Greetings, and welcome to the Essex Property Trust, Inc. Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Schall, you may begin.

Thank you, operator. And welcome to our third quarter earnings call. As usual, Erik Alexander and Mike Dance will follow me with comments on operations and finance, and John Eudy and John Burkart are also in attendance for Q&A. I'll cover the following topics on the call: First, comments on Q3 and market conditions; second, an update on the cyber attack; third, investment activity; and fourth, our preliminary market outlook for 2015. Before proceeding, for the Essex team members listening today, I would like to recognize your extraordinary contribution to the company's success. Your dedication and relentless efforts has allowed us to prosper despite the significant challenges we faced this year. Thank you. You are extraordinary. On to my first topic, Q3 results and market commentary. We were pleased to announce another exceptionally strong quarter, demonstrated by our reported Core FFO of $2.16 per share. That result was $0.08 ahead of the midpoint of the guidance range provided in connection with our second quarter call and the components of out performance are noted in the press release. In our coastal California Markets, our results reflect a persistent housing shortage, attributable to limited housing construction relative to the robust demand really related to job growth. While apartment construction has increased in response to strong demand, for-sale housing construction continues to significantly lag, a condition that we don't see changing until at least 2016. At this point, in past economic cycles, it is typical to see banks lower their lending standards for mortgages and construction loans, leading to more housing construction. We're pleased that credit standards remain high to the benefit of both apartments and for-sale housing. While for-sale housing prices have accelerated, so have apartment rents and valuations, and so the significant premiums in value for condos relative to apartments have…

Thank you, Mike. We continued to be impressed with the focus of the operations team and are very appreciative of the results that have been delivered since the merger. We were able to build on a solid second quarter and deliver results beyond our initial expectations. While occupancy remained strong during the quarter, rent growth continued to accelerate above expectations. We also continued to make great progress with our goal to reduce turnover and increase occupancy within the BRE portfolio. Same-store occupancy and annualized turnover rates were nearly identical in the third quarter for the Essex and BRE portfolios. This represents a significant improvement in the BRE portfolio compared to the same period last year. Turnover is down 8% and occupancy has increased 200 basis points since that time. This performance is not possible without the dedication of the corporate teams that have pushed through integration challenges and fought off external distractions to deliver essential support services, allowing us to remain committed to our core business of creating communities people call home. Despite challenges, we have been able to reprioritize some of the system integrations and remain on track towards a single operating platform. Thank you, Essex. I am proud to be a part of your high-performance team. During the quarter, leasing activity accelerated faster than expected in almost every submarket. With respect to performance of the Essex portfolio, the strong results in July set us up for a great quarter. In fact, we achieved sequential scheduled rent growth of 2.8%. Strong revenue growth was fueled by increasing economic rent levels that were up nearly 9% year-over-year. These higher market rates helped push our renewal pricing to rate 7.4% higher than renewals achieved in the third quarter of last year. Looking forward, we expect renewal activity to continue to support…

Thanks, Erik. Today, I will provide comments on our third quarter results, the revisions to our merger and integration cost guidance and we'll close with an update on our balance sheet. As Eric and Mike mentioned, we had another outstanding quarter, in which Core FFO exceeded the midpoint of our guidance by $0.08 per share or a 13% increase over the third quarter of 2013. The out performance in the quarter was primarily due to better-than-expected property operations and the strong development lease-up activity in both the Essex and legacy BRE portfolios, as the growth in new jobs minimize the impact of the new supply delivered in the quarter. The 6% sequential increase in Southern California's operating expenses was predominantly caused by utility expense increasing by $350,000 from seasonal water use and $225,000 increase in property taxes. In California, the new property tax year begins on July 1 and the sequential increase on property taxes of 4% was due to assessments in Southern California returning to their adjusted Proposition 13 valuations after benefiting from the temporary declines and valuations from the recession. These sequential increases in Q3's operating expenses were expected and included in the guidance provided on our second quarter call. As a result of the strong third quarter results, we have increased our same-property revenue growth by increasing the midpoint 30 basis points to 6.9%, and our same-property net operating income growth by 40 basis points to 8.5% at the midpoint. For the full year, we have revised down the merger and integration cost estimate by approximately $19 million at the midpoint. We expect to realize between $5 million to $8 million of savings in merger and integration cost and expect to incur the remaining integration cost in 2015. Yesterday after our earnings release, Essex received notice that our Wesco II preferred equity investment of $95 million was prepaid. The redemption fee recorded in the fourth quarter will increase our guidance for total funds from operations by $5 million. However, this prepayment penalty will be excluded from Core FFO. The loss of our preferred equity investment of yielding 10.1% and our asset management fee of 1% will largely be offset by the pipeline of new preferred equity investments and the fourth quarter real estate acquisition which Mike referred to earlier. I will now conclude with brief comments on our balance sheet. At the October -- at the end of October, we have approximately $750 million available on our unsecured line of credit. The legacy BRE Phoenix assets held for sale of approximately $108 million should close early in 2015. We have approximately $100 million of debt coming due in the next 12 months, and our share of the unfunded development commitment is approximately $300 million. Overall, Essex is in great position financially as we head into 2015. This ends my comments. And I will now return the call back to the operator for questions.

