined companies from the perspective of risk, reward, cost of capital, NAV and core FFO accretion.
This could include co-investments on future development opportunities, for example. Number two; rethink how we provide our basic service given significant market concentrations within our portfolio.
This could include a different management structure for our greatest concentrations of property, regional leasing centers with evening hours, and investments in our technology platform to improve marketing, customer relationship management, resident experience and efficiency. And finally, third, continue to improve the E team by focusing on career paths that develop skills and create career opportunities and leaders, improve our hiring practices, provide greater regional coordination of staff and related topics.
That concludes my comments. Thank you for joining our call today.
I'd like to turn the call over to Erik Alexander. Thank you.
Erik J. Alexander
Thank you. As Mike has already highlighted, we are off to a very good start in 2014 and the next chapter of Essex's story looks promising.
Both Essex and BRE turned in great quarters, and I wanted to take a moment to thank the property teams for maintaining focus during the merger. With the whirlwind of merger activity last quarter, it would be easy to lose sight of the customer and property needs.
Not only did they maintain their focus, they exceeded expectations and really helped Essex set up for a strong year. We have a lot of integration work ahead of us, but I am very encouraged how the regional leadership has brought the property teams together and concentrated on the fundamentals of property management.
Thank you, E team. Senior Management and the shareholders sincerely appreciate your efforts.
So, five weeks into the integration, property operations is thriving. Culturally, the BRE and Essex teams have really come together to support the common Essex goals.
I believe our early success can be attributed to purposeful outreach to BRE associates in January and February, and the fact that 90% of the regional management team from BRE has joined Essex. This group has been instrumental in leading their teams, encouraging important communications and delivering strong results.
One of the early objectives was to share our core philosophy of balancing the three-legged stool by fairly serving the representative legs, residents, employees and the shareholders. As some of you know, this philosophy includes very open atmosphere, where truth trumps title.
We cannot improve as an organization, if we do not know where the challenges and opportunities are hidden. There are some inconveniences with running parallel systems at this point, but we are making progress on our program evaluations.
The positive aspect of this review is that we have the good fortune of choosing between excellent options. There are really no bad choices and we firmly believe that our commitment to review these alternatives will make Essex a better operating Company.
Make no mistake we are committed to unifying the organization under a single platform. And to the extent we can accelerate decisions that lead us to that direction.
We will take action to do so. One of the most vital components is revenue management.
While we continue to operate two revenue management programs, we’ve taken important steps towards integrating Essex's pricing philosophy and our proven strategy of maintaining higher occupancy. Through the combined efforts of the revenue management team and the property operations group, we have increased occupancy among the BRE portfolio by 43 basis points in April alone.
We will remain focused on refining our pricing practices and stay true to our collaborative process. We expect to make further gains in occupancy with the BRE portfolio throughout the year, with the goal of having the entire portfolio operating at the same high level by the first quarter of next year.
Now, as for the Essex portfolio during the first quarter, leasing activity met or exceeded expectations in all of our markets, highlighted by better than expected occupancy, strong market rent growth, consistent renewal activity and scheduled rent growth ahead of budget. Renewal rates grew at 5.7% during -- over expiring rates during the period, while April renewals improved to 6%.
May and June renewals are expected to achieve rent growth around 6% as well. Market rents continue to grow throughout the quarter and have accelerated in recent weeks to a level 6.2% higher than where we began the year.
Given our low availability and improving demand, we should see strong, sustainable rent growth for new lease activity in all markets. However, the two areas in our portfolio that we will watch closely are CBD Seattle and the A product in Orange County, as both have shown some pricing resistance due to competitive options.
Turnover has remained within expectations during the quarter, and with rising home prices across our West Coast markets, move outs due to home purchases during the period were less than 10%, the lowest level in three years. Heading into the peak leasing season, the portfolio's positioned right where we would like it to be, ending April at 96.2% occupancy with a net availability of less than 6%.
Leasing activity at our new developments remained strong during the quarter and Dublin station stabilizing ahead of schedule and currently is 99% occupied. Epic leased apartment homes at a rate of 45 per month during the first four months of this year and we are now more likely to stabilize this project ahead of plan.
Avery, Huxley opened in Southern California, while Mosso in San Francisco began pre leasing last month. All three projects, along with the BRE legacy project, Solstice and Wilshire La Brea have performed well and are leasing ahead of expectations.
