艾芙隆海灣社區公司 (AVB) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities third-quarter 2016 meetings conference call. Today's call is being recorded.

(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.

Thanks, Jessica. And welcome to AvalonBay Communities third-quarter 2016 earnings conference call.

Before we begin please note that forward-looking statements 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 as 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 at 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 to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks.

Thanks, Jason, and welcome to our third-quarter call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum.

I will be providing management commentary on the slides that we posted yesterday after the market closed and all of us will be available for Q&A afterwards. My comments will focus on providing a summary of Q3 and year-to-date results, our outlook for 2016, a look at fundamentals and, lastly, an update on investment activity and a look back on our capital allocation track record.

So let's start on slide 4. It was a solid quarter where we achieved core FFO growth of 7.3% from a combination of same-store NOI growth of over 4% and healthy contributions continuing from new lease-ups. Year-to-date core FFO per share is up over 9%. And in Q3 we raised over $1 billion in new capital including the October bond deal and disposition activity to fund ongoing and upcoming development and to pay off maturing debt.

Turning to slide 5 and our updated outlook for the year, we've updated our outlook for FFO and same-store metrics. Core FFO per share has been reduced by $0.05 per share or 70 basis points for the full year to 8.3% due to a combination of factors including same-store revenue growth being trimmed by around 12 basis points from our midyear forecast from a mix of lower projected occupancy and rate for Q4.

Secondly, higher same-store operating expenses related primarily to higher utility cost and delayed resolution of several tax appeals. Thirdly, lower redevelopment NOI and, lastly, higher interest-related cost in connection with our recent $650 million bond deal that we completed earlier this month.

Turning now to slide 6, we thought we'd spend a couple of minutes on fundamentals that are shaping portfolio performance and the overall outlook for the apartment sector. GDP and job growth, as many of you know, continued to decelerate. GDP growth has been below 1.5% now for the last three quarters while job growth is running more than 20% less than its cyclical peak and well off last year's pace so far year-to-date. Lower corporate profits and business confidence is resulting in less investment in labor and capital as businesses appear reluctant to make new commitments.

Turning to slide 7, while businesses are slowing down the consumer appears to still be in good shape. The labor market continues to tighten with more job openings helping to contribute to an improved wage picture. Consumers' balance sheets are in the best shape in many years and these trends are contributing to cyclically high consumer confidence, which in turn is helping to drive stronger household formation which is running north of 1 million per year after lingering at generational lows earlier this cycle.

Turning to slide 8, longer-term secular trends should continue to support apartment demand. Young adult job growth is outpacing the US average driven, obviously, by strong growth in this age cohort. This generation is marrying and having children later and unsurprisingly we've seen the strongest household formation for singles and couples as one- and two-person households have been responsible for more than 80% of all net new households formed so far this cycle.

Home ownership rates have in turn continue to fall for this segment helping to stimulate healthy apartment demand this cycle. While the leading edge of millennials are now in their mid-30s, the largest part of this generation are still in their mid-20s and are expected to stimulate renter demand for several years. So overall despite slower economic activity, demand fundamentals are still healthy for the housing market in general and for the apartment sector specifically.

Turning to slide 9, let's take a look at what these trends mean for our markets. So far this cycle from 2010 to 2015 we have benefited from a significant imbalance between demand and supply. This slide looks at this in a couple of ways.

On the left we look at the broader housing picture as household formation significantly outpaced housing starts during this period. And on the right job growth outpaced new apartment deliveries by roughly two times. So the first part of the cycle through 2015 demand has run well above supply and apartment rents have grown well above the long-term trend. Going forward over the next two to three years you can see from the right-hand side of both those charts through 2018 we expect demand and supply to be more in balance, reflecting an industry moving toward equilibrium after years of significant outperformance.

Turning to slide 10, that notion is certainly reflected in recent rent performance across our markets and in our same-store portfolio. Overall market rent growth according to Axiometrics has declined from around 5% to 2% to 3% over the last four to five quarters. Similarly, in our same-store portfolio we've seen same unit rent growth decline from over 6% to a 3% to 4% range during that same time, order levels that are closer to historical average.

Turning to slide 11, and double clicking through on our portfolio bit here, we can see a couple of other trends. First, we are seeing convergence in performance between East and West as differentials in rent growth have narrowed by around 300 basis points over the last year, driven mainly by deceleration in Northern California and some improvement in the Mid-Atlantic. Second, and as we've been discussing in recent quarters, rent growth in the suburbs continues to outpace that in urban submarkets by around 200 basis points given the concentration of new supply in urban centers.

Let's turn now to investment activity and to slide 12. Lease-up performance continues to be strong as rents are roughly 200 basis points above pro forma and yields are 30 basis points higher. And with yields well above prevailing cap rates and our marginal cost of capital new development is contributing meaningfully to NAV and earnings growth well into the current cycle.

Turning to slide 13, and as discussed couple of quarters ago, this really has been the case during our life as a public Company. This slide depicts development performance across various phases of the cycles since 1995.

The strongest performance generally occurs during the expansion phase for sure, but has been healthy even when new development is delivered into the downturn. We believe this speaks to our capability in this area and our disciplined approach to allocating capital to this activity.

Turning now to slide 14, in addition we continue to be disciplined in how we capitalize new development commitments. Excluding the benefit of any free cash flow or retained earnings we may enjoy we are still currently 85% match funded against our $3.1 billion pipeline.

That is we've already raised most of the permanent capital for this bucket of assets well in advance of it producing operating cash flow. So as this development stabilizes, it will add meaningfully to future growth and free cash flow.

Turning to slide 15 and shifting gears a bit, we thought it might be helpful to briefly review our capital allocation track record over our life as a public Company. You know what, we understand that there's a lot of focus right now on moderating fundamentals and the impacts on portfolio performance. We are investing in long-lived assets with an aim to deliver outsized total returns over the long run.

As you can see on this chart over the last 20-plus years we have been able to generate strong investment and returns with unlevered IRRs of around 13%. A few points worth noting here: first, we've been able to deliver healthy returns, double-digit IRRs across all of our regions; second, we generated strong IRRs across both urban and suburban submarkets; third, we've generated the highest returns in markets where we have the longest tenure, the Mid-Atlantic and Northern California. In our business tenure matters in terms of market intelligence, experience, reputation and relationships.

And, lastly, while these returns represent a mix of unrealized or projected returns and realized returns the average is consistent with what has been realized through our dispositions over the last 10 years as shown on attachment 12 of this release.