[Operator Instructions] Our first question is from Nick Joseph with Citigroup.

[Audio Gap] conversion optionality in the portfolio. So I'm wondering if you can give kind of a percentage around where you see that in the -- both the Essex legacy and the BRE legacy portfolio.

Nick, I missed the first part of that question, but I think you were asking about where we see the premium of condo versus apartment values. Is that right?

That's part of it, and then kind of what percentage of your portfolio has that condo quality.

Well, in California, I think the key issue is whether we have the entitlements to sell these condos. Most California cities are very protective of the rental stock. And as a result of that, they do not allow convergence of apartments into condos. The numbers that we had in our Investor Day about a year ago were somewhere in the 6,000 to 7,000 units of apartments that our condo convertible not all of immediately, but there's a process that we think that we can convert into condos and sell. In terms of the premium of condo values over apartment values, it varies very widely by market. And Southern California, for the most part, I'd say, at 0. And in Northern California, really specifically San Francisco, it's in the 10% to 15% range.

And then just in terms of operations. Are you running into your self-composed cap at any of the assets right now in terms of the rental rate growth?

Yes. Rental rate growth, yes. We have a self-impose on renewals. We have a self-imposed 10% cap on our renewal rates. And again, it goes back to -- it's not in a vacuum that can sound like a limiting factor. The purpose of the cap is really twofold. It's, one, to give existing residents a little bit more favorable transaction relative to people coming in through the front door, and 2, to increase the renewal percentage so we turn fewer units. So there's -- we believe that there's a payback in how we manage that part of the equation. And, I guess, there's a third potential benefit, which is I think the local government entities would consider that a reasonable approach as it relates to the need for rent control type ordinances.

The next question is from Alexander Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: So first question goes to BRE. And I'm trying not to do a multi-part to squash my second question. So let me just ask it this way. You guys have done a phenomenal job at bringing up the BRE portfolio to the Essex standard in 2 quarters. So you also spoke about the same point of maybe restarting the redevelopments. So just sort of curious, Mike D, not asking for 2015 guidance, but as far as more upside out of BRE, is it -- should we think about it more from integration, which it doesn't sound like it sounds like you guys have maxed at all or is it more from the external stuff like redevelopment? Where do you think that we'll see more of the upside of the BRE portfolio?

I think it both looks good. I think there's still integration opportunities and the renovations, I think, will put up impressive returns. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. So is there -- but, I mean, if you guys are already 140, if you guys have already gotten it up to the Essex's occupancy and it sounds like the rents are similar or the rent increase are similar, where's the other operational stuff that we can look towards?

Alex, it's Mike here. Let me take a shot at that, and Erik may want to chime in here at the end. I think that we've got the let's call it the low hanging fruit and that we have normalized the occupancy and taken some of the immediate steps that we can take. But in our experience, revenue management is a process. And it will take a couple of years to get all of that dialed in. And by that, I mean, for example, we amenity-price every single units. And so I think that we still need to work through the amenity pricing that was done on the BRE portfolio. There's a lot of, I think, opportunity there just because they didn't have enough time to fully implement LRO. And we've done it now a few times and those of you that go back far enough with us will remember that it wasn't always so perfect on our case either. So it takes time to fully dial that in. There's some opportunity and expiration management as well. We took on the expiration that we had in place on April 1. In general, BRE had shorter lease terms, somewhere around 10 months. And Essex was a little bit longer than that. And so we think there are some opportunity there. On the redevelopment side or the value add part of the portfolio, again, we approached it differently. And so we stopped the -- we have of the BRE -- on the BRE side, and are going to reimplement it. I think there are some unique opportunities here because their properties are somewhat newer than the Essex portfolio, and therefore, there's less of the basic infrastructure, we have plumbing and roofs and that type of thing and more things that the customers see, which are kitchens and baths and that type of improvements. So I think there's good opportunity in both areas. And we're excited about the opportunity. We think we'll be able to unlock some additional value there. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And the second is on the office conference calls for San Francisco, a lot of talk about the impact of Prop M on limiting new office development. Is there any inhibitor on your ability to develop in San Francisco that would impact multifamily? Or there basically are no restrictions on the ability to continue to build new product in San Francisco as long as it pencils?

San Francisco is a difficult place to do business, and as you can imagine and there are always challenges on the entitlement side. So there's no Prop M equivalent to worry about, but there are other challenges to get deals approved, which always limits supply in general.

Our next question is from Dave Bragg with Green Street Advisors.