Now, I'll share some highlights for each region beginning with Seattle. Employment growth in the region remains strong and well above the national average, with a year-over-year increase of 2.8% in March and unemployment hovering around 5%.
Amazon continues to consume office space in downtown Seattle, but the big news for the quarter was the announcement of a new 1 million-square foot distribution facility in Kent, which should bode well for our south end assets. Boeing also committed to building a new 1.1 million-square foot wing facility in Everett.
This will translate to nearly 3000 direct jobs at peak employment in the future. Rent growth remains strong in the region, especially areas outside of the CBD, where much of the new supply continues to be delivered.
However, with economic rents up 5% over the prior year, downtown isn't exactly struggling, but it is highly competitive and therefore, rents have been slower to recover from the seasonal slowdown in the fourth quarter. As expected, we anticipate that downtown Seattle will lag other sub markets in the region in terms of rent growth, but should enjoy some benefit from accumulated loss to lease, as scheduled rents were up 6.6% year-to-date.
Improved leasing velocity in March and April, along with net availability under 6% at the end of last month, demonstrates healthy demand in the sub market. But we will have to remain vigilant, given additional deliveries throughout the year.
Turning to Northern California, job growth continues to improve in the Bay area, with year-over-year increase of 3.3% in March and 4.3% in San Jose. We have yet to see any signs of slowdown, as Salesforce, LinkedIn, Dropbox and Twitter all announced significant expansions or lease transactions totaling more than 1.7 million square feet in San Francisco, including hiring plans for 2014.
San Jose is equally strong with 59% of Silicon Valley companies surveyed planning to hire people for new local jobs during 2014. Office absorption in Silicon Valley was nearly 900,000 square feet during the quarter.
Additionally Western Digital subsidiary HGST announced plans for a new 335,000-square foot expansion in San Jose, while Google plans to lease the Moffett Airfield to develop robotic, aviation and aerospace projects. Furthermore, much talked about mystery Tech Company has committed to occupy a recently approved 2 million-square foot office project near the San Jose airport.
This would be the single largest office project in San Jose and is scheduled to begin construction later this year. The East Bay also continues to build for future job growth with software firm Workday announcing plans to build a new 430,000-square foot facility in Pleasanton.
Economic rents levels continue to outperform in all sub markets and consistent with expectations, San Francisco and Oakland are leading the way with year-over-year growth north of 10%. Finally, turning to Southern California.
Employment continues to grow at a more moderate pace compared to Seattle and the Bay area, but is improving, with Orange County, Los Angeles and San Diego all posting year-over-year job growth rates above 2%. Unemployment continues to decline in Los Angeles and now stands at 8.7%.
This is down from 10.1% last year and is improved 50 basis points since December. Not only is this overall employment picture continuing to improve in Los Angeles, the professional business service sector posted a 4.7% gain in March, so the quality of jobs is improving as well.
The year-over-year economic rent growth for Essex Southern California portfolio was 6.2%. The Los Angeles sub market posted encouraging results with a 6% year-over-year growth in economic rent and a 4.7% gain since the beginning of the year.
Orange County and San Diego are performing as expected, but Ventura is ahead of projections through the first four months of the year and may represent a favorable surprise for Essex, if job growth projections match our forecasts. So overall, economic and rental market conditions remain strong across the portfolio, and solid performance through the first four months of the year gives us confidence heading into the peak leasing season.
I am encouraged by the early integration efforts and look forward to completing many of the fundamental system changes this year that will allow us to take advantage of the operational efficiencies that we believe are available with our more concentrated footprint. Thank you for your time.
I will now turn the call over to Mike Dance.
Mike T. Dance
Thanks, Erik. Today, I will provide comments on our first quarter results, followed by highlights on the recent balance sheet activity and close with new guidance for the full year, which includes BRE.
First, I’ll start with the same-property expense growth in the quarter, which grew at 4.6%. While the growth was above the high end of our guidance range, it was consistent with our plan for the year.
The cause of the above average growth was due to higher taxes in Seattle, the timing of scheduled repairs in maintenance and higher utility rates relative to last year. For the second quarter, we expect our same-property expense growth to be around 5%.
And in the second half of the year we expect the growth rate to moderate to approximately 2%. For the full year, we expect same-property expense growth to be within the 3.5% at the midpoint.
