艾芙隆海灣社區公司 (AVB) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AvalonBay Communities second-quarter 2016 earnings conference call. (Operator Instructions). Your host for today's conference call is Mr. Jason Reilley, Senior Director of Investor Relations. Mr. Reilley, you may begin your conference.

Thank you, Augusta, and welcome to AvalonBay Communities' second-quarter 2016 earnings conference call. Before we begin please note that forward-looking statement may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well is in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is also available on our website, www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. With that I will turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

Yes, thanks, Jason. And welcome to our second-quarter call. With me today is Kevin O'Shea, Sean Breslin and Matt Birenbaum. I will provide commentary on the slides that we posted last night, then all of us will be available for Q&A afterwards. My comments will focus on providing a summary of Q2 and year-to-date results, our revised midyear outlook for 2016, our view regarding the trajectory and durability of the current apartment cycle, and lastly a look at how current development activities is contributing to earnings growth. So starting on slide 4, it was a solid quarter where we achieved core FFO growth greater than 8.5% from a combination of healthy same-store revenue and NOI growth of 5% and contributions from new lease ups as we completed almost $200 million at a projected yield of just under 7%. Year-to-date core FFO was up over 10% again driven by a combination of internal growth from the stabilized portfolio and external growth from stabilizing development. For the first half of the year our same-store portfolio performed in line with budget, although a bit ahead of budget in Q1 and a little behind in Q2. I will discuss this trend a little more in a couple of minutes. Turning to slide 5 and our updated outlook for the year. In short overall expectations for core FFO are in line with our original outlook, which called for core FFO growth of 9%. Our projection for same-store NOI growth has been trimmed by about 40 basis points or approximately $0.03 per share for the full year, but is offset by contributions from other categories such that our full-year outlook for core FFO remains unchanged. Projected investment and funding activity for the year remains more or less in line with our original expectation with some minor variances. Turning now to slide 6, we thought we would provide a little more color regarding our outlook for the same-store portfolio in the second half of the year. As I mentioned earlier, we performed in line with expectations for the first half of the year, although in Q2 we did experience -- we did not experience the seasonal strength in effective rent growth that we are accustomed to seeing. This trend appears to be largely demand driven as economic and job growth fell short of expectations for the first half of the year. And declining business confidence and investment no doubt was a contributing factor as recent uncertainty and global events have left businesses hesitant to make new commitments. Turning to slide 7, slower economic growth impacts corporate and transient demand which helps fuel seasonal strength in the second and third quarters for our business. A weaker corporate and transient demand affects us in two ways: first, a reduction in premium income which typically runs 50% to 60% higher per lease; and secondly, an effective increase in market vacancy, as an effect inventory is essentially added back to the market. Turning to slide 8. As economic conditions have moderated over the last two or three quarters effective rent growth in our same-store portfolio, expressed as like term rent change, has remained in the 4% range over the lax six to seven months. And while like term rent change did improve modestly in Q2, we did not see the same seasonal lift we have seen in prior years so far this cycle. And turning to slide 9, of course performance does vary across our regions. Effective rent growth has moderated most notably in Northern California and the Northeast while Seattle and the mid-Atlantic have been trending up. Rent growth in Southern California remains healthy in the 6% range. Turning to slide 10, as you might expect, these trends are impacting our outlook for portfolio performance for the year. Again, the Northeast and Northern California has fallen short of projected budget while Seattle and DC are expected to outperform. Overall the net impact is resulting in a reduction of same-store revenue of almost 40 basis points for the full year with all of that expected shortfall to occur in the second half of the year. Turning now to slide 11, just given trends in the operating environment we thought we would just revisit where we think we are in the cycle. We still believe that fundamentals point mostly in favor of an extended cycle much like we saw in the 1990s. As you can see on this chart, consumer confidence remains on solid footing at cyclically high levels and young adults are feeling the best and leading the way. Turning to slide 12, consumer confidence is being shaped in large part by an improved employment picture with jobless claims continuing their fall since the cycle began and job openings now outpacing hiring activities. As you can see on slide 13, the growing strength in the labor market seems to finally be putting pressure on wages as evidenced by recent ADP reports. And combined with reduced debt burdens and stronger balance sheets you see on charted 2, the consumer is in good shape and getting stronger, which bodes well for the continued -- for continued economic growth given their contribution to GDP. Turning to slide 14, in addition renter demand should continue to be supported by favorable demographics with the largest segment of millennials in their early to mid 20s still moving into their prime household formation and renting years. Obviously demographics have been a major driver of renter demand this past cycle and they should continue to support healthy rental demand over the next five plus years even if home ownerships begin to stabilize -- I'm sorry, ownership rates begin to stabilize as the leading edge of millennials begin to consider buying a home. Turning to slide 15, the supply side of the equation is encouraging as well. Apartment deliveries are expected to peak nationally in 2016 and 2017 as permitting for new projects has slowed down over the last two to three quarters from their cyclical highs in 2015. This is due in part to tightening credit for multi-family construction, which has become much more pronounced over the last couple of quarters. Turning to slide 16, in addition to the apartment sector remaining in balance the picture for the overall housing market looks positive as well. Projections for new housing production are in line with household formation over the next four years. But it is important to note that first these figures -- these supply figures ignore obsolescence or destruction of roughly 400,000 units per year. And they also assume that housing production over the next four years increases by 30% from its current level and roughly doubles what we have seen so far on average this cycle. So overall while we may be seeing economic growth moderate a bit, we don't see any real tangible signs that the apartment or housing cycle is nearing its end. Rather we are still seeing solid demand growth matched by what we believe is reasonable levels of new supply to meet that demand. Turning to slide 17, within this operating environment, one where demand and supply are expected to remain in balance, we believe that we are well positioned to continue to deliver outsized growth from our development platform. So far this cycle we have completed over $4 billion of new development at initial stabilized yields on average of around 7%, well in excess of our marginal cost of capital during this time which has contributed to strong core FFO growth over the last few years. And finally turning to slide 18, development should continue to drive solid external growth going forward as development underway along with non-stabilized recent completions should generate another $200 million of NOI with less than $400 million of capital required to complete this basket of $3.3 billion of assets. With these assets projected to yield well above our marginal cost of capital, most of which has already been raised, we are positioned to deliver industry leading external growth over the next two to three years. So in summary, 2016 is shaping up to be another strong year for AvalonBay and we believe that the Company is very well positioned from an investment and funding perspective to outperform going forward. And with that, Augusta, we would like to open the call for questions.