Lastly, turning to slide 16 this long-term track record has certainly extended to the current cycle. So far this cycle we've delivered around $4.5 billion of new development at yields that have generated initial NAV accretion of around $2 billion and healthy earnings accretion, contributing to annual compounded growth and core FFO of almost 13% over the last six years, a period of time when core FFO per share has more than doubled and dividends have grown by more than 50%.

So in summary, while we are seeing some moderation in fundamentals it appears that we are settling into a period of equilibrium as the economic expansion plays out. Of course, some markets will outperform while others might lag, but overall demand and supply seem to be roughly in balance and projected to remain that way over the next two to three years.

As we move into the later stages of a very healthy apartment cycle we continue to exercise a disciplined approach to capital allocation both in how we raise and deploy capital. That should allow us to generate solid earnings and NAV growth that will help us outperform.

With that, Jessica, we'd be happy to open the call for some questions.

(Operator Instructions) Rich Hightower, Evercore ISI.

So looking through the presentation last night we noticed that, I guess, this quarter you didn't break out the market-by-market assumptions that are driving the changes in guidance versus guidance as of last quarter. Are you able to provide those on the call this morning?

Rich, this is Sean. I can give you sort of a general overview of where we are seeing market performance relative to our midyear expectations, if that's helpful. You know, obviously, it was a very modest reduction in terms of full-year same-store revenue guidance and essentially where the shortfall is occurring is primarily in four places: it's Northern California, the greater New York region including parts of New Jersey, the Mid-Atlantic and then in Fairfield County.

Those are the four main drivers of the shortfall relative to our original expectation. So it's not a meaningful difference but enough that the adjustment was required.

All right, thanks Sean. And then would you be able to break out the new and renewal divisions to the different markets from 3Q and then maybe also (multiple speakers) in 4Q?

For the third quarter?

Yes, third quarter and then maybe what you are seeing today in the fourth quarter, as well.

Sure. For third quarter blended rent change was 3.5% and as you kind of walk through the markets here that represent 3.2% in New England, about 2.5% in the metro New York-New Jersey region, just over 3% in the Mid-Atlantic, 5.2% in the Pacific Northwest, 2.7% in Northern Cal and mid-5% in Southern Cal. That blends to 3.5%.

Okay, thanks. Then my final question here concerns development.

So it looks like implicitly, I guess, starts are expected to go up in the fourth quarter versus what happened in the third quarter. And just a general question, I guess, how are you guys feeling about the development pipeline today? And have any of your assumptions changed in terms of how you are underwriting or the projected yields on the overall pipeline or the things that you are starting in the near term?

Hi, Rich, this is Matt. No, we are expecting a lot of start volume here in the fourth quarter. It was always really in the plan that the starts were going to be backloaded this year and it's really just a function of when those deals work their way through the system and are ready to start.

So I wouldn't say our view has changed in any material way in terms of the attractiveness or the profitability of the development platform. We are still adding new development rights through the course of the year. They are still at the same current economics.

Again, we underwrite to today's rents and costs and expenses and don't really trend. We are still seeing on average our development rights pipeline underwriting to about mid-6s yield. Some variation by region, but that's been pretty consistent really for the last several years.

The only thing that's really potentially changed is just different deals will move around quarter to quarter, so whether we wind up with the start volume for the total year that we expect at the beginning of the year probably just depends on what happens with the Columbus Circle deal and whether that starts this quarter or it may slip into the first quarter of next year.

All right. I guess thanks for that, Matt.

I guess maybe one follow-up there, just simply to the extent that the current environment has deteriorated over the course of 2016, I think where we might be a little bit confused is just how some of the assumptions haven't changed much. Is that just a function of underwriting rents versus the basis that you guys have locked in? Or is it are we misinterpreting the way the numbers move there?

Rich, this is Tim. Rents are continuing to increase in our markets generally and so it's a function of how it interplays with construction costs for sure. We are seeing some moderation in some markets on construction cost now.

Land cost, as you know, is locked in. So in terms of overall economics on a current basis as Matt mentioned we haven't seen a big change.

We published the deals that completed this quarter that stabilized at a 6.4. We've got about $2.5 billion that are under construction that we still estimate are a 6.4 and that's with most of that pipeline not re-mark to market yet, which we would anticipate that to gravitate up.

And then just the deals we've been putting under contract in 2016, which probably has been a little bit of a surprise that they've been as attractive from an economic standpoint as they've been or consistent with those kinds of returns. So the assumptions are always based upon what we're seeing in the markets today. And I think that's what Matt meant in terms of our underlying assumptions haven't changed in terms of how they are derived.

Okay, that's helpful, Tim. Thank you.

Nick Joseph, Citigroup.

Thanks. Tim, you mentioned the increase to same-store expense growth is driven by utilities and the delay in tax appeals.

But can you talk about what's driving the growth of the more controllable expenses? It looks like payroll, R&M and office operations were up this quarter.

Yes, Nick, this is Sean. Why don't I give you an overview of the change from the midyear guidance that we've provided as compared to what we provided last night if that is helpful.

But the gross change if you look at, call it, the combined third quarter and fourth quarter back half of the year represents around $2.6 million, $2.7 million, about a third of that is timing related and the majority of that ties to three tax appeals in LA County that were scheduled and anticipated to occur in Q4. That looks like they are going to slip into Q1 and then the balance of the timing-related component related to the startup of a co-gen facility at one of our New York high-rise assets that's been delayed a little bit.

So about a third of it we'll get, we're just going to get it closer to Q1 as opposed to Q4. But in terms of the absolute amount of the change, it's about 70 basis point. If you look at the midyear guidance we provided basically around 2.4% to where we are at 3.1% today the major components are the utilities about $1.8 million, taxes around $700,000 and there's a couple hundred thousand related to insurance and payroll.

Again, that's comparing back half of 2016 as compared to our midyear re-forecast. So a big chunk of it, again, is timing related. But those are the primary drivers of the difference as compared to what we said earlier at midyear.

Thanks for that breakdown. And then the use of concessions. Can you talk about if you are using concessions on any stabilized properties today what markets you are doing that in, if it is free rent or gift cards or any other details you can provide on that?

Yes, sure. For the most part we don't use a lot of concessions but we do use them in certain markets and I'd say it depends on a couple of things, Nick. Obviously in New York you'd probably see a greater use of concession given some of the legal rent issues that surround that market.

And then in certain situations where we think there may be just a bulk of deliveries that is coming through at a particular quarter or two that impacts the then-current environment and we want to take a temporary hit as opposed to the full 12 months of reducing the rent when it comes lease renewal for those customers, that we tend to use.

