艾芙隆海灣社區公司 (AVB) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities Second Quarter 2017 Earnings Conference Call. (Operator Instructions)

Your host for today's conference is Mr. Jason Reilly, Senior Director of Investor Relations. Mr. Reilly, you may begin your conference.

Thank you, Melinda, and welcome to AvalonBay Communities Second Quarter 2017 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, the 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.

And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities for his remarks. Tim?

Well thanks, Jason, and welcome to our Q2 call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. I have a few minutes of comments on the slides we posted last night, and all of us will be available for Q&A afterward.

My comments will focus on providing a summary of Q2 results, an update to our outlook for the full year, and lastly, I'll touch briefly on how we're positioning the balance sheet at this stage of the cycle.

Starting now on Slide 4, our results for the quarter include a core FFO per share growth of 3%. Same-store revenues grew 2.5%, or 2.6% including redevelopment.

We completed $400 million in new development at an initial projected yield of 7%, representing net value creation of close to $200 million. We paid off $1.2 billion of secured debt this quarter that carried an average GAAP interest rate of 4.5% and an average cash rate of 6%, and we refinanced that debt primarily with new long-term unsecured debt of 10- and 30-year maturities.

Turning to Slide 5, and our updated outlook for the year. We now expect core FFO growth of 5%, which is down 50 bps from our original outlook of 5.5%. Same-store NOI is forecast to be a little bit lower at 25 basis points, at the midpoint -- 25 basis points lower, I'm sorry, based upon higher CapEx -- I'm sorry, higher operating expenses. NOI from development and other stabilized communities is expected to be off by roughly $7 million from our original outlook, driven by schedule delays at a few developments. Our development starts are expected to be about $100 million less than expected, and external funding is expected to be up by about $200 million from our initial outlook, driven mainly by the opportunistic pay off of a $550 million Freddie pool that was scheduled to mature in 2019.

Slide 6 shows how these changes are contributing to the revision on our outlook to core FFO growth. The same-store and redevelopment portfolios are expected to be off by $0.02 per share as a result of the higher OpEx I mentioned earlier. Expenses are being driven by a number of factors, but most notably from uninsured losses and maintenance costs in connection with West Coast storms occurring in Q1, and higher-than-expected bad debt. As mentioned earlier, the development bucket is expected to be down by $7 million, which equates to $0.05 per share. Our revised capital plan is contributing $0.04 per share to core FFO this year. And finally, overhead is projected to be up $0.01, primarily due to higher professional fees and a true up of long-term compensation metric.

Turning now to Slide 7, same-store revenue growth is still expected to be in the mid-2% range for the year, with modest revisions across regions. In Northern California, our revised estimate is largely attributable to our new rent-control measure recently passed on a retroactive basis, in Mountain View, California, where we have 3 communities that are subject to the new ordinance. Other regions are within 30 basis points, plus or minus, of our original outlook.

Turning now to Slide 8, as mentioned earlier, a delay in deliveries across a few projects is impacting lease-up related NOI in our development bucket for the year. We expect a shortfall of roughly 270 units per quarter on average, with most of the shortfall occurring in the peak leasing season, the Q2 and Q3, as you can see on the chart at the left or the graph at the left. This equates to the $0.05 shortfall in the development NOI for the year. The table on the right is really just provides an illustration as to how delivery delays impact earnings growth for the year.

Turning now to Slide 9, importantly, our lower development NOI this year is not being driven by slower absorption or declining rates. Rather we continue to see healthy lease up performance, with occupancies running at 34 units per month per community in Q2, and average effective rental rates at 4.5% above pro forma on the $1.5 billion of communities currently in lease-up. This slide shows 2 communities that are performing well above expectations, Avalon West Hollywood in L.A. on the left and AVA Noma in DC on the right, both of which are seeing effective rental rates of around $300 per month, above pro forma. The average yields of the $1.5 billion of communities in lease-up is currently 6.5%, which is roughly 200 basis points above prevailing cap rates for these assets on average. So while we may be experiencing some schedule delays that impact current year earnings, we continue to generate strong NAV growth through the development platform.

Now to Slide 10, as mentioned earlier, we've been very active in the capital markets in the first half of the year. So far this year, we've raised $1.5 billion of external capital or most of what we had planned for the full year, much of it in connection with the refinancing of maturing debt. We do expect to raise another $400 million or so for the balance of the year.

Lastly, I want to touch on the balance sheet for a minute. Turning first to Slide 11. The capital activity this past quarter has significantly improved our debt profile. Duration has increased with average years to maturity above 10, an increase of a couple of years versus the average so far this cycle, and the average interest rate on total debt has fallen by 150 basis points since the beginning of the cycle and now stands at 3.6%.

And lastly, we have little exposure to debt maturities in the next 2.5 years, as you can see on the bottom chart, with just over $200 million coming due before 2020.