Merger expenses incurred in the first quarter total approximately $16 million and was comprised of local transfer taxes on the BRE assets transferred on March 31, professional fees incurred, and the cost of the commitment for the bridge loan, which was canceled on March 31. In total, we expect to incur approximately $70 million of merger expenses in 2014, which will reduce reported FFO, but be excluded from core FFO.
Next, I will comment on the capital markets transactions and provide a post merger update to the financial metrics of our combined balance sheet. Through the end of April, we issued $191 million in equity to fund our acquisitions and development pipeline.
In April, we went to the bond market and issued 10 year unsecured notes at 3 7/8% or 128 basis points over the 10 year treasury rate. Given the outsized demand for our notes, we upsized the offering relative to our original expectations.
These capital market events, while very attractive long-term costs of capital, will have a short-term negative impact to our 2014 earnings of approximately $0.05 per share due to the timing and the magnitude relative to our original plan. We have now waived the long-term debt, the equity and the joint venture capital originally planned as part of the BRE transaction, enabling us to avoid the extra costs of funding the bridge loan announced with the merger.
We believe these post merger capital markets activity clearly demonstrates the cost of capital benefits we envisioned as part of the BRE transactions. The Essex post merger pro forma April balance sheet continues to strengthen.
While the debt to total market capitalization of 31% is relatively unchanged from the end of the first quarter, the unencumbered net operating income to total net operating income has increased to 63% and our secured debt to total assets has decreased to 18%. While the net debt to EBITDA ratio has increased by approximately 1 turn, the forecasted growth and net operating income from the stabilized portfolio and the delivery of the development pipeline will improve this ratio to approximately 7 times by March 2015.
I will now highlight the changes to our new 2014 guidance. On page 6 of the press release, you will find the key assumptions regarding BRE, and on F13 of the supplement, we have provided the line item details for the original Essex guidance with the changes from the mergers' key assumptions.
We have increased the midpoint of our core FFO per diluted share estimate by $0.05. The $0.05 per share updates the Essex guidance for the capital markets activity I noted earlier, and includes the expected contributions from the BRE portfolio and the combined synergies from eliminating redundant public company costs and corporate positions.
To date, the achieved savings exceed our initial plan for 2014. However, the greater savings are offset by the negative impact from the Mission Bay 360 fire.
We now expect to achieve the high end of our prior range for accretion from the merger on a full year run rate basis, as we are more confident than we -- that we will be able to exceed the synergies we originally underwrote. In closing, I wanted to provide a quick explanation as to how the fire at Mission Bay 360 impacts our 2014 FFO guidance.
Properties acquired in the business combination are assigned fair values as of the merger close date. Our original forecast assigned a fair value to the Mission Bay 360 development based on the assumption that leasing activities would begin in the second half of the year.
After the loss from the fire, the value of the damaged property is significantly below the historical cost basis and results in less capitalized interest beginning on April 1 and continuing through reconstruction. If the fire had not occurred, our 2014 guidance range would have increased by another $0.03 to $0.05.
That ends my comments and I will turn the call back to the operator for questions.
Operator
(Operator Instructions) Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.
Nick Joseph - Citigroup
Great. Thanks.
I was wondering if you could talk about the decision of which properties actually contribute to the JVs.
Mike J. Schall
Sure, Nick, this is Mike Schall. We do a pretty good ranking of each property.
We looked at every property, underwrote each one of them and we tried to find properties that were consistent. In other words, we wanted to own over the long haul, but we tended toward the higher cap rate type of properties and tried to match that with the right investor.
We think that that leaves us with a very, very strong portfolio, well diversified within the different marketplaces. And I guess it's a little bit like painting a picture, in that you move through it piece by piece, trying to match the investor with the assets and coming up with something that you think is fundamentally attractive and appropriate, given our business plan going forward.
That's how we approached it. So there's not a simple answer to that.
It was an evolutionary process, and but I think the outcome worked out very well for us.
Nick Joseph - Citigroup
Thanks. And you mentioned one of your priorities going forward is the acquisition opportunities.
Can you talk about the acquisition pipeline today?
Mike J. Schall
Sure. We just closed our first transaction post merger, Piedmont in Bellevue in the Pacific Northwest.