(Operator Instructions). Nick Joseph, Citi.

Given the more muted near-term 2016 operating outlook, does it give you any pause in terms of development starts in the back half of the year?

Nick, this is Tim. No, not really. I mean that was kind of the point to the last few charts and talking about where we think we are in the cycle. We think the cycle still has room to run, the economic cycle and more broadly the housing cycle and the apartment cycle. So what would give us pause -- if we thought the cycle was maybe nearing its end and the cost of capital was -- that we needed in order to fund those commitments changed dramatically. But in terms of the expected yields on that basket of communities relative to what we think we could fund them at, we think it is still provides attractive accretive growth. So at this point I would say no.

Thanks. And then just in terms of markets, maybe one on -- one that surprised on the negative and one on the positive. Can you talk about what you are seeing in New England and then in the Pacific Northwest?

Yes, sure, that, this is Sean. Happy to talk about that. In terms of New England, first it is typically more seasonal than most of our markets. And if you look at what has happened throughout the year, rent change started the year in the mid-2% range and it has trended up to about 3.5%. But it is running well below both last year's rate of about 5% and our initial expectations. And I think it is largely a result of two things. One is job growth in the first five or six months of the year has been somewhat disappointing and an annualized rate of about 1.5% relative to expectations closer to about 2% for the full year. And then also the transient demand that Tim referred to has been pretty weak in Boston this year which put downward pressure on rental rates in the late spring and the early summer. So in terms of New England that is kind of what is happening there. And as it relates to Seattle, Seattle -- for the most part it is all about demand. In the first half of the year job growth is running in the mid-4% range. I think most forecasters that we rely on had projected a slowdown in hiring in the Seattle market and it has not slowed down. There is still plenty of supply at about 3.5% of inventory, but the surprise has been on the demand side in terms of job growth. There is still softness in the sort of urban core of Seattle. We don't have many assets there, we really have two operating assets in those submarkets. But if you move out to the north end and you move to [Redmond], you move to [Bellevue] revenue growth is still relatively robust. And I think the difference between Seattle and Northern California in terms of what you are seeing in performance is you really have some well established, large well-capitalized companies driving the hiring in the tech sector in Seattle as compared to a lot of the smaller businesses that make up a greater share of employment in Northern California that are more susceptible to changes in funding tied to the VC market and what is happening with IPO valuations, etc. So that is really what has been helping Seattle is really the job growth.

Thanks. And then just finally it looks like bad debt increased. Could you talk about what drove that increase and if it was in any specific markets?

Yes, did you say bad debt, Nick, just so I have got you clearly?

Yes.

Yes. No, bad debt was up about 15 basis points year-over-year. We are seeing elevated levels of bad debt across four of the six regions. About 60% of it though is coming from a combination of factors in the New York region, really three things that I could point to. One is the core process has slowed considerably in 2016 relative to 2015. So it is taking a lot longer to get sort of judgment, if you want to call it that. And our policy is to write things off after a certain period of time. If we collect it later it will be an offset. But we are writing things off more rapidly. And then secondly is we are just not getting the same level of judgments that we were seeing just based on some new judges in certain courts. And then thirdly is we did have one corporate housing provider go belly up on us, it was only 15 homes but it represented a couple months of rent. The underlying client was actually still paying. So it is sort of an anomaly in the system I guess I would say. But New York is about 60% of the total increase so that was an unanticipated.

Thanks.

Rich Hightower, Evercore ISI.

So, a quick question here on the New York/New Jersey region. It does seem that the revised projection is not meaningfully below the original projection but somewhat below. So could you break down what you are seeing in the different submarkets whether it is Manhattan or Brooklyn or even the outlying suburbs and just where you are seeing pockets of strength or weakness on either the supply or demand side there?

Sure, Rich, this is Sean again, happy to do so. First, overall for New York New Jersey, just to give you a sense of how it has trended throughout the year across that portfolio. Rent change increased from about 1.5% in Q1 to roughly 3% for Q2. And while we have had good progress on renewal rent change, which is in the low 4% range, move in rent change remains pretty stubbornly low at around 1.5, it hasn't really improved much through the second quarter or into July. And I think what you are seeing there, particularly in New York City, which I am including northern New Jersey in kind of this general description of the geography at this point, is while there has been steady job growth, there's just not enough high-paying jobs being created to absorb all the new supply that is all being delivered at the high end of the market. And if you look at the performance, particularly recent performance, the suburban markets in and around New York are performing better than the city. We are seeing rent growth in New York City that is sort of in the mid-2% range, but as you move into Long Island and Northern and Central New Jersey we get up to the 3% to 4% to even 5% in Central Jersey over the last quarter. So, in general I'd say the supply is weighing most heavily on the New York City market, so, including the boroughs and Northern New Jersey, and we are seeing better performance out of the suburban submarkets.

All right, Sean, that is helpful. And then one also final question on property tax increases. I know that they were up 9% for the quarter. I guess if you could pinpoint this, when can we expect that trend to sort of taper off a little bit or do you think we are sort of just in for consistent mid- to high-single-digit growth for a little while here?

Yes, really [taxes], the second quarter and the first half are really a reflection of prior year activity for the most part. About two-thirds of the increase in taxes relates to supplemental assessments that were reversed last year in the second quarter. Our expectation is that by the time we get to year end taxes will probably be growing on a year-over-year basis in the 4% range, 3.5% to 4% range. So there is a lot of noise in there in terms of the appeal to whether we achieve something this quarter or what we were seeing in the same quarter last year, etc., sort of muddies the comps a little bit. But call it 3.5% to 4% is the expected growth rate in taxes for the calendar year 2016.