Turning now to Slide 12. In addition to reduced liquidity needs related to rolling debt over the next 2 to 3 years, the strength of our credit metrics provides us with plenty of financial flexibility. Our debt-to-EBITDA remains at 5x, which is at the low end of the target range that we've discussed with you in the past. Our fixed charge coverage stands at 4.7x, and unencumbered NOI is up materially to 88% of total NOI. Our balance sheet and credit profile then leave us very well-positioned 8 years into the current expansion.

And so in summary, our outlook for the full year really hasn't changed much. We still expect modest deceleration of fundamentals in the second half of the year, with same-store revenue growth in the mid-2% range for the full year. And while construction related delays are expected to reduce our lease-up NOI somewhat in 2017, we continue to generate healthy NAV growth through development. And our balance sheet and liquidity give us ample flexibility to support continued growth through new development, while also providing a healthy margin of safeties as we move into the latter years of the cycle.

And with that done, Melinda, we'll be happy to open up the call for Q&A.

(Operator Instructions) And we'll go to Nick Joseph, Citi.

Just on the same-store revenue, just curious how things are trending relative to the midpoint, just given that we're in early August now, and you have some visibility in terms of renewals for August and September?

Nick, it's Sean. Just a couple of comments on that. Generally speaking, things are trending as we expected. They've kind of been playing out that way for the most part through the first half of the year and now into July and August. So I'd say we feel pretty confident as to the guidance we provided.

And when you think about -- you narrowed the range. When you think about what the potential drivers could be of either reaching the high end or low end of guidance, what are the key variables there at least where we stand today?

Yes. Nick, at this point, it's probably going to really move around occupancy. If you think about where we are in terms of the leasing season and lease expirations, you know, the fourth quarter, not a lot of activity. We kind of know where we are for August. We have pretty good insight for September. So where we sit today, if you look at it, current occupancy in August is running 95.5%, 95.6%. That's up about 25 basis points compared to last year, and when you look at availability in terms of what we have available to lease, 30 and 60 days out, that's down between 30 and 40 basis points relative to last year. So our expectation is we are going to pick up a little bit of occupancy in a year-over-year basis in Q3 and in Q4 it probably flattens out a little bit. So for the most part, given where we are with rent offers that are out there with being committed and in the expirations that are left as you move into Q4, for the most part any deviation is going to be around occupancy, absent some material acceleration or deceleration in demand, which is unforeseen.

And just finally on supply. In, obviously, your portfolio you've experienced some delays. It feels like across markets those delays are pretty common. So I'm just curious what you're seeing in terms of expected deliveries in the back half of this year, in 2018? And then any shifts that you've seen in any specific markets that you'd like to call out?

Sure, Sean again. Happy to address that. And then Tim or others, you may have comments as well. But at the beginning of the year, our expectation across our footprint is that supply would be just over 2% of inventory, about 2.1%. As we've massaged it, midyear, both on a sort of bottoms-up basis and a top-down basis with our teams and third-party data sources, the expectation right now, based on what people are telling us is that 2.1% is still generally intact. But what's happened is, it shifted pretty dramatically. There's probably, out of the -- roughly 85,000 units that are expected across our footprint for 2017. About 7,000 units have been shifted from the first half to the second half. So the way that plays out is, if you look at the first half of the year, we're running around 44 to 45 basis points in each of the first 2 quarters. That's going to tick up close to about 60 basis points in terms of supply stock in each of Q3 and Q4. So it's basically been back-end weighted, particularly as you get to Q4, which is north of 60 basis points. I think what that tells us is, based on what we're experiencing and others, that the number's probably not going to come in at 2.1% for this year, it's probably going to come in shy, because everything that was pushed to the fourth quarter, not all of it is going to make. So our expectation is it probably will come off of that 2.1%, maybe into the high 1% range, 1.9%, 1.8%, who knows. And some of that inventory will get pushed into 2018. So the peak for supply probably will be in the back half of '17, first half of '18, before you start to see any moderation.

We'll next go to Nick Yulico, UBS.

Just a couple of questions on New York. I guess first, it looks like your same-store pool got a little bit bigger in New York City. There was an asset added to it?

Yes, we had a couple that came out of development, one of which is a two-phased community, the second phase came in same-store this year. Correct. And then in addition to that, there was a change in the basket between Q1 and Q2. There was the one asset that was being considered for disposition in the first quarter that was not in the same-store pool, that came in at the same-store pool when we pulled it from the disposition list in the second quarter.

Okay. I guess I'm just wondering as I look at the reported revenue growth of 1.4% this quarter in New York City versus first quarter, 2.4%, year-over-year numbers. Was there any impact for that delta on the change in the same store pool?

Yes. The one asset that did come in is trending weaker than some of the other assets in New York City. So it certainly pulled down the growth rate for the city, specifically if that's what you're referring to.

Okay. That's helpful. And then, within -- one other question is, Long Island City, your waterfront assets there, what percentage of your New York City revenue are those assets? And how are you thinking about the supply impacts still to come, recognizing it's not right in that submarket, Long Island City, but it's nearby and at rents that are much cheaper than your assets?