But in terms of the concessions that we granted in the third quarter it's about $440,000, about 50% of it is in San Francisco, about another 25% is in the Pacific Northwest, which has been a healthy market but it tends to be a market where there's just a greater use of concession. So we used concessions last year, we used concessions this year, it's just sort of the nature of the barter in Seattle.

But if you look at the year-over-year change, about 85% of the year-over-year increase is really in San Francisco. And that's primarily concentrated at the Mission Bay assets, a little bit at 55 Ninth, a little bit at Ocean Ave. which are competing with more of the new deliveries.

Thanks.

Nick Yulico, UBS.

Thanks. A couple of ones.

First, on a couple of markets like you think about New York, San Francisco, if we look at Axiometric's data it's showing that year over year there's been no rent growth or slightly negative rent growth in the markets. At what point does that flow into your portfolio more so where if market rents just aren't moving how do you still keep up, let's say, positive renewals in both markets?

Yes, Nick, this is Sean. In terms of a bleeding through the portfolio, the softer market environment this year, obviously, has already started to bleed through the portfolio which was our original expectation at the beginning of the year and the guidance that we provided.

The rate at which it bleeds into the portfolio really is a function of a couple of different things. For the most part it really does depend on turnover rates because if you are turning over say 54% or 55% of the portfolio every year that's going to get mark to market to some degree and then the balance of it really is in renewals. And historically we have seen more pricing power with renewals relative to new move-ins because of switching costs and things of that sort.

So it takes a period of time for that to happen. So, obviously, in some markets we are seeing rents go down relative to this point last year, I'd say particularly in markets like San Francisco or a little bit in New York City. But we are seeing overall positive rent change currently in those markets I'd say due to two reasons: one, is we probably are performing slightly better than the market average in those markets and, secondly, is just a function of the renewals versus new move-ins that I described previously.

Okay, that's helpful. Just second question maybe for Tim. Are you seeing any change in cap rates for where multifamily assets are trading in the private market?

If we think about how much rent growth has slowed in some markets and just looking at multifamily sector overall for the REITs you've also seen growth slowing. It's hard for I think some people to imagine how cap rates won't move higher to reflect this. What are you seeing for asset values today? Thanks.

Well, Nick, I think I'll probably defer to Matt or acquisition dispositions reports to him. But, obviously, we've been active on the disposition side both for our own portfolio and as we wind down some of the funds and then we've been more active on the acquisition side in a couple of markets. But Matt, maybe you can just speak to what we've been seeing there from a cap rate perspective.

Yes, I think it probably does vary by market and by asset type. And really it's a function of where the capitalist is most aggressive. So what we're finding is older assets with a value add story, particularly on the West Coast, it's still very, very deep.

In early October we sold an asset Avalon Brandemoor in the northern suburbs of Seattle and that was a sub-5 cap rate on an asset that was 15 years old in a good submarket but not one of the more sought after submarkets in metro Seattle. And that's just a reflection of the fact there's a lot of value add money chasing that story, if you will.

In some other locations I don't know, really, I couldn't tell you where Northern California cap rates are today. Obviously there's been a lot of deceleration of NOI growth there and we have not bought or sold anything in Northern Cal in a while and I think assets volumes are down a little bit there because of that. So we haven't been selling real core stuff and that's where you might see the impact felt more so, but we don't have any direct evidence to speak to that on either the buy or the sell side.

All right. Thanks everyone.

Jeff Spector, Bank of America Merrill Lynch.

Great, good morning. I am here with Juan Sanabria.

I guess just wanted to focus a little bit more, Tim, on some of your key points, talking about moderation, equilibrium the next two to three years. Obviously, this year there were a few issues to cause management to lower guidance.

How should we think about those comments in the next two to three years? What is giving you comfort that we stay there or what are some of the assumptions behind that, behind those comments?

Well, we tried, Jeff, we try to show that in slide 9. I mean, first of all, in terms of changes in guidance it's really a reflection of it being a weaker economic environment than consensus or us had anticipated.

So to the extent the environment deteriorates further and we are anticipating some moderation in both in job growth and an increase in supply in our markets over the next couple of years. But I think we show on slide 9 that we think it's roughly a balance, and if you look at the overall housing picture we are starting it between 1.1 million and 1.2 million units per year, about 400,000 of those are multifamily.

Almost all of those are rental. That's about, on a percentage basis that's about what you are seeing in terms of renter propensities right now.

It just seems like the market is producing housing that's consistent with what we're seeing from a marginal demand standpoint which ought to translate into inflation or maybe a little bit better in terms of rent growth. And I think if you are seeing tightness anywhere it's probably more in the for sale arena where they are still seeing 5% growth in value. So we are not seeing too much supply in terms of the overall housing picture.

We are seeing pockets of oversupply for sure. We've talked about those markets.

And so some will lead and some will lag. But overall based upon an economy that's growing at, call it, 2% and jobs that are growing around 1.5% and supply that's being delivered into the market at about 1.5% of SOP that just looks like equilibrium to us, supply being roughly equivalent to demand.

Thanks. Do you also assume that in 2018 that supply is going to really come down or, no, that's not part of the thought process right now?

You know, modestly Jeff. I think it may come down less for a couple of reasons.

One, I think the projection for 2017 are probably going to prove out to be too high, again, because it just seems like supply just gets delayed. Some of the supply I think over the last couple of years, 15% to 20% of what we were expecting to hit in that year ended up getting delayed.

So if anything we've been overestimating supply for the next year. And so I suspect some of the 2017 deliveries will leak into 2018 and that you will see a more I think you will see a fairly level supply picture for the next couple of years is our own sense.

Okay thanks. And Juan has a question.

Just if I could follow up on Jeff's point, if you could just talk through your 2017 supply assumptions across your major markets, and in particular maybe if you could touch on Northern California how that comes online throughout 2017? Is it front-end loaded or is it pretty evenly distributed throughout the year?

This is Sean. Why don't I take that one? In terms of the expectations for 2017, before I run through the markets one thing to keep in mind, as Tim noted, is for the most part over the last three years I'd say supply has been, call it, stretched out if you want to think about it that way where expected deliveries are pushed off into the subsequent period.

But in terms of what we are seeing for 2017 right now across our markets, the expectation is we are going to be somewhere in the neighborhood of about 2% of inventory. And the way that breaks down, to give you some perspective, is the New England market is about 2.5%, metro New York-New Jersey around 1.8%, Mid-Atlantic high 2%s, Pacific Northwest still elevated up at 3.7%.

Northern Cal mid 2%s and Southern Cal in the mid-1% range. My expectation is those are going to trend down as we digest numbers and refresh our supply pipeline when we get to January.