Okay, great. Thank you.

Dennis McGill, Zelman & Associates.

First question, was hoping -- it looked like turnover for the whole portfolio was up a little bit. Hoping you could put a little color behind the markets, if you are seeing any markets vary materially from that trend.

Sure, I mean if you look at it, it is a little bit of a rounding error I would say. It was basically at 61% this year and last year in the same quarter. And if you look at turnover as a percentage of expirations, because expirations do move around a little bit, turnover was actually down about 100 basis points. So the only market where there is anything to note is that the Pacific Northwest was up about 300 basis points year-over-year. It's sort of to be expected given the nature of the rent increases that we are achieving in that market, that turnover is up. So other than that for the most part relatively benign change in turnover on a year-over-year basis.

Okay. And then how about concessions? Are you seeing any shift in concessions, particularly I guess in Northern California and in the New York City area? Any prevalence -- increased prevalence of concessions?

Yes, there definitely is I would say a trend of increased concessions primarily in the New York City market and in San Francisco. Those are probably the two places that you are seeing it. And for the most part I think it is a direct reflection of just the lease up activity that we are seeing in those markets. So, in both San Francisco and in particularly in Manhattan there is a fair amount of concessions at the lease up communities and the stabilized assets do tend to compete based on those price points. So in many cases we are marking to market rents, but in some cases where you think it might be an aberration for a short period of time you might use a concession as opposed to reducing the rent, particularly in New York when you are faced with communities that have legal rent caps and things like that you are trying to manage with.

Okay. And then just lastly, as you look at your second half outlook, and I believe a 3% to 4% revenue growth outlook, what would the pace look like through the year? Do you see the third and fourth quarter relatively similar? Or do you see a shift in momentum as you exit the year?

Yes, what is implied by the revised outlook is high 3% range in terms of revenue growth in the second half. Expect it to be slightly above that in the third quarter and slightly below that in the fourth quarter.

Okay, perfect. Okay, thank you, guys.

Jordan Sadler, KeyBanc Capital Markets.

Hi, good morning, it is Austin Wurschmidt here with Jordan. Just up and to this point really the weakness that we have talked about has really been supply driven and this is one of the first references I recall of being more on the demand side. So I guess I am just curious, aside from you mentioned new England being one of the markets where job growth has come in below expectations. What other markets are you seeing demand sort of weaker than you initially expected? And then what gives you the confidence with I guess greater uncertainty of the world and the election upcoming that things could re-accelerate or level out?

Yes, I think -- I could speak to maybe some of the near-term things and Tim might want to speak to sort of the broader cycle, which I think is what he referenced in his prepared remarks in terms of acceleration or deceleration. But in terms of current trends, as Tim mentioned, job growth overall is running below expectations across the country. I would say with the exception of what we are seeing in terms of acceleration in the Mid Atlantic and the Pacific Northwest, most of the other markets are slightly below expectations in terms of job growth for this year. So given the level of supply which was anticipated and reduced job growth, that is where you see us falling short a little bit in terms of our expectations for revenue growth in the second half of the year. But in terms of the broader outlook, Tim can probably reference some thoughts on that.

Yes, just to be clear, I wasn't calling for an acceleration of fundamentals. What I was saying is we believe that the cycle is not done and we are not actually going to see a continued deceleration. We have -- as I think the one chart showed, we have seen like term rent change be right in the 4% range now for the last six or seven months, that is a period of time when we have seen weaker economic activity than we had anticipated. I think job growth has been off about 50 basis points from what we had projected. I just think when there is just less economic activity and job growth you can have a little less household formation. But having said that, as we said in our management letter, we do expect rent change to be in the 3% to 4% range for the balance of the year. That is at or above trend, long-term trend. That is still very healthy rent growth for our business. So, we are not necessarily calling for a re-acceleration to cyclical highs, but we are not -- we don't think it is over yet. And again it is one of the reasons why we compare it to the 1990s. If you go back to the 1990s and you just sort of chart what rent growth and revenue growth looked like, it moved around from year-to-year based upon what was happening in that particular year from an economic activity standpoint. It does ebb and flow a bit and that is just the way economies work. But we don't see the kind of distortions that you might expect to see -- you see some weakness but you don't see the kind of distortions that you might expect to see that results in a lot of dislocation and ultimately leads to negative economic growth or recession.

Appreciate the detail there. And then you kind of touched a little bit on Southern California. And I was just curious, that was a market that was sort of trending ahead of expectations early in the year. Now you are calling for things to soften into the second half of next year and didn't really highlight it as an outperformer versus your initial projections. Can you just give a little detail as to what is driving some of that softness into the second half of the year? And then maybe a little detail by submarket would be helpful.

Sure, this is Sean. On that topic, basically Southern California, as you pointed out, is slightly ahead in the first half. It basically slightly behind in the second half as a function of the macroeconomic things that we spoke about in terms of jobs growth, etc. The supply is pretty much as expected. And so, I don't know that there is a great story in Southern California in terms of whether it is a deceleration other than the job environment. I mean if you look at it, we had a little bit of a boost in the Los Angeles region, particularly San Fernando Valley in the first half of the year, as a result of just a one-off issue which was a gas leak in that area that drove some additional demand in the first quarter. It boosted occupancy but we have given that back in the second quarter. So there was a little bit of a lift in the first quarter and first half as a result of that. So that is partly reflected in a deceleration, I guess if you want to call it, as you look to the second half relative to the first half. But it is basically performing on plan. Los Angeles is healthy. Orange County has been slightly choppy but still relatively healthy. You have got some supply coming into Anaheim, Irvine and Huntington Beach creates a little bit of choppiness, but for the most part that product is being absorbed. And then San Diego just continues to perform quite well. So, I don't know that there is any unusual story coming out of Southern California other than slightly lower job growth and then the sort of one time boost that we received in the first half of the year from the gas leak that occurred.

Great, thank you for taking the questions.