And we are accumulating transactions. Actually, the deal flow going into the summer appears to be picking up and as you know, principally because John Eudy who's here with me today and Craig Zimmerman have so much credibility in the marketplace, we tend to get a look at virtually everything.
So I'm hopeful. As it stands today, we're looking at several transactions.
We've committed to none of them. And -- but again, the deal -- within a deal flow volume that is picking up.
I would say going back to our guidance would be our first step this year, which was $300 million to $400 million. We expect to achieve that level and whether we can go above that remains to be seen.
We're working on it.
Nick Joseph - Citigroup
Great, thanks.
Mike J. Schall
Thank you
Operator
Our next question is from the line of Andrew Schaffer with Sandler O'Neill. Please proceed with your question.
Andrew Schaffer - Sandler O'Neill
Thanks. Continuing on the topic of investment activity, given the continued strength in Northern California, should we expect to see more acquisition dollars spent in this region rather than Southern California?
Mike J. Schall
That's a good question. And we like both right now.
Northern California still has a lot of room to run, when Erik read through his script, every time I hear it, I marvel at how much positive news there is out there. And the economy once it starts clicking, it's a momentum thing and momentum does not generally change real quickly unless there's an asset bubble or something else materially changes to changes scenario.
So that's what we like about Northern California. Having said that, Northern California, if you look at price per unit, look at rent per square foot, appears to be becoming more pricey, although the rent to median income statistics are still well within the desirable range and that causes us to look to Southern California.
So I'm going to say about the same thing that I said last quarter, which is, we like -- we like all of the markets. We would have a slight preference for Southern California, given lower valuation metrics.
Andrew Schaffer - Sandler O'Neill
All right. Thanks.
That's it for me.
Mike J. Schall
Thank you.
Operator
Thank you. Our next question comes from the line of Dave Bragg, Green Street Advisors.
Please go ahead with your question. Mr.
Bragg, please go ahead with your question.
Dave Bragg - Green Street Advisors
I am here. Can you hear me?
Mike J. Schall
Yeah. We catch you Dave.
Dave Bragg - Green Street Advisors
Okay. Sorry about that.
Good morning. And thanks for taking my questions.
The first relates to the operational synergies in the BRE portfolio. You -- it's -- I just want to confirm that in terms of narrowing the revenue growth gap between the Essex and BRE portfolios, it sounds as though you think you can get 75% of the way there and you can't really do anything about the 25% that you attributed to sub market positioning, is that correct?
Mike J. Schall
Dave, its Mike Schall and Erik may want to chime in here as well. Yes, I think that's what is achievable.
I think that the Essex versus BRE scenario included they have about 10% more turnover of units and the way they price their renewals is fundamentally different from Essex. And what they view as the sweet spot with respect to occupancy and availability are different from Essex.
And so what Erik has done is he has consolidated the revenue management function. Actually, the person that's leading that is a BRE executive under John (indiscernible) leadership, or under his guidance.
And so we're running both LRO and yield start. But we view both of those as being essentially tools and really the strategy is what's important.
And so we've changed the strategy. It's consistent going forward.
And the only thing that you would think that we could not pick up would be, I agree, the sub market allocation, which will change over time obviously as the slow, steady recovery in Southern California continues to get better and we go through periods of time. So even -- I'd say even that the 1.6%, 25% of the 1.6% was attributable to sub market allocation.
Obviously, that'll change over time as the relationships between the sub market rent growth vary from market-to-market.
Dave Bragg - Green Street Advisors
That's helpful, thank you. And the second question relates to the full year run rate range of $24 million to $27 million that you provided for operating and G&A synergies.
Of course BRE's G&A last year was $23 million. So can you please break that out between G&A and other operating synergies and talk a little bit about what those operating synergies are?
Mike T. Dance
Well, what you see on the $25 million, that is net of cost that they capitalize or allocated to property management. So it is not a simple exercise and rather than getting into the details, we can probably do that offline.
Dave Bragg - Green Street Advisors
Okay. All right.
That's fine. Thanks.
Mike T. Dance
Thanks, Dave.
Operator
Our next question comes from the line of David Toti with Cantor Fitzgerald. Please go ahead with your question.
David Toti - Cantor Fitzgerald
Hi, Good morning. You mentioned ultra low move out rates due to home purchasing.