One thing to keep in mind is some of those deals that are in the pipeline as projected starts, but people start looking at their numbers and are seeing construction costs up quite a bit over the last couple of years if they've been processing a deal and then the tightening that we've seen in the financial markets as it relates to construction lending and a little bit on the equity side as well, some of those deals probably just aren't going to make.

And just one quick follow-up. Are you seeing any pull into San Francisco of demand that otherwise would have been in Oakland or San Jose from the discounting for the new projects?

You know, a little bit but nothing that's really discernible that shows up in the data that you could call it a significant trend. Typically it takes a period of time for that to happen. And we've been talking about certainly decelerating growth in San Francisco for the last few quarters, but it's really only I'd say in the last six months that it's really come down quite a bit and people are on year leases and things like that.

So it typically takes a year or two for that phenomenon really to occur. If you think about the early part of this cycle San Francisco outperformed quite a while and San Jose as well before the East Bay caught up. And the East Bay has been outperforming the last couple of years of the cycle.

Thank you.

Jordan Sadler, KeyBanc.

Hi, good morning, it's Austin Wurschmidt here with Jordan.

I was just curious if you could update on your outlook for job growth. I think last quarter you mentioned it came down 50 basis points roughly from your expectation. But just curious what your outlook is as we move into 2017?

Austin, this is Sean. Why don't I take the first half at it and then maybe Matt will want to comment, as well.

But in terms of the forecast for 2016, we rely on several different shops to get aligned around where we think job growth is going to end up. That includes the (inaudible) consensus as well as Moody's. And right now the numbers are in the 2.3 million to 2.4 million jobs range for the calendar year and in terms of 2017 the expectation is for job growth at least at this point to be relatively similar to 2016.

So certainly that will be updated as Q4 evolves and we get to January. But the expectation is that job growth will be relatively similar next year as to this year which is down, as Tim mentioned, relative to 2015 and 2014.

And maybe just as a follow-up to that, as I mentioned earlier it's around 1.5% and our markets we're expecting about 1.7%. And the only real anomaly is Seattle where we are still expecting job growth north of 3%. The others are in the mid-1% range, all other regions.

Thanks. And then just on DC it's been one of the few submarkets that's been accelerating. It stalled a bit this quarter.

I know you highlighted it from a question earlier in the call. But just curious what your thoughts are on how this market, how it should fare moving forward? Do you still see acceleration coming?

Yes, this is Sean. The trend we believe that will occur has continued acceleration in revenue performance there. We thought it would have accelerated probably a little bit more in the third quarter and fourth quarter, but it's still bumping along here.

So there's still one thing to realize is job growth has been much better in the DC metro area but supply has still been plentiful. So we are going to continue to see it rise. But it's going to be in a pretty moderate pace as we move into next year.

And what are supply projections in 2017 versus this year?

For DC specifically?

For your market, yes, for your markets in DC.

For the Mid-Atlantic it looks like it's right around just over 2.5% and that's just a little bit higher than it was this year.

Thank you.

Hardik Goel, Zelman & Associates.

Hey guys, thanks for taking my question. I just wanted to talk about the two acquisitions and I know you've mentioned attractive merchant deals in the past. Just wondering given the fact that you have such good economics in your own development pipeline how did you think about the two deals there?

I think if I am not wrong one of them was a lease-up, another one was a land swap of sorts. If you could provide more details on that and the yields you expect?

Yes, sure, this is Matt. I can speak to that. I wouldn't say it's either/or between the two investment activities.

We are really not funding acquisitions through expansion of the balance sheet. It's really portfolio management. So essentially we are in the market when we think that there are assets that are attractively priced and if we find assets that we like then we can always fund those through incremental dispositions.

And we've wound up this year selling more than we probably planned to sell at the beginning of the year because we have been successful in finding some interesting acquisition candidates. So that doesn't really displace development activity from a funding point of view. So that's the first thing.

And then in terms of these specific deals, we have been concentrating in the Mid-Atlantic for the most part. We sold down in the Mid-Atlantic back in 2011 and 2012, saw the softness coming here, so we are actually underallocated against our long-term targets. We haven't been as actively developing in this market through this cycle either.

So the one deal we bought in South Arlington after you allocate to the retail we think basically it's a low 5s cap, $330,000 a unit for concrete frame construction that's eight or nine years old. That's below replacement cost for that submarket. So we felt that was a pretty compelling buy.

That's a submarket that's suffered some in the last couple of years and we think has bottomed out and we are starting to see positive revenue growth there again, so we feel like it was a well-timed acquisition and should be a great investment. The other deal we bought just completed a lease-up, it's a smaller deal in North Hollywood and that the other region I'd say we are underallocated to at this point is Southern California.

It's been more difficult there because cap rates are quite a bit lower than they are in the Mid-Atlantic. But still that deal we think it's a low 4s cap. And after allocating to the retail we think the basis in the residential is about $400,000 a unit which, again, is a pretty compelling basis for that location.

And that's a submarket where we are looking for more exposure where we see a lot of good things happening. And we think that we are in a good point in the cycle there.

And just as a follow-up, those are economic cap rates, right? And it would be really helpful to get economic caps on the dispositions, as well, overall.

Yes, those are, I would say those are, I'm not sure what you mean by economic cap rates.

Minus CapEx, I guess, CapEx adjusted but (multiple speakers)

There's kind of a typical lender reserve CapEx number in there but it's consistent. The dispos we've been selling this year, we sold about $275 million in wholly-owned assets and the cap rates there have been in the mid 5s. And then we've also sold some fund assets and then, of course, we sold the asset in Seattle earlier this month.

That's not in that $275 million. That was a high 4s cap.

Yes, to be clear when we quote cap rates we are quoting them on a market convention basis in terms of how the market would underwrite CapEx, not necessarily how we might underwrite CapEx.

Got it. All right, thank you. That's all from my end.

Conor Wagner, Green Street Advisors.

Good morning. Sean, what were overall new and renewals in 3Q for the portfolio and how is that trending into October?

Yes, Conor, in terms of movement in Q3 average 2.1% renewals were 4.8.% to blend it to the 3.5% in Q3. And in October, obviously, call it a little bit earlier this year than last year, as I recall, but basically low 2% range for October to date.

This data is as of, call it, a few days ago basically and still running in the high 4%s on the renewals but slightly negative on the new move-ins which is primarily a result of Northern California, New York and New England, the Boston market. A little bit of a push on our part to get a little more occupancy as we get into the latter part of the fourth quarter. So a little more pressure on rate in October.