Kris Trafton, Credit Suisse.

I am just following up on Jordan's question. Given that we are expecting deliveries to peak this year in markets outside New York, and job growth continues around the 150K pace a month. Not looking for 2017 guidance, but is your thought that revenue growth could potentially bottom at the end of this year?

Well, I will just go back to my earlier comments. I think revenue growth can move around for the balance of a cycle. It is very different than what we saw in the 2000's where rents went up and then when they stopped going up they went down. So far this cycle I think even you saw in those two charts that we put up, one that showed the entire portfolio and one that showed the six regions, even after you sort of neutralize for seasonality, rents have moved around a bit even this cycle. And we are saying we think that we are going to continue to see that a bit. Having said all that, we do see demand and supply becoming more imbalanced, which means we think we are going to get -- we are basically moderating -- we are moderating towards trend right now or a little bit above trend.

Okay, perfect. And then just going back to one of your slides on the job openings versus job hires slide. I mean given like the protection of sentiment kind of in the United States and less likely to import foreign labor and the skills gap that we have here in the United States, do you think that that gap between openings and hires may stick around for a while? And then do you give it any thought in terms of how that may affect demand in kind of your major markets?

Yes, I think it is a fair question, I mean particularly as you get into college grads and highly skilled positions, as you mentioned, that there could be a shortage. And what that does is it creates more income growth for a big part of our resident population, which is one of the things that we said you -- we really need to have as the cycle gets longer to help to continue to support the kind of rent growth that we have been seeing. So I think it is -- potentially it is a favorable trend for our business, maybe not for -- more broadly for the economy, but for the apartment business and the kind of markets that we are in.

Perfect. Thanks a lot.

Jeff Spector, Bank of America.

I don't think this question was addressed, but if it was please let me know. On the supply points you mentioned in your management letter, you talk about supply averaging approximately 2% of your markets in 2016/2017. When we look at different sources of supply, and I know it is still hard to figure out for 2017, it seemed like there was some differentiation between let's say San Fran and New York City. But based on your comments I wasn't sure if you feel like San Fran is going to stay elevated into 2017. Because I think we were looking at stats that were showing a drop off in let's say the Northern California area in 2017 versus New York, it is going to persist at least through 2017.

Yes, Jeff, this is Sean. Fair comment. I think if you look at it based on the way we look at our markets, which is different from the US overall, we are not as heavily involved in scrutinizing supply in those markets. But in our footprint we are expecting the Northern California region to decelerate slightly from 2016 to 2017 from about 2.5% to 2.2%. But if you look at San Francisco specifically we are expecting it to increase again in 2017 from 3.1% of inventory in 2016 to 3.4% in 2017. So you do need to look at the composition of the different markets within that region to determine what is happening. And then as it relates to New York, we are expecting that to continue to be an issue through 2017. As you may know in New York [2015] deliveries were about a 1.5% of inventory, it is up to about 3% now. And when you get the 2017 it is expected to peak closer to about 3.5% of inventory in the New York market.

Okay, great. So in San Fran you are expecting in 2017 an increase. What is the disconnect let's say between what you are projecting versus let's say I believe you guys look at that -- I think Axiometrics is projecting a decrease. Is it just more of the submarket?

Yes, I think all I can speak to is our process for the most part and the way we do the process is a little bit top-down and bottoms up, just sort of meet in the middle with our forecast. The top-down sort of comes from other sources whether it be REITs, AxioMetrics, or certain local market providers like Delta Associates as an example here in DC, or others in other markets. So we take that, but then we also do sort of a ground-up assessment. We have a market research team here in Arlington that scrubs all the local websites municipalities in our market to understand where certain deals are in their processing for entitlements and what the expected delivery dates are. In addition to that, our local development team where we have three to four people per office around the country is tracking all the developments in their markets as they are competing for sites and expected opportunities in their markets. And then in addition to the development teams the last scrub in our process is through the operations team where they know what is beginning to pre-lease to better predict when deliveries are expected to arrive in certain submarkets and if we need to alter our revenue management strategy ahead of deliveries coming. So, it is a pretty thorough process from a top-down and a bottoms up perspective as compared to just looking at the REIS data and think that is what we expect. So, I think our process is probably more robust than average, but given our capability and development, how important it is to our business we just give a lot of scrutiny.

Okay, thank you. That is very helpful. And then I just had one question on development yields. In 2Q yield was higher than I think 1Q year to date. Can you talk a little bit about those yields? I assume that they came in above underwriting expectations.

Sure, this is Matt. I can speak to that. Are you talking about the 2Q completions?

Correct, in your presentation you talk about the development yields for 2Q, I think it is --?

Yes, we completed three communities in the quarter and the number is going to move around based on the specific communities, the geography each quarter. And the three we completed this past quarter all beat pro forma pretty handily. One of them was on Capitol Hill in Seattle, which is our first asset in that submarket, which just exceeded expectations obviously with a big run up in rents since we started that deal 2 plus years ago. Another one was a deal in northern New Jersey in Union, which hadn't seen any new supply in many years and frequently we find a positive surprise on rents when we lease up in communities like that. And the third one was an Irvine. So, the basket moves around from quarter to quarter, but I think year to date it is in the kind of 6.3-ish range. So obviously the completions compared to the prior quarter were a little bit lower yielding, some of those were in -- one of those was a large deal in Southern Cal, which tends to have lower yields. So it is going to generally move around, but we're continuing to see yields obviously beat the initial underwriting on the strength of good rent growth.

Okay, great. Thank you.

Andrew Rosivach, Goldman Sachs.

Good morning, this is Jeff on with Andrew. Just to turn to slide 8 of the presentation. It looks like much of the setup is like 2013 where your same store slowed but bottomed at 3.5%. But I am just curious, if you take this chart what would it look like in 2001 or 2008 when things were about to fall off a cliff?