But could you comment on turnover and move outs around price and potential renter fatigue and is that some of the increase in activity in Seattle?
Erik J. Alexander
This is Erik. So the reason for move out due to call it costs, or whether some people describe it as they got a rent increase or it's too expensive or they've -- it's passed them up, has remained basically the same over the last four quarters.
We're not seeing that in Seattle at this point. Seattle does have the highest rate of move out due to home purchases in that average that's below 10%.
That region's around 13%, but still well under where it has been in the past. So we still feel very comfortable with the relationship between the applicants that are coming in and what they make and where the rent levels are.
David Toti - Cantor Fitzgerald
Okay, that's helpful. My second question has to do with the BRE integration.
And I don't know if you've mentioned this, but is there -- have you defined the scope of potential redevelopment opportunities within the BRE portfolio, or is it too early? And if not too early, is there any kind of expectation for scale and time line and return?
John F. Burkart
Yes, this is John Burkart. We haven't defined that and released that, but the size of the opportunities we think are pretty significant.
There is a slight difference in the portfolios between Essex and BRE in that their portfolio is a little bit younger than ours. And therefore, as we look at the renovation opportunities, there's a little bit less infrastructure work that we will be doing and a little bit higher return of finished work that will be doing in that portfolio.
But we are aggressively putting together a plan, similar to what we did to the Essex portfolio. We'll probably have a lot more of that information available at the November NAREIT.
At this point in time, we're working through, trying to make good decisions. We'd like to understand the marketplace and put a lot of time into that.
It's not as simple as just looking at what we perceive as issues from a physical plan. It's getting in and really understanding what the residents will value and making that the right decisions there.
David Toti - Cantor Fitzgerald
Okay, very helpful. Thank you.
Operator
The next question is coming from the line of David Harris of Imperial Capital. Please proceed with your question.
David Harris - Imperial Capital
Yeah. Hi, everyone.
We're frequently told in the aftermath of a merger that everything exceeded expectations. I'm just wondering if I can pose the question, what's been the least positive development as we've gone through this process.
Mike J. Schall
Hi, David, it's Mike. Wow, way to put me on the spot on that one.
David Harris - Imperial Capital
We don't do soft questions in this department.
Mike J. Schall
As someone noted, one of the research pieces noted that we didn't have to deal with the polar vortex. Although we did have to deal with droughts, fires, earthquakes and other random events.
The worst thing, I think that a number of people that are knowledgeable and have been through this process, including one of our Board members that was involved in several bank M&A transactions, said watch out for the cultures and integrating the cultures and integrating across different offices and a variety of things, is the most challenging event. And I'd have to say that I think that is, that proved accurate.
I think that we did a really good job of getting out ahead of that. I sent Mr.
Burkart and Mr. Alexander on a mission to go to attend the BRE company meetings and annual awards ceremony and they answered questions for an hour plus at the BRE meetings before the merger.
And so we tried to work that together so that the teams can come together. But as you can imagine, there are fears.
They're human beings with concerns about their job and what it means and how it could be different and who are the new leaders of the Company and how will they treat us, and so overcoming that I think was -- is challenging. It's not done by any means, but it's an ongoing process, and I think we've done well with it.
David Harris - Imperial Capital
Are you over the hump with that, Mike? You seem to be talking a bit in the past tense.
Mike J. Schall
Well, I don't think that we're exactly over the hump, no. I think that there is still plenty of issues to be overcome.
People, for example, they -- all things being equal, people want to utilize the system. We talked about integrating systems.
Well all things being equal, people want to utilize the systems they're most used to, and that obviously can't happen. We need to become one company, and we need to merge these together.
And so people need to work with us to both make the right decision, which sounds simple, but it's somewhat threatening to the people. My view is we're going to continue growing as a Company.
There's going to be plenty of opportunity out there for those that buy into the culture and love the company like I do and so that it shouldn't -- it won't be an issue. However, when you get into the nitty-gritty of that, what that looks like, it is a little bit problematic.
David Harris - Imperial Capital
Okay. If I can have a second bite, now we're with the big boys in the S&P, isn't it time to split the shares and make Essex a little affordable for grandma to own more than two shares?
Mike J. Schall
Well, I think as soon as Warren Buffett splits Berkshire Hathaway we'll consider that.
David Harris - Imperial Capital
Okay.