And Sean, I know last year in 3Q you guys were aggressive in pushing price and taking a dip in occupancy. Do you think you were too aggressive this year in dropping occupancy to get price and particularly in the Mid-Atlantic?

Yes, last year I would say we were relatively aggressive. This year as the year has evolved the posture has changed. Every market is a little bit different and really every asset is a little bit different, but I'm not sure that we would revisit the decisions a lot.

The Mid-Atlantic we basically put out an expectation midyear that things would continue to improve at a greater rate than what's actually occurred. Whether you could tie that back to rate of occupancy and say that we were too aggressive I wouldn't necessarily say that.

We were trying to push a bit but to get the rate growth you've got to have some of the occupancy and if the occupancy didn't show up you are just not going to get it. So I think it's really a blend of both. I wouldn't just tie it to one piece or the other.

Great, thank you. And then, Matt, you earlier mentioned the delay at Columbus Circle. Is that due to permitting or is that more just a continued problem with finding a retail partner there?

Conor, it's Tim. I can speak to that. We've been demolishing the existing building there for a good part of the year.

We are just completing that process now and still need to get signoff, final signoff by the city. So it's really been probably more a function of that. I think as we reported maybe last quarter or the quarter before we are still considering bringing in a capital partner there.

It's not necessarily a requirement from our perspective but something we are considering but that isn't holding up work. We will probably get started with maybe some site-enabling work here before the end of the year. But between how long it took us to get the demolition done and finishing up our plans it's just looking like right around the end of the year for the start of the new building.

And that would be the only deal that would possibly cause you to miss your guidance for 1.2 billion in starts this year?

We think so. We think so at this point. The others look like they are pretty much going to happen in November or early December.

Great, thank you.

Rob Stevenson, Janney.

Hi, good morning. Sean, you talked earlier about the weakness in Northern California and New York City among other markets.

When you are looking at supply coming online in those markets that are directly impacting your assets or likely to directly impact your assets, if you assume job growth remains static when is the peak disruption to your assets from an operational standpoint? Are we in that now? Is that sometime in early 2017?

Is that back--end 2017? How are you guys thinking about that?

Yes, and you are thinking about two specific markets there, Rob, in terms of New York and Northern Cal, I assume?

Yes.

Is that what you are thinking about primarily?

Yes.

So I think for the most part if you look at it New York supply is actually expected to increase in 2017 relative to 2016. So I think the pain is going to continue in New York through 2017 for certain. It's really going to be what Tim said which is a function of job growth, what's happening in the economic environment that will determine rent change performance and ultimately revenue performance.

But supply is expected to continue and as it relates to our specific portfolio in New York City really what you worry about is supply being delivered in Midtown West is impacting us, that's probably the bulk of it. There's some supply in Long Island City but it's more downtown than on the waterfront and Long Island City is actually performing quite well.

The other market that we will probably start to see more pressure is in Brooklyn. There's more deliveries in Brooklyn next year as compared to this year. For the most part it's been a relatively light year in deliveries, it is just starting to pick up in Q4 so that's the broad picture of New York.

As it relates to Northern California, also expect to see a pickup in deliveries in Northern California next year about 40, 50 basis points. As compared to 2016 it goes from about 1.8% to 2.3%. Again, we are going to be massaging those numbers as we get to December and January.

A number of those deals are already under construction, of course. But for the most part what we have seen is that those deals have been delayed in terms of actually getting through the system, getting everything signed off, etc. But if you look at where the deliveries are going to be concentrated it's the same place is really in terms of what's happening in the midmarket, south market, etc.

So in terms of our portfolio the Mission Bay assets and 55 Ninth will continue to be impacted in 2017. I don't have the quarterly breakdown for 2018 at this point. It's probably a little premature to talk about it, but by January we will have a pretty good outline of that.

Okay. And then your turnover levels look pretty static. Are you seeing any material increase in days vacant between turns?

Not really. When you look at it on a quarter-over-quarter basis it's not really changing much. I think in the third quarter around 22, 23 that's pretty consistent for the third quarter, a lot of leasing velocity, a lot of turn activity.

So did not change materially. You will see that number increase in the fourth quarter. And in the first quarter as a result of just the seasonal nature of the market and you don't have to turn things as fast because demand is not as robust in this quarter as compared to Q2 and Q3, therefore you are not going to outsource turns and things like that that cost more money just to get it done faster.

Okay. And then any increase in bad debt?

You know, bad debt has been higher than our expectation pretty much all year, around 13, 14 basis points higher. We expected to be around 76 basis points or so. We are running closer to 90.

And really if you look at it for the full year in terms of operating expenses relative to our original budget we are talking about an insignificant variance. It's like 0.2% in terms of total operating expenses relative to our original budget. And the only difference really is in bad debt.

Okay, thanks.

Gaurav Mehta, Cantor Fitzgerald.

Yes, thanks. Good morning. So going back to your comments on supply and the performance that was between suburban and urban assets, I was wondering if you could comment if you expect that trend to continue, meaning suburban outperforming urban for next couple of years and supply to remain focused on the urban markets?

I will start and maybe Matt or Sean will step in. I think we are expecting supply in urban markets, urban submarkets to be twice that of suburban submarkets in 2017, which is actually a larger disparity than what we saw in 2016.

So you can see on that chart it's been about a 200 basis points delta on rent performance over the last, call it, eight quarters. We would expect that certainly to continue into 2017 and maybe to a lesser extent as you go down into beyond 2018. But over the next one to two years we think that trend is going to continue.

Okay. And then in your initial remarks you also talked about equilibrium over the next couple of years and disciplined approach to capital allocation. I was wondering what that translates into development starts over the next few years?

Well, we have a pipeline of close to $4 billion which would suggest low $1 billion range in terms of starts assuming they continue to make sense and they get through the process and the economics make sense. But from a discipline standpoint I guess I would say a few things.

Once we start Columbus Circle and the Hollywood deal we will actually have less than $100 million of land on the balance sheet, which actually is a cyclical low and maybe over the last two cycles. Part of the discipline has been around managing that land exposure from in terms of when you actually buy the land versus optional land. And, secondly, as we've been talking about over the last few quarters is how we capitalize the deals once we do start them.

As I mentioned we are around 85% match funded without consideration of any free cash flow right now. So in effect we've already capitalized what's already been started and not just in -- as we get later and later in the cycle we will continue to be conservative with how we manage that the exposure of unfunded commitments.

So it's going to be so much depends on how attractive the deals are relative to the capital environment at this time. But as we said on one of the slides that we showed as one of the slides over the last 20 years as a public Company we have demonstrated you can continue to create value through all phases of the cycle as long as you are disciplined about how you bring those deals into the pipeline and ultimately how you capitalize them.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning. Just two questions here.