Yes, I think I'd reference, they looked -- I don't know we had this exact data series -- time series certainly for 2001. But if you recall, I mean you had a big run-up in 2000 in the apartment world. So you really had a rent spike that was driving pretty phenomenal performance in 2000. And then with the tech crash and the elimination of -- you had two things going, you had the elimination obviously of a lot of technology jobs and you had a pretty -- much more dramatic expansion of monetary policy in terms of the impact on interest rates. So you had a lot more -- homeownership rates went up in the face of recession which was unusual. So you had a lot more demand disruption in the case of rental housing than you did actually in the 2000's where you had job losses that were actually three times what we had in the early 2000's. But we saw sort of the typical pattern where rentership rates actually went up during recession. So, it was a little more -- as I mentioned earlier, in the 2000's it was a little bit more of kind of a straight up and then straight down curve to rent growth, it kind of kept going up and then -- until it didn't. And then after about 2006 into 2007 rent started to decelerate until 2008 hit us.

Great, thanks. That is helpful. And then also if you looked at cap rates by region, where do you believe the lowest and highest cap rates are in your portfolio?

This is Matt, I guess I will speak to that one. Lowest cap rates are still probably Manhattan; kind of core best locations in Manhattan are probably still three caps. But outside of that I would say generally speaking the lowest cap rates are probably Southern California right now. I don't think a lot has been trading in Northern California recently just because the changes on the ground there. So we have been trying to buy in Southern California and it has been a little bit frustrating. Good newer product in Southern Cal in infill submarkets is definitely trading sub 4 cap rate. And then the rest of the markets are kind of low to mid 4s up to mid 5s depending on where you are.

Great, that is helpful. Thanks for taking my questions.

Nick Yulico, UBS.

If I look at page 9 of your slides where you give the rent change by market, a lot of your markets seem like they are just sort of fluctuating over a five-year average. But the chart that looks scarier there is Northern California, which looks like it is in sort of freefall since last year, but may be reaching a bottom on your five-year history. So, what was the first half of this year like term rent change in San Francisco and what are you assuming for the second half of the year? And maybe you can break down the performance of the markets a bit between San Francisco versus the East Bay and San Jose?

Yes, Nick, this is Sean. Why don't I try to address some of those comments and we can always follow up with greater detail if you are interested. Why don't I give you a sense that -- in Northern California first, give you some perspective from an overall standpoint? Rent change started the year around, 6% but it's continued to decelerate and is currently running around 4%. And that is made up of about 2.5% in San Francisco, 6% in the East Bay and a low 4% range in San Jose. So that is kind of where we are now. If you look at -- if you want to kind of decompose that even more into the new move ins and like term rent change by market, why don't I get that to you separately so we don't consume a lot of time on that? But I think it is fair to say that San Francisco is probably the softest at this point. So just to address that one, rent change at this point on move ins is essentially just barely positive, 50 basis points to 100 basis points kind of range. We continue to hold renewals sort of in the low- to mid-4% range. So you are talking about anywhere from 2.5% to 3.5% sort of numbers on a blended basis in San Francisco. Those numbers are certainly better in the East Bay and San Jose, as I mentioned, currently. But in terms of it reaching a bottom and flattening out, as I mentioned in response to a prior question, we still expect continued deliveries at a pretty heavy level in San Francisco throughout this year and then even increasing into next year. So performance, really rent change, is going to depend on the level of demand and job growth has been decelerating there. So to the extent that we see job growth level off that would certainly help. But I think really your forecast for job growth is going to dictate performance in 2017., and whether that levels off or not. Certainly as you get beyond 2017, given the nature of the product that's constructed in San Francisco, supply should start to fall off. But we do expect it to be somewhat challenging through 2017 in San Francisco specifically. So (multiple speakers).

Okay, that is helpful. I guess just specifically the second half of 2016, is it going to be -- your guidance is assuming it is worse than the 4% you have done in the first half of the year?

That is correct.

Okay, but no specific number?

In terms of that specific market, I can give you some general ranges in terms of what we are expecting in the third and fourth quarter. I mean Northern California we are probably talking about more in the 3%, 3.5% range, somewhere in that ballpark for all three markets combined.

Okay, that is great.

Yes, the weakest is going to be in San Francisco. So keep in mind I said Northern California more like 6% in the first quarter and then 5% in the second quarter as this continues to trend down. The 4% I mentioned was more of kind of where we are currently -- kind of current mark down (multiple speakers).

Okay. So, going back to the East Coast, the Brooklyn development project that is underway, how is the lease up doing? Particularly I am interested in the Avalon component, which I know just started leasing as the higher rent piece of the project. Any changes to how you are thinking about concessions there and the ultimate yield on the entire project? Thanks.

Sure, this is Sean again. Willoughby and -- Avalon Willoughby and AVA DoBro have been performing quite well. As you indicated, we are just starting to lease up on the Willoughby component. But if you look at performance for the second quarter, which represents mainly AVA DoBro, we leased and occupied 65, 60 a month which is quite strong, and up from the first quarter which was around 39. So leasing velocity has been healthy. As I indicated, it is a little too early probably to give you great guidance about the Willoughby component. We did mark the rents up this quarter, but our expectation is that hopefully there will be some additional lift as we move through the second half of the year. The views are pretty spectacular at the top of that building. So, I am not sure that we have seen exactly where the rents are going to settle out. But, I think it is fair to say that overall project has performed quite well. In terms of the impact on yield, the only negative I can speak to is that we have had a little bit of a surprise on the property tax side that may offset some of the rent lift. But our expectation is that the yield will be essentially on par with original expectations, hopefully slightly above.

Thanks.

Drew Babin, Robert W. Baird.

I was hoping to talk about LA. My understanding of your portfolio was that you have very little exposure to downtown LA where there is quite a bit of supply coming over the next couple years. I was hoping you could speak to whether at least tangentially there was any impact from downtown LA supply in some of your submarkets in the second quarter.