Mike J. Schall
No, I'm just kidding. The issue there is the cost of splitting the shares when you are in the high, what 90% institutionally held and typically you're charged are per share cost to sell stock.
So it just seems to fit our profile and it seems to make sense to us so we probably will not split the shares.
David Harris - Imperial Capital
Okay. All right.
Thank you.
Mike J. Schall
Thank you.
Operator
Our next question is from the line of Michael Salinsky of RBC Capital Markets. Please go ahead with your question.
Michael Salinsky - RBC Capital Markets
Good afternoon, guys. Mike, you talked about investment, I think you addressed a couple questions about how that's picking up.
Can you talk about -- a little bit about what you see are the opportunities on the development side, whether development still makes sense at this point of the cycle? And then also, BRE had been going through a fairly extensive cleanup.
How much of that's left to do on the BRE portfolio?
John D. Eudy
Hi, Michael, this is John Eudy. We probably hit our peak on April 1, the day of the merger in terms of the development exposure that we anticipate having, a little over 2,800 units, plus or minus $1.75 billion after we add the BRE assets to the Essex.
Most of those deals were contemplated, underwritten and done two and three years ago, so we have the benefit of both the cost side, as well as the land basis side and fees to -- wind to our back. On a go forward basis, we are and we've said this previously, lessening our development exposure in total.
However, there are still a few deals that we are going to be doing over the next year that have some legacy advantages cost wise. It's very difficult on the ground to buy at expectation prices that sellers are willing to sell at and at costs where they are today.
So that's mainly the reason why I'm going to most likely see our portfolio average exposure go down. We have probably three more starts this year.
By the end of this year, just for some color of our -- the 2700, 2800 units that we have in development, we will have stabilized about a third of them by the end of the year. They'll come off.
Another third will basically be done, delivered to operations and be fundamentally well on their way to stabilization, so you can see the bell curve on exposure is going to go down dramatically, even with the three additions.
Michael Salinsky - RBC Capital Markets
And then in terms of the cleanup on the BRE portfolio, I know they had been talking about selling assets. They sold three before the merger.
How much cleanup's left to go on that?
Mike J. Schall
Hi, Mike, it's Mike Schall. There were two assets in Phoenix, plus a joint venture on a third asset in Phoenix that were being marketed by BRE in Q4 and Q1.
Ultimately did not sell and we will look to sell those assets at the appropriate time? So we still have some cleanup with respect to those assets.
Michael Salinsky - RBC Capital Markets
Okay. And then Mike, this is my follow-up question; you talked about the occupancy and renewal strategy.
I'm assuming that's going to generate accelerating revenue growth on BRE. Is it an expectation that in 2014 you could see by the fourth quarter the growth rate in the BRE portfolio we've seen that of Essex, given the low hanging fruit there?
Erik J. Alexander
This is Erik. I think it's very possible that we could accelerate the occupancy and the rent growth faster than originally anticipated.
Going back to Mike's comments about the culture I think that's the key and do the teams that have to execute this, you know buy into the plan and so far, so good from revenue management standpoint and property operations. So we're encouraged by what we see.
Some of the things we can't change with respect to lease expiration profile. That'll have to happen over time and renewals that have already been sent out.
But that's a short term issue and, again, I think we're set up to take advantage of the peak leasing season.
Michael Salinsky - RBC Capital Markets
Okay. Thank you.
Operator
(Operator Instructions) Our next question comes from the line of Tayo Okusanya with Jefferies & Company. Please proceed with your question.
Tayo Okusanya - Jefferies & Company
Hi, yes. Good morning, over there.
Fantastic quarter. Just quick question, with Northern California doing even better than I think most of us expected.
Are we any closer to condo conversions at this point?
Mike J. Schall
Tayo, yes, this is Mike Schall. We are ever closer I think as time goes on.
The key metric there I think is the year-over-year increase in housing prices. And if you look at -- if you look at some of the specific metros, the closer you are to downtown San Francisco, for example, and really down the peninsula, some very interesting things are happening.
And condo prices for well located properties are moving up pretty significantly. And in fact, one of the Senior Executives here is listing his condo because he got an eye-popping number.
And so I think we're getting closer and with respect to a couple of metros. But as a general statement, we have somewhere around 7,000 apartments that could be converted to condos.