First, on slide 15 the returns that you guys have had on the developments over time, just surprised that the West Coast has had lower returns on average than the East Coast. I would have thought that there would have been more cap rate compression to drive higher returns. So if you could just give a comment, maybe it's the fact that just land from the get-go is more expensive out there and, therefore, you just never get there, but that part was a little bit surprising given cap rate compression.

Yes, Alex, Tim here. I guess the point here and part of the slide is being a skilled capital allocator is as much about timing and being tactically smart.

By the way, this is all investment, so it isn't just development. This would include acquisitions to be clear.

And, interestingly, our return on acquisitions aren't materially different than development, which speaks to being highly disciplined in terms of investing earlier in the cycle with respect to acquisitions. I mentioned in our comments we've made more money where we've been the longest, Northern California and Mid-Atlantic. So part of that is just understanding the markets, having deeper relationships, being confident that you are focused on the right deals at the right time of the cycle which only comes through experience and track record in our view.

So I think -- and then the last thing I would say is this is only through Q3 of 2014. So I think if you looked at Seattle, in particular, just given some of our recent deals that have completed, those numbers actually will go up from what you see there of around 10.3%. In the case of Southern California you are just starting at such a low going-in yield, cap rate compression has really occurred throughout really all of our markets, probably through all markets nationally.

And if anything where you have probably seen it is there's probably more cap rate compression on the urban product than there has been in the suburban product. So it probably hasn't been geographical as much as it has been submarket focused.

But, again, it comes down -- we are looking at managing to total return and sometimes that's investing in higher-yielding, slower growth markets. Sometimes it's lower yielding, higher growth markets. I think this chart just really reflects that.

Okay. And then the second question is in response to one of the analyst questions earlier about San Francisco and if you are seeing a backflow from East Bay back into San Francisco, you said you are not. Are you seeing any change in demand in San Francisco or is it because your portfolio has a good chunk of it is suburb that maybe you are not seeing, you are not feeling the impact of a lot of the two-months rent concession that's attracting renters to move around San Francisco?

Yes, Alex, Sean. A couple of things.

In terms of my comment earlier about people moving from the East Bay back into the city or back into San Jose, my response is really that we've seen a little bit of that but it's not a meaningful number at this point. Given things have decelerated in San Francisco, obviously, pretty quickly that if someone was considering living in San Francisco at this time last year relative to the East Bay that was a pretty expensive proposition.

And whether you started to see meaningful deceleration in the second half of this year in that market, people sign one-year leases, they typically lag a year or two before they say, okay, the rents have really come down, I think that's the right kind of trade to make. And my point was during the beginning part of the cycle San Francisco and San Jose outperformed quite a while before the East Bay caught up and then the East Bay has been outperforming the last couple of years. So you would expect that to occur just in the opposite direction as the market decelerates.

In terms of the comment about demand, certainly as Tim pointed out it is a weaker economic environment than I think many of us anticipated which has resulted in lower job growth across the markets with the exception, probably, of Seattle and Northern California has not been immune from that, so there's certainly a weaker demand profile in Northern California. It just so happens to be at a time when we have meaningful supply being delivered in San Francisco and, therefore, you are seeing one-month and two-month concession sort of the norm on all the new deliveries in San Francisco, as an example.

But Sean, do you feel that you are on the tail end of that or you think that we are having, you guys expect to have another year of that and, therefore, as you outlined next year you are still going to be talking about the pressure on demand and supply in San Francisco?

Yes, I still think there's going to be demand. Assuming that job growth is basically the same and deliveries continue at the rate that's forecasted which pretty much is baked at this point because those buildings are delivering now, I would expect that Northern California and San Francisco specifically that's what you're interested in will continue to be a weak environment. So if we saw a significant uptick in job growth that equation might change.

Okay. Thank you.

Rich Hill, Morgan Stanley.

Hey, good morning guys. Just I was curious about your comment about the apartments reaching a steady-state. As I am thinking about what you've put on the board for the first nine months relative to your full-year guidance, it looks like to me maybe revenue growth and NOI growth in the fourth quarter might be decelerating to 3.4% and 2.7%.

So I am wondering if I was thinking about that correctly? And then number two, if that sort of the steady-state we should be thinking about going into 2017 or are we supposed to be more bullish or maybe a little bit more cautious? Any color or transparency would be helpful in that regard.

Rich, Tim here. In terms of Q4 I think your math is approximately correct as it relates to what we look for in terms of year-over-year growth. Steady-state for us or equilibrium shouldn't be a whole lot more than inflation from our perspective.

I think historically if you look at our markets we've been able to generate roughly 70, 75 basis points stronger growth than inflation, whereas nationally it's been probably a little bit closer to inflation. And that's equated into kind of high 2%, maybe just sub-3% kind of rent growth. So when we're talking about equilibrium that's the kind of rate of growth we expect to see.

We obviously started this year well above that trend. And so while we have seen moderation our view has been it has been moderating more towards an industry that's starting to approach demand and supply being roughly equal after six years of really an imbalance.

And it's what you would expect after a while in capital markets where capital should flow freely to businesses that are sustaining outperformance.

Yes, yes and to that point, and maybe taking a little bit more of a positive and longer-term view, do you characterize this supply that's coming to market as more of a bottleneck or looking longer term can you make the case that we have enough apartments in the United States or maybe we even need a little bit more apartments in the United States? I'm curious in your view as an owner of apartments and most likely taking a 10-year view rather than a six- to 12-month view how do you think about that? So said another way -- yes, go ahead.

I think I follow it. Our expectation is we are going to see household formation of over 1 million, 1.2 million to 1.4 million again on a steady-state basis based upon a reasonable growth and population of jobs.

And our view is that if you just look at underlying demographics and as millennials age that we are going to see based more balanced housing demand between for sale and rental. Most of the rental has been, I mean most of the multifamily that has been built has been purpose built as rental. And so right now you have an industry that's generating about 1.2 million houses, new units against demand that's about 1.2 million, about two-thirds of that is single-family which is generally purpose built is for sale and about of third of that is multifamily which is purpose built as rental.

The numbers almost can't be more in balance than that. So with that we are going from an industry that's been out of balance where rental housing demand has been close to 80% or more of total housing demand kind of in early years of the cycle to where it seems like we found a new normal, if you will. So that's our view.

Okay, that's very helpful. Thank you.

Tayo Okusanya, Jefferies.