Yes, Drew, this is Sean. You are correct, we have one operating asset in downtown LA, it is in Little Tokyo, a community we constructed at the early part of the cycle, actually have a great basis there. But, yes, there is a significant amount of supply being delivered into LA. I think it is upwards of 15% of inventory. You have to put that number in context with the fact that they are trying to create a whole new environment in downtown and it is spread across multiple submarkets within downtown LA. But in terms of any indirect effect on the rest of the portfolio from that supply, we have not seen that. Most of the product that we own in that market is a mix of some newer communities, but also a fair amount of older communities in terrific suburban locations that are performing quite well.

Okay, you also mentioned markets like Huntington Beach and Irvine for instance that are seeing a decent amount of supply just in Southern California. What does that supply growth trajectory look like going into next year? Is there a fairly sizable deceleration in supply or do you expect some continued pressure there?

In those specific submarkets you are referring to or just in the submarket overall?

LA and Orange County generally.

Yes, I mean LA and Orange County, if you look at the supply that is coming online, for the most part we do expect continued elevated deliveries in downtown LA, it is like 14%-15% this year and it stays at that level through 2017. Yes, the are a couple pockets you are seeing supply in LA is really Marina Del Ray. In particular there is one large development there at Playa Vista that is delivering right now, and then a couple of other submarkets. As you move down into Orange County you do see supply fall off a little bit in Anaheim from 2016 to 2017. And as it relates to Irvine, Irvine is actually projected to increase some as you move into 2017 as a result of some deliveries by a handful of developers, but in particular a couple of large projects that will be delivered by the Irvine Company. So increase there. And then a modest reduction in Huntington Beach. And in Huntington Beach there is kind of two anchors to the supply, there is a fair amount of product being delivered right at the mall at Beach Boulevard and the 405, but there's other communities, a couple of large communities under development down at Pacific City which is down along Pacific Coast Highway there and Huntington Beach. So, there is not much sort of in between there, but those are the two sort of anchors of supply in that market. So if you look at it though overall, one thing to keep in mind for Southern California is we are still talking about deliveries that are low 1% range of inventory overall. So, you do have to be careful about which submarkets you are in. But if you look at it, the region is pretty supply constrained.

Okay, great. Thank you.

Vincent Chao, Deutsche Bank.

I jumped on a little late, so I apologize if I missed this. But just in thinking about the underperformance of job growth year to date versus your original expectations, did you guys mention what the outlook for job growth is in 2H -- in the second half for your portfolio?

We did not, we did not. We just -- we really just spoke to the shortfall so far this year, which is about 50 basis points less than we had anticipated, that is nationally. And then if you look at our markets, I think it is probably roughly in line with that in terms of the overall shortfall so far this year.

And one other point to comment on, Vince. I think our projection for the full year now at this point is about 2.5 million jobs and originally we were well north of that for the full calendar year.

Yes, okay. I am just trying to get a sense if you are expecting things to sort of stabilize here at current levels or maybe decelerate a little bit further. I guess any color you could provide there --.

Yes, Vince, let me just -- maybe just speak to that. What happened in the first half year is what is really going to impact portfolio performance in the second half of the year. So that is why we are not really all that focused -- we aren't not as focused in terms of -- what happened in the second half of the year in terms of job growth will really play more into our 2017 outlook than the back half of 2016. You'll usually see about a two quarter lag impact in terms of what is happening in terms of the direction of job growth relative to the portfolio.

Okay, thanks for that clarity. And then just another question, just in terms of looking at the like term effective rent change is around 4% so far this year, expect it to maybe moderate a little bit in the back. But if we look at the first half same-store revenue growth it has been a bit higher, maybe 100 basis points higher than that. And it looks like the July data, there is a narrowing of that gap, and I am just curious if there is anything specific that is driving that. Is it folks trading down or just different lease term lengths than you have seen typically and just any color you have on that.

Yes, I mean what comes to mind is really comps. I mean the second half of the year certainly we have more challenging comps. And it has really played out in terms of if you look at it on a granular level, it really comes down to the monthly sequential change in GP. And what we have seen in both like term rent change as well as the transient and corporate component is it is just not compounding at as great a rate as it was at this time last year. So to give you some perspective as an example, if you looked at the change in GP on a monthly basis, last year we were talking about through the second quarter on a monthly basis moving up at 60 basis points in April, 100 basis points in May and about 110 basis points in June versus this year those numbers were 30 basis points, 60 basis points and 90 basis points. Some of that is a reflection of the transient demand that we mentioned earlier, Tim alluded to in his prepared remarks, which does sort of turbocharge GP growth in the late second quarter and early third quarter that we're not seeing this year, so that is certainly part of it.

Okay, thank you.

Conor Wagner, Green Street Advisors.

(Technical difficulty) due to lease growth and how does that compare to the prior year?

I'm sorry, Conor, I think we caught the tail end of your question, would you mind restating?

Yes, 2Q and July new lease growth and how those compare to last year.

Sure, 2Q move in rent change is 2.6%. And last year at this time we were doing -- hang on one second, I will tell you the exact number for 2Q was running in the mid-4%s. And then you said July? You are looking at July as well, was that (multiple speakers) question, Conor?

Yes, yes sir.

So, July move in rent change is running 2.8%. And last year -- last year, actually I don't have last year right off the top of my head here, Conor. I will get back to you on that detail.

Okay, thank you. And then what was the initial year cap rate on the Tustin sale?

Tustin sale -- this is Matt, let me just look that one up for you, Conor. I think it was in the low -- if I can find that.

And maybe while you are looking for that -- Tim, what was the new development site you added in Southern California? The new right.

It is in the arts district.

Okay. In LA, correct?

Correct, yes, I am sorry.

So then you have Hollywood -- you have the West Hollywood deal and now the arts district deal there. Those are your two Southern California rights, correct?

Well, yes, there is a West Hollywood that is under construction, there is Hollywood which is a development, right, which is three quarters of a mile down Santa Monica. So Hollywood and the arts district, correct.

Okay, thank you.

Yes, this is Matt. It looks like East Tustin was a 4.9[%] cap rate, call it.

4.9%, and is that on -- that's on about $400 a door of CapEx, correct?

There might have been a little more deferred CapEx that is not included in that number.