We're talking about a relatively small subset of the portfolio at this point in time and really focused on San Francisco and some of the other Northern California cities.
Tayo Okusanya - Jefferies & Company
Thank you very much.
Operator
Our question is a follow-up from the line of Dave Bragg, Green Street. Please go ahead with your question.
Dave Bragg - Green Street Advisors
Thank you. When will we receive the BRE first quarter financials?
Mike J. Schall
We're filing a Q hopefully Friday that'll show pro forma at a very high level. There is no requirement for them to file a Q, so there will be limited disclosure on those statements other than what we are required to produce for 8-K or pro forma going forward.
Dave Bragg - Green Street Advisors
So no actuals from BRE from the first quarter?
Mike J. Schall
There's no requirement to do so. So there's no -- again, what would be required for us you'll purposes, you'll see some net income on a pro forma basis in the Q that we file on Friday.
Dave Bragg - Green Street Advisors
Thank you.
Mike J. Schall
Thanks, Dave.
Operator
Our next question comes from the line of Haendel St. Juste, Morgan Stanley.
Please go ahead with your question.
Haendel St. Juste - Morgan Stanley
Hey, good morning out there.
Mike J. Schall
Welcome Haendel.
Haendel St. Juste - Morgan Stanley
Hey, just one for me here. It's been a long call.
Question on the Essex Management psychology going forward, Mike, Essex has historically been what a lot of people would deem an opportunistic investor, not only on the direct asset side, but also doing things that some of us would call non-core, some of your mezzanine type of investments. Given your larger size, your S&P inclusion, do you expect that to change?
Will you perhaps become a bit more conservative, more core in your investment approach going forward?
Mike J. Schall
Hi, Haendel. That's a great question, thank you for that.
Not as long as I lead the Company. So I mean my view is you can add -- we've added a zero or two to the Company over time and it doesn't fundamentally change anything.
It doesn't fundamentally change my job or how we have learned to make money in this business and do the things that we do. So it is actually the opposite of that.
I would expect us to continue to be opportunistic to try to understand markets and I think that we will have greater resources to do so. And I think that if there's been one limitation that we've had as a Company, it's been because we're flat and G&A-constrained, let's say.
We have a few more resources than we've had in the past. I'll give you an example.
BRE had a business intelligence unit that had several people and we've taken over that. We believe strongly in it.
And we think that given, or having the ability to have that type of entity within the Company will help us make better decisions, help us understand the portfolio better, and so I think it's actually the opposite. I think that the reason why we thought that BRE transaction made sense was, number one, because the real state made sense on a per share basis.
But number two, we think that this business is -- there is an element to this business that is scalable and part of that is how we deal with problems and opportunities and having the required resources in order to maximize the ultimate outcome. So long winded, but I think that's what we're focused on and that's why we're very excited about both the short term and the long term of the BRE transaction.
Handel St. Juste - Morgan Stanley
Well, it's worked for you so far. Good luck and congratulations again.
Mike J. Schall
Thank you.
Operator
Our next question is from the line of David Harris, Imperial Capital. Please go ahead with your question.
David Harris - Imperial Capital
Yeah. Hi, again.
I'm looking for a little clarification on the merger-related expenses. You've expensed $16 million in the first quarter.
And I'm looking at the guidance, and Mike Dance I think you made reference to $17 for the year.
Mike T. Dance
Yes.
David Harris - Imperial Capital
So million $70 million minus $16 million is the outstanding balance?
Mike T. Dance
Correct.
David Harris - Imperial Capital
Okay. What -- there's a footnote here saying excludes BRE merger costs of $35 million on the right-hand side of that -- these numbers on the S13 page.
Mike T. Dance
Yes. You're on a roll.
You're correct, three for three.
Mike J. Schall
Right, exactly. The BRE went through the BRE books and records and they--
David Harris - Imperial Capital
I see.
Mike J. Schall
History, so it's not on -- it won't be on the Essex books, there were -- all the BRE related merger costs that have been incurred prior to the merger were expensed by BRE in the past. And the other component that doesn't show up there is the diluted share count, the impact of the change of control on option and RSU vestings, both the share count.
David Harris - Imperial Capital
Okay. So I've got a question with regard to the timing of this, then.
Is it reasonable to think that most of that additional -- what was -- $70 million minus $16 million, that $54 million is going to be front end loaded, or is it going to be spread evenly?