Yes, good morning everyone. Just there's been a lot of talk recently about rent control hitting the ballot during the election season in the Bay Area. Just curious what you are hearing what you think the probability of that happening is and what could be the potential impact to your portfolio?

Yes, Tayo, it's Sean. You are correct that rent control is on the ballot in about five different municipalities in the Northern California market.

Only one of -- I can't speak to exactly what's likely to pass and what's not. That probably changes from week to week depending on which poll you read. But there is support, for more than majority support for some of those ordinances based on recent polling.

There's really only one that potentially impacts our portfolio which is the proposed rent control ordinance in Mountain View. And if you look at it, it depends on how it's actually adopted. There's actually two proposed ordinances on the ballot in Mountain View, one that's sponsored by the city and the other that is sort of a voter referendum.

And to the extent that it comes to fruition Mountain View overall, when you look at the assets that are impacted it would impact around 9% of our Northern California revenue in terms of the specific assets that fit the vintage that would be governed by the proposed ordinance. And the rent increases, it is a blend, it's limited to CPI plus but it's got a collar on it minimum 2, max 5.

And you can bank it. So you are going to get it over time one way or another in terms of what's happening in the market with vacancy, T- control, etc.

Okay, great. Thank you.

Drew Babin, Robert W. Baird & Company.

Thanks for taking my question. I wanted to break down New York metro a little bit more.

You mentioned that New York metro results have disappointed year to date relative to your expectations. I would assume that's been driven more by New York City with New York suburban and New Jersey actually both showing sequential acceleration in 3Q. Did that sequential acceleration in those suburban markets surprise you or is that something that was in the underwriting?

No, we did expect some acceleration in those markets. It actually came in a little bit short of our expectations but we did expect some acceleration in those markets.

If you look at the fourth quarter we are falling short across the geography, New York and metro New Jersey. Less so in New Jersey than certainly in New York and particularly in New York City. But for the most part I'd say the greater New York region is falling short of expectations and to a certain degree in New Jersey but just more moderately so.

You would characterize the suburban marginal weakness as a trickle-down from what's happening in New York with new supply and people just adjusting to pricing in the market or what might be behind that?

I wouldn't say that it's significantly weaker, just we thought things would pick up a little bit more. But the job growth in that region has been weaker over the last six months.

So I think it's more widespread as opposed to as it relates to most people aren't moving from Central Jersey to Manhattan as an example, just that trade in rent usually doesn't make much sense. You don't see that happen. Same thing when you get into Westchester or Long Island, making the trades come into the city is just prohibitively expensive.

Okay, and then one quick one on the downtown Brooklyn development. I noticed the completion date was delayed from 4Q 2016 to 1Q 2017, but it looks like the leasing statistics and the stabilization date are on pace and nothing has really changed there. So I was just curious what's behind the movement in the completion date?

Drew, this is Matt. It's really just when we get into finishing a building, particularly a building of that size and complexity, when we're actually going to be able to close out all the books and everything and whether the lapsed apartment homes turn over for occupancy in December or January it's going to be somewhere right around that time frame. So it's not a response to anything we're seeing.

As you point out the lease-up has been doing great. So it's just a question of it's a $440 million some asset, so we may keep the books open one quarter longer just to make sure we've got everything.

Okay, thank you, that's helpful.

(Operator Instructions) Vincent Chao, Deutsche Bank.

Hey everyone, thanks for taking my question here. Most have been answered already.

But just sticking with the New Jersey commentary, not necessarily the answer to just the last question but earlier I thought it sounded like Jersey was specific markets where you are seeing some of that slow down. Relative to an earlier expectations I would presume that's Jersey City waterfront markets, but just curious if it's more widespread than that.

Yes, this is Sean, Vincent. In terms of our portfolio we really only have one asset in Jersey City. So there's certainly a meaningful amount of supply being delivered there, but the portfolio performance isn't significantly impacted by just that one asset.

As I mentioned, job growth has slowed in that region over the last six months. And I think it's more widespread and just representative of what you're seeing across all of those markets, whether it be parts of Central Jersey, Northern, Long Island, Westchester, etc. job growth has come down across the entire region. So that's really what you are seeing as more softer demand, the supply is sort of as expected.

Got it. Thanks. And then we really have talked about most of the market share except for LA.

So just curious if you could give us some commentary on what you are seeing there. We have seen some slowing in the same-store revenue growth for a couple of quarters now and job growth there also seems to be decelerating. So how should we be thinking about LA going into 2017?

Yes, for the most part LA is performing quite well. The only places where there is any pockets of weakness really is the stabilized asset I'd say in downtown LA, as an example, where there's a meaningful amount of supply being delivered there.

We only have one operating asset there AVA Little Tokyo that we completed earlier in the cycle but for the most part LA is tracking just fine. Job growth has been slightly weaker and so that weighed on performance a little bit. But in terms of our expectation for that market, we are tracking pretty close to what we expected in the back half of the year.

Okay, thanks a lot.

Nick Joseph, Citigroup.

Hey, it's Michael Bilerman. Tim, I'm curious as you think back to the Archstone transaction where you and EQR split up a portfolio, if assets were to come to market within your six regions I guess where, and, obviously, at the right price and at the right cost of capital, which regions or markets would be most interested to you to deepen your presence?

Yes, Michael, a couple of comments. First of all, one of the things that was great about the Archstone transaction it basically allowed us to get roughly to a target portfolio, particularly as it related to Southern California which we had always been short in. but right now we are not significantly off where we'd like to be in any region.

I think Matt mentioned it's been a little bit behind our buying in the DC area. Both we think tactically it's not a bad time to be buying there and we have been a little underallocated since we bid (inaudible) a bit in early 2010 earlier this decade.

So it's probably from a market standpoint it's probably still DC in Southern California because those are markets where we could probably still seeing a little bit more allocation. And we don't think from a market condition standpoint and cycle standpoint it's too bad of a time to be investing a little bit more capital and trimming in some other areas.

And if you think about the debt and equity capital that's out there to finance apartment transactions, obviously, we've come off two years of significant activity by private equity and buying large apartment portfolios and platforms. How do you look at the market today in terms of being able to finance larger deals both from a debt and equity perspective?

I will maybe just speak from a public market standpoint and maybe wake up Kevin over here who's been absent this conversation.

He gets one. He gets one.

But you look at where apartment REITs are trading, obviously relative to underlying NAV it doesn't make sense to be using your balance sheet to finance. To the extent you see a portfolio out that the looks better than what you currently own and you can finance it through some kind of asset swap or 1031, perhaps that makes sense.