Frankly, if you put in some of the CapEx the buyer put in the cap rate would be lower.

Okay, great. Thank you very much.

Alexander Goldfarb, Sandler O'Neill.

Just two quick wins from me. First, on the outperformance that obviously helped this year's guidance number and has sort of been a hallmark for you guys, the 30 basis points. As fundamentals moderate how should we be thinking about that outperformance? Is that something that you expect to continue? Or eventually, maybe if not in the next six, maybe in the next 12 months where trend is going you will just be delivering at your underwriting rather than exceeding?

Well, Alex, I mean as you know, I mean we do underwrite based upon current rents in place. So as long as rents are -- continue to rise at some level we would expect yields to continue to go up all other things being constant. Which, for the most part they are. We've generally been able to bring development in close to budget. So yes, you would expect that left to moderate as rents might moderate. Now the 30 basis points is a little misleading. If you took out the impact of Willoughby, well Willoughby's rents went up pretty significantly, so did the taxes as Sean had mentioned. So that actually muted the impact in terms of the yield impact. If you neutralize for Willoughby the other deals on average have gone up by 70 basis points. So almost a 10% lift in terms of -- about a 10% lift in terms of the projected yield. So you have got to look at the actual basket and some different things that may be happening with individual assets.

That is helpful, Tim. And then the second is maybe Kevin. Can you just provide a little bit of color? I don't think you addressed in earlier. But in the guidance revision you are getting a lift from capital markets and transaction activity, a $0.02 positive variance versus your original outlook. Can you just provide a little bit more color on what is going in there, what has changed in your thinking of those two items to give you that positive benefit?

Yes. Alex, this is Kevin. The $0.02 lift in expected core FFO per share coming from capital markets and transaction activity is as you would expect. It's a mix of things going on there. It is the impact of net acquisition and disposition activity both in terms of the amount and the timing, as well as some changes to JV income --I'm sorry, some changes to the debt assumptions that we have got. We did pay off a piece of debt in the second quarter. And we had some benefit from lower interest rate being woven into the mix here.

Okay, but it is not as if -- because you guys haven't historically drawn your line -- I can't remember actually the last time you had drawn in your line. But it is not as though you intend to use more of your line of credit, it is just timing of other activities, correct?

It is timing of other activity, primarily acquisition and disposition activity, both amount and the timing of it. So, yes, we don't expect to be a significant user of our line of credit and we haven't been throughout the year.

Okay, great. Thank you very much.

John Kim, BMO Capital Markets.

I just wanted to follow up on commentary of concessions on stabilized assets. Can you just quantify what percentage of your stabilized portfolio you are offering free month's rent and maybe compare that to last year?

Percentage of the portfolio offering free rent, I am not sure I have that statistic. We can certainly get that back to you. But to give you some sense in terms of absolute dollars on a year-over-year basis in the second quarter, cash concessions in the second quarter of 2015 were about $75,000 versus the second quarter of this year of around $300,000. And the greatest increases were in the new England, New York and Northern California markets.

And when you discuss 3% to 4% like term rental growth in the second half of this year, is that on an effective or nominal basis?

That's effective, that is a net effective number.

Okay. With your cost of debt declining, have you changed your underwriting hurdles at all on your development pipeline as far as yields or IRR?

Hey, John, this is Matt. We do index our target investment returns to our weighted average cost of capital assuming a 30% to 70% debt to equity mix. So as the cost of debt goes down it does at the margin reduce our WACC a little bit. But frankly it is a lot more impacted by the equity. And we don't adjust it on a day to day basis. We will adjust it maybe twice a year. What we have seen is that it's actually been pretty darn sticky over the last four or five years really through this entire cycle. So I would say no in general, our target returns on development has not moved in any material way over the last really couple of years. We are still looking at -- and when you look at where the underwriting returns on the development rights are, they have been very consistent in that kind of mid 6 range.

And, John, this is Kevin. Just to add to that. While treasury rates have certainly gone down, if you sort of look at our cost of debt for 10-year unsecured debt, last year we averaged around 3.4% or 3.5%. As you know, in our May offering we executed just under 3%. If we were to raise -- do a 10-year unsecured bond offering today we'd probably be around 3% because while treasuries have fallen spreads have widened, essentially neutralizing the treasury change. So, even over the last year there has only been maybe a 40 basis points or 50 basis point decrease in our overall cost of debt. So, when you weave that through on a blended basis, 30% leverage for what Matt alluded to in the underwriting, it is a pretty modest potential impact.

It seems like it would be a higher levered return though on your developments, is that a fair assessment?

I am not sure if I follow. We underwrite yields on an unlevered basis. And so, what we do is we -- in our yield matrix the component that Matt was alluding to that ties to our short-term cost of capital looks at our unlevered initial short-term cost of capital which ascribes 30% weighting to debt, 70% weighting to equity. So you end up with having essentially undelivered or neutralized number there from a leverage point of view. So we don't look at yields on a levered basis.

Got it. Okay, thank you.

Richard Hill, Morgan Stanley.

A quick question for me on the development side of the equation. I am curious how much of the job occupancies or job openings that you are seeing are driven by construction and if that is having any pressures on construction costs and then would ultimately impact development yields. I know you mentioned development yields were probably going to be stable, but I am curious if you are seeing rising construction costs regarding -- driven primarily by wage growth on that side?

Well, it has been driven mostly by labor, not by materials for sure. And that has been a mix I would imagine of both profitability and labor costs. If you look at the different sort of wage indices out there, construction labor is towards the top if not at the very top in terms of year-over-year wage growth. So it is an industry that has seen a lot of skilled labor leave over the last cycle or two. It is a challenge to get good skilled labor at a lot of these sites. And when you think about the production level not just of apartments but just housing and all real estate categories, the level of construction is still not that high and yet it is a real challenge for the industry right now. And I think a lot of that just has to do with the shortage of skilled labor.

Got it. And you are pretty comfortable that development yields will remain stable despite that?