So we've covered a lot as it relates to the BRE topline synergies, but can we talk about the expenses? It looks like you have a 69% operating margin on the Essex same-store portfolio. That's about 400 basis points better than the BRE legacy portfolio. We understand that maybe some of these can't be closed due to property taxes. What is that opportunity though?

Dave, it's Erik. Again, the focus has been on the revenue side. And we've tried to consolidate some of the expense activities. But there's definitely more opportunity there as we reorganize procurements, as we take advantage of some of these synergies where we have these now bigger clusters of properties. We've started some of the job sharing. But again, that won't be fully implemented until probably late next year as we utilize some scheduling tools and so forth. So I think we still have a fair amount of opportunity there.

Would you care to try to compare a same-store expense growth rate for the Essex legacy portfolio versus that of the BRE portfolio? How much difference would there be between the 2 going forward?

David, it's Mike Schall. We're in the middle of the budgeting process, and that process ends this December when we present our business plan to the Board in early December. So I think you've caught us sort of mid-cycle on that. But as a general statement, I don't think there's -- other than the things Erik said, there is some things in the BRE portfolio that, over the longer term, I think falling to the merger synergy of things. If you have, as I mentioned on one of the other calls we've got 10 properties within a couple of miles of one another. So what are the synergies resulting from that? We have not -- we don't have a number for that. And I don't think that they fallen to the low hanging fruit category. They fallen to the reorganized and become more efficient. And I think it probably benefits both sides. I think the key difference here is that you have the proper team revaluation as you alluded to on the BRE portfolio, and it's a fairly large number on the Essex portfolio. So I wouldn't see, other than those comments that I made, a significant difference between the expense growth rate overall. And I think, again, our focus is going to be on the combined synergies lowering the overall growth rate of expenses of the combined portfolio. And we're not going to be all that sensitive to which side it comes from.

And as it relates to the JV of the BRE assets, can you talk about how those operations at that pool the BRE properties is just fairing ?

In terms of...

Well, you took out, I think, some of the lower quality BRE assets were put into a joint venture. And the results that you're seeing at remaining BRE same-store properties are wonderful. But how -- as we think about the old BRE portfolio, it would be helpful to hear how the revenue growth is trending at the JV property, too.

David, this a Mike Dance. They're doing very well. We had about 7% rent growth in that portfolio. So it did as well as the rest of the portfolio.

Great. And last question for Mike. You suggested that development activity on year end should slow going forward. Are your JV partners on the same page there? Is this potentially indicative of less new start activity in your markets? Or are your partners, just as example of other capital interest and West Coast development, do they retain an interest in doing more?

I think, David, there's plenty of capital out there. I don't think that's the limiting factor. And if you look at our multifamily supply, '15 versus '14, it's up a couple of thousand units, 36,500 for '14, 38,350 for '15. So we expect about the same amount of supply overall within the areas that we operate. I think the limiting factor is a couple of things. In certain areas, I think you have pressure on labor cost. There is some other cost increases that are part of that, and they're putting pressure on cap rates. So getting cap rates to that, that clearing price of somewhere above a 5%, 5.25%, 5.5% type cap rates measure today, and stabilizes somewhere in to 6% to 6.25%. So it's hard to make those numbers work when you're fighting against increased cost. And I think of this -- the cities are somewhat less excited about a lot of development. I think that there's a factor there, I note San Francisco, there's some pressure to increase the low income component to up to 30%, whether or not that actually happens on all future deals, I don't know. But that will have a very significant impact on apartment construction in San Francisco. So our expectation is that the multifamily supply remains about the same, and we'll see what happens. But I think that's probably good for the next year or so. Everyone's asking us when we expect supplies to peak, and the answer is we don't exactly know. It seems like there's plenty of apartment supply in Seattle that's a concern. But in California, we think we're overall -- we remain limited supply level for the next couple of years.

[Operator Instructions] Our next question comes from Jana Galan with Bank of America Merrill Lynch.

Just following up on your comments on development. Curious where do you see stabilized yields for the current projects? And what are you projecting for the forward starts next year?

We're projecting 3 starts next year, 3, maybe 4 starts next year. All of them in the underwritten today, based on the rents today between 5 and 5.25, and that means a stabilizing somewhere around 6 to 6.25, something like that. Did that answer your question?

Yes.

Just 1 clarification on the units being delivered this year and next year that are already under construction. They're in the 6 to 6.5 range on today's numbers going to a 7.

Exactly, on the deliveries.

On the delivery.

Maybe I misunderstood.

She asked both, I think.

Did she -- okay. Well, I was answering starts, John was answering deliveries. So just to clarify.

There are no more questions at this time. I would like to turn the floor back over to Mr. Schall for closing comments.

Thank you, operator. In closing, we appreciate your participation on the call, and happy Halloween to all of you. We are obviously very pleased with the results last quarter and the outlook ahead. And we look forward to seeing many of you at NAREIT. Good day.

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