Debt we, obviously, want to pull from an unsecured standpoint. But we wouldn't be looking, and I don't know, I guess I'd be surprised if anybody in the sector would be looking at really levering up to grow at this point in the cycle.

And so unless you can find a way to do it in a leverage neutral way I think public entities are probably at a disadvantage today but to the extent something came to market. Kevin, any other thoughts, you do want to say hello?

I can comment on Southern California and leasing spreads too. So no Michael, I guess certainly from a financing point of view in the private market things are tightening up a little bit, particularly in the construction area as many of you are well aware already.

So I think from a supply standpoint longer term you know that is a bit of a headwind for those who are looking to add new supply in the private side and finance it in the debt markets. Particularly for small, less well-capitalized developers pricing in construction financing has probably moved beyond 300 basis points over LIBOR which affects, of course, what kind of deals pencil.

And then you've got the OCC which is pushing banks to lend less on real estate. And the regulatory environment for banks has become more expensive for them to be active in the construction market and be profitable. So I think you're seeing that getting construction financing, particularly in some of these urban submarkets, is a lot more difficult than it has been before.

For stabilized financing, the GSEs certainly have been active. For the M cap business there is certainly availability that's mostly affordable and types of opportunities. I think they do expect to record production year.

The caps have been lifted a number of times. But their interest in Class A product is more modest, as you are well aware.

Nonetheless, banks and insurance companies are pretty active while CMBS has been far less so due to the risk retention rules. So I think when you step back in time to some of the comments Tim made capital is there for deals that make sense but it's certainly not as plentiful now as it has been in recent years on the debt market side.

And I think probably a lot on the equity side joint venture sources of capital have been a lot more disciplined because they like you and we have been seeing the same headlines about supply in some of the markets that are out there. So they are probably a little bit more cautious but at the same time relative to some other sectors in real estate multifamily even at trend level revenue growth does provide pretty healthy returns that one can reasonably bank on achieving over a long term.

Right, well I guess that's what sets up this a divergence between the public stock trading at discounts and whether there's enough private capital out there both from a debt and equity perspective that would find those attractive enough to or the companies themselves saying I don't want to trade at a discount anymore, I can monetize that spread by tapping into it.

The question is is that debt and equity as excited about the multifamily business as it has been over the past couple of years given the volume of deals that has transpired already? I don't know the answer, I'm looking for you for the answer.

I think it's going to be somewhat a function of the balance sheet as a target to the extent they are financed more through secured versus unsecured. It may be more doable than -- and we've seen some recent examples of that in the apartment space. Obviously, where you had cleaner balance sheets and more unsecured it tended to be more public to public and where you had more secured financing and maybe a little bit higher leverage it tended to be more attractive to the private side. So I think that's probably as big of a factor as well as just where private versus public market valuations are trending.

Okay, thanks for the time.

Neil Malkin, RBC Capital Markets.

Hey guys, good afternoon. Thanks for taken my questions.

The first one is on jobs. You made commentary about job growth being basically in line with this year and next year. But I wonder, digging a little bit deeper, do you guys look at the types or quality of that job creation?

And I ask that because if you look at the higher-paying jobs, professional business services, tech, stuff like that in some coastal markets we're seeing slowdowns which would auger for less traffic, especially at the high price point type of assets that you guys have. And I wonder if you bake that into your guidance? Because not all jobs, not all demand is created equal.

So how do you think about that, particularly in, let's say, New York and San Francisco when you have job growth that may be flat but, for example, in New York you have a lot of hotel and leisure jobs? And I don't know if they can afford $4,000 a month, $5,000 a month apartments, so do you guys have a view on that?

Well, we look at jobs in a number of ways. There's pretty good data out there related to mid, high and low wage job growth.

And I think actually we've gotten later in the cycle we've actually seen stronger growth in our markets in the mid to higher wage segments, particularly the midweight segments where it's kind of early in the cycle. So I think it was a little bit more tilted towards lower. There does seem to be a bit of a disconnect right now.

I mean openings are higher than hires right now, which is a good thing from a wage growth standpoint which allows people to pay higher rents for sure. But it does seem to be that there may be a growing disconnect between what jobs are open versus the availability of labor to fill them.

Certainly as you look at college graduates the unemployment -- we're at full employment, for sure, people who have college degrees and that is the majority of our residents. So you may not see as much job growth there, Neil, for that reason over the next two year or two and I think it's likely to mimic something closer to population growth. But, on the other hand, it should translate into stronger wage growth than we've seen maybe in the early years of the cycle.

Okay, thanks. The next question is given that new leases have slowed across the board but renewals stay in the mid single digits, what is the gain or loss lease and your portfolio and what's your comfort level on that either way as we go into 2017 or maybe a slower or more dubious part of this cycle?

Neil, that's a good question. One thing to think about related to that is gain or loss lease moves around throughout the seasons of the calendar year. In our business rents grow pretty rapidly, market rents grew pretty rapidly from early February up through July, early August and then trail off in terms of what's expected for basically the latter part of the third quarter and the fourth quarter.

So taking a snapshot of loss lease at this moment in time doesn't necessarily represent how you want to think about rent growth in for next year. So I think you've really got to model it in a way that you look at the typical trajectory of rents from the trough late in the fourth quarter to the peak to the following August and then determine how much you think you are going to get during that period of time that will then ripple through lease expirations.

So that's how we think about it more so than we've got X percent or X dollars baked in right at this moment based on today's market rent, if that makes sense. Does it make sense?

Yes, I understand it goes through cycles based on peak or shoulder season. I just mean if you think about how you are rolling over like a trailing four-quarter period you would have a full cycle or leasing season.

And I just wonder, I think someone asked the question earlier, when does that start to impact potentially renewals? Essentially you don't want to generate a gain to lease that is unsustainable or that would leave you susceptible if markets turn or job growth slows more than you think.

Yes, I guess one way to describe that is if you take a snapshot of where the rent roll was today relative to what the rent roll has averaged for 2016 you are in the low 1% range, 1.25% or something like that that if nothing happened next year in terms of rents growing at all you'd be delivering north of 1% revenue growth in a static market.

That's one way to look at it. And then you just have to apply what you think is going to happen with rent growth through the fourth quarter and then throughout 2017 to determine what you think you are actually going to really do in 2017.

Okay, that's helpful. Thank you, guys.

That does conclude today's question-and-answer session. At this time I'd like to turn it over to Mr. Tim Naughton for any additional or closing remarks.

Thanks, Jessica. Thanks everybody for being on today and I think we will see most of you next month in Phoenix at NAREIT.

So take care. Have a good day.

This concludes today's call. Thank you for your participation. You may now disconnect.