Mike J. Schall
Yes.
David Harris - Imperial Capital
And then is it reasonable at this point in time to assume that we're then done or do you think there will be some run on it into 2015 of merger-related costs?
Mike J. Schall
I suspect that the vast majority of it will fall into 2014. And most of it, the attorneys, the investment bankers, the -- all those related costs have been incurred and will be part of the second quarter and that it will drop off.
The merger integration expenses will be ongoing. We've made some comments about what those categories are and they will -- again, we're not going to be in a huge hurry to try to integrate the systems because from our perspective, we've grown from $6 billion to $16 billion in enterprise value and essentially taken our time to work through how we deliver the service and what the best options are with respect to the structure of the Company, are very important decisions and we're not going to feel like we have a gun to our head in order to make those decisions quickly.
David Harris - Imperial Capital
Okay. And then an additional question, sorry to take so much time up.
But we're looking for the capitalized cost of disclosure. As you know, I think this is a rather important issue and I'm wondering whether I've not seen it or whether it's not been included for whatever reason?
Mike T. Dance
Yes, with the merger integration costs, there's a lot of noise going through that schedule. So starting in 2015, we'll continue to provide that, but we want to get the merger and integration costs through the system to make that disclosure more meaningful.
David Harris - Imperial Capital
So we're not going to have it for the rest of this year, Mike?
Mike T. Dance
That's the plan.
David Harris - Imperial Capital
Okay. When you bring it back, can you bring a new and improved version including G&A capitalized costs?
Mike T. Dance
That was in the old version. So that we would continue, not to say it can't be improved on, but your input will be valued.
David Harris - Imperial Capital
Good. Thank you.
Operator
Our next question is from the line of Karin Ford, KeyBanc Capital Markets. Please go ahead with your question.
Karin Ford - KeyBanc Capital Markets
Hi. Good morning.
Just a technical question. Will the BRE same-store pool be in Essex's same-store pool starting next quarter?
Mike T. Dance
Good question. This is Mike Dance.
We have not yet decided, so we are kind of working through the options and we'll come up with what we think is the best presentation.
Karin Ford - KeyBanc Capital Markets
Okay. And when you give revised guidance, presumably you'll give us revised core on both in the second quarter?
Mike T. Dance
Depending on which will partially take, that would be if we do the pro forma as if we bought BRE out of a pooling of interest, we would show the combined. But that's -- again that will part of the decision making process.
Karin Ford - KeyBanc Capital Markets
Okay.
Mike J. Schall
And Karen, can I add one other thing?
Karin Ford - KeyBanc Capital Markets
Yes.
Mike J. Schall
It's Mike Schall. Mike's comment is from an accounting standpoint.
From a Managerial perspective, we are very focused on trying to close that gap between our growth rate and BRE's growth rate. That is one of our primary internal metrics, so we're going to be looking at it primarily from that perspective.
But what Mike said about the accounting side also very relevant. So, wanted to give you pieces of both.
Karin Ford - KeyBanc Capital Markets
That's helpful. And my last question is just on the fire at MB 360.
Do you expect that to have any material impact on the long term viability of that project or the neighborhood or do you think once you get it cleaned up and rebuilt that that project's going to be as good as you expected it to be before the fire?
Mike J. Schall
It's Mike Schall and if you drive out there in that Mission Bay Area, San Francisco, it is truly an amazing place. And so we think the long-term viability of the asset is every bit as good, if not better, than it ever has been.
And so we're very excited about the project and obviously disappointed with the fire and all the outcome. And by the way, there's a longer process there with respect to testing the podium strength and the PT cables and a variety of other things.
So that's an ongoing process and it's still way too early to comment about exactly what's going to happen there.
Karin Ford - KeyBanc Capital Markets
And the second phase that's going to start leasing in the fourth quarter of 2014?
Mike J. Schall
Yes, yes.
Karin Ford - KeyBanc Capital Markets
Okay. Great.
Thank you.
Operator
Thank you. At this time for closing comments, I'll turn the floor back over to Mr.
Mike Schall.
Mike J. Schall
Thank you, everyone, really appreciate your participation on the call today. We look forward to seeing many of you at NAREIT in June.
And we also look forward to doing this all over again next quarter. So good day.
Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.