Well, we continue to -- whenever we look at new opportunities as well as existing opportunities, we continue to sort of re-underwrite them as we continue to best pursue cost of capital and make sure it is something we want to continue to do -- that is what we think is sort of the highest risk capital of any deal which is that entitlement and design -- that pursued cost capital, if you will. So the kind of yields that you see on the schedule in the release, they are consistent with the kind of yields we see in the development [right] pipeline.

Great and then just one more quick question on the financing side. Are you actually seeing guys pull back or developers pull back because they haven't been able to get the construction financing that they see -- or that they used to see?

There is clearly -- I mean part of why we have been able to replenish our development right pipeline I think is connected to that. We are seeing more deal flow. I think there are -- if a developer has three or four deals they may be looking to lay off one of them in terms of land. And it is probably a function somewhat of the kind of reception they are getting with some of their key lending partners. But across the board you are definitely hearing from both banks, the suppliers of capital as well as the consumers of capital developers that construction financing is less plentiful.

Great, thank you.

Tayo Okusanya, Jefferies.

Just a quick question. Could you talk about rent to income ratios in many of your key markets and if you think that is a contributing factor to -- or rent fatigue is a contributing factor to some of the slowdown in rent growth we are seeing? Just want to get a sense of how much of this stuff really is supply-related versus how much is demand-related.

Sure, Tayo, it is Sean. Yes, rent to income ratios are running around 23% right now. So it is certainly at the higher end of long-term averages, if you want to think of it that way. We are seeing income growth -- income growth in the portfolio and households that moved in in the second quarter was up a couple hundred basis points year-over-year. In terms of rent fatigue, if you look at the portfolio in terms of reasons for move out, it has actually come down. If you look at rent increases as a percentage of move outs, it was running closer to 20% last year, it is running about 17% right now. And as you might imagine, it has come down a fair bit in markets like New York and Northern California. So, we are starting to see pretty good signs of wage growth across the economy and in our portfolio. And as you have seen some deceleration in rental rate growth in some of these markets, there is just not as much pressure there as there was during 2015, as an example.

Got it, helpful. Thank you.

(Operator Instructions). Wes Golladay, RBC Capital Markets.

Looking at the reasons to move out, have you noticed any changes that are material?

No, not really other than what I have mentioned as it relates to rent increases being down year over year. For the most part it has been pretty stable at the portfolio level. And I wouldn't say there is any significant highlights even at the regional level at this point. So sort of you'd expect for the most part, relocations, caused 23% to 25% of move outs, rent increases as I mentioned running around 17%, and then home purchases are running at 13%. It is actually down about 50 basis points year-over-year and still well below long-term averages. So a little bit of movement upward in a couple of markets, but it is not really moving much in terms of home purchases.

Okay and looking at Exhibit 7, how much did that impact -- or the lower corporate and transient demand impact the overall same-store number for the year, when you factor in 2Q and 3Q?

Yes, Wes, it's a little hard to quantify and I will tell you why. It is easy to quantify some of the direct effect on the short-term component in particular. So, to give you an example, if the percentage of leases that are short-term is down say 50 basis points we typically get a 50% premium on that, we lost about 25 incremental basis points of GP growth during that period of time. What is hard to quantify is the indirect effect of having that inventory back in the market. So it is hard to say exactly what the impact is for the full year because of those various assumptions you have to make. So it is fairly easy to quantify the three or four months which we could certainly talk to you about off-line. But the broader impact is hard to quantify.

Okay, and was that pretty broad-based by regions, both the corporate and transient, or was it just isolated to the East Coast where leasing was a little bit softer?

No, the corporate component was pretty widespread, probably slightly more pronounced in New York as an example. And then on the transient piece also relatively widespread, a bit more acute in new England.

Okay, thanks a lot.

Nick Joseph, Citi.

Hey, it is Michael Bilerman with Nick. I am curious, just sticking with slide 7, as you think about -- I don't know whether you track this or not, but was there any change in sort of Airbnb type rentals? Were renters in your apartments accelerating the listing of their apartments or scaling that back as a way to maybe generate income to offset some of their rent expense? Is there anything there that you have been able to discern on the Airbnb front within your portfolio?

Not necessarily, Michael. I mean we do stay connected with Airbnb and they provide us information on leasing activity in our apartment homes. Based on the last report that I saw there was not a material shift. Some of the stuff that we see is really -- you have to dissect it at a very granular level to understand it. So for example in New England, Boston specifically, there were some pretty good winter storms the last couple years. When we underwrite things we sort of look at an average year. This year was a better than average year so there was less transient demand from insurance claims for people that had damage in their homes during the winter. It gets to that level of granularity in terms of understanding that demand. So I have not seen anything regarding Airbnb at this point though.

And then when you think about the -- so this captures about 6% of the lease volume of your rent roll between the corporate leasing and the short-term. So the balance call it about 94%. Is there other categories that we should be mindful of that are either accelerating or deceleration? I don't know how granular you get between student, singles, couples, couples with children and how you dissect all the data. I am just curious whether you can share any light on about 94% relative to the 6% you show here?

Yes, we do dissect the data in terms of percentage that are single, single with children, married, married with kids, roommates, etc. There's not been a significant movement in those numbers. It is a large population so you'd really have to see in an absolute sense quite a bit of movement to move the needle here. The reason we have brought this up is the premiums are so significant on the short-term leases that it can have an impact. Again when you are talking about a 50% premium even if it is 1% of your leases or 50 basis points or 0.5% of your leases then it can have a significant impact on GP in any given month. So that is what we highlighted this one in particular and the same thing on the corporates.

And is there any change in terms of the number of people occupying a home over time that may indicate any shift in terms of affordability that would be noticeable?

We have not seen that to date, no.

Okay. Great. Thanks for the time.

We have no other questions at this time. I would like to turn the conference back to Tim Naughton for any additional or closing remarks.

Well, thank you, Augusta. And thank you, everybody, for being on the call today and enjoy the rest of your summer and we will see you in the fall.

That does conclude today's conference, thank you all for your participation. You may now disconnect.