Yes. What I can tell you is, I can get back to you on the specific percentage of revenue from those 2 assets, I don't have that off the top of my head. What I can tell you is most of the supply in Long Island City is now coming into more of the Central Business District portion of Long Island City as opposed to the waterfront. There's still some activity on the waterfront. But if you think of it relative to the supply that's been delivered on the waterfront over the last decade, it's relatively immaterial. The riverview assets that we own there are still are the best-performing assets that we have within the New York City footprint at the moment, in terms of revenue performance.

Nick, it's Tim Naughton here, and you're right. I think it represents about 1,000 units of roughly 3,000 units. I don't know what, in terms of a percentage. I suspect, Sean, a little bit lower?

It'll be a little bit lower than that, yes. Maybe it's 20%. Something like that. 20%, 25%.

Okay. And so I guess, so you're saying that assets are still performing very well, but is that a function of that some of the supply impact still has to come in the back half for the year? I mean, I understand that they're good assets, very good location. But I'm just turning to understand how they are outperforming within New York City? Is it just be a function of the supply impact having not come yet in that market?

Not necessarily. The 2 assets that we have there are pretty well positioned. If you think about it, really, a few things going on. One from a macro standpoint is, that specific area on the waterfront, Long Island City, has really become a neighborhood over the last decade. We were bit of a pioneer there early on when we built our first asset and then we built our second asset. A lot of newer, higher price-point assets have been delivered into that submarket, sort of buoying the whole environment, and our assets there, being a little more value-oriented, continue to perform pretty well as the supply has abated, in particular along the waterfront, and shifted more to the business district, I would say. So there's more supply to come, more in the business district than on the waterfront. So what comes in the waterfront really is coming at much higher price points than where we are, which just enhances the entire neighborhood.

And Rich Hightower, Evercore.

Sean, really quickly. It hasn't been asked yet, so I'll ask it just to see if you can run through new and renewals across the major markets for the quarter and then, maybe, where we are in July and August as well?

Sure. We're happy to have a run through some of that for you. So in terms of the Q2 data, blended rent change was 2.6% for the quarter, which is 4% on renewals, which has been, remarkably, pretty flat all year. And then move ins, at 1%. It did trend up through the quarter. So April was 2.2%, May was 2.6% and then June trended up to 2.9%, and the range is sort of mid-to-high 1% range in New York, New Jersey, the mid-Atlantic and Northern California, and then it moves up to sort of low 3% range in New England, High 3s, to 4% in southern Cal, and then sort of mid-6s up to high-7% in Seattle. And then, if you look at July, July is trending sort of in the high 2% range as well. And offers, if you're looking out for August and September, they're running in the mid-5% range, which is down 30, 40 basis points from where they were in May and June.

Okay, great. And then my second question, I know you guys have been doing development for quite a long time and are very, very good at it. I'm just curious, if -- as you kind of look at the development schedule every quarter, how much cushion is baked in, in terms of the delivery cadence? Just -- for the reasons that we saw last quarter where you see some delays, it impacts numbers to some extent. Just how much cushion do you put into those numbers every quarter?

Richard, this is Matt. We do monthly updates on all of our development projects. And what we put out there and what we share is essentially what we expect. So I'd say that's the expected case, just like it is on the capital cost side, on the budget side. So we feel like, based on everything we know now, that's our best guess. I will say there's probably more risk in the first turn than in subsequent turns on these projects. So the hardest thing to peg is always when you're going to get that first certificate of occupancy. That's when the inspection and some of the processes around the local jurisdiction is a little more uncertain. Usually once you get beyond that first CO, you have very good visibility into when your subsequent turns are going to happen, you know how your subs are performing then. So when you look at how many communities we first opened for occupancy in the last couple of months, those, I would say, there's not that much risk in the subsequent turns. If there's risk, it's probably in the communities that haven't yet opened the doors.

Rich, this is Tim. Maybe just to follow-up on that a little bit. I think historically, we've actually had a little better success as it relates to schedule. I think we've always had deals that, where you have some struggles, as Matt was saying, but they've generally have been offset by projects that we've been able to deliver early. I'd say there was a couple of other things happening, some that you probably -- those of you that attend ULI or whatever, probably, you've been hearing, just in terms of just labor shortages, subcontractors getting stretched, not necessarily performing, holding up work. We've actually have had some subcontractor failures that have cost us some time. But a big piece of it, Matt mentioned inspections, as the inspectors are stretched as well. And it's -- so we're not often -- we're not getting the kind of response that we have, maybe earlier in the cycle that you get from them. And the other thing is, when they get out there, they've been more stringent around phased occupancies, and subsequently on these high-density woodframe buildings where we may be able to get phases of occupancy in smaller batches, they've tended to be in larger batches, which have contributed to pushing back that first delivery that Matt talked about. So it's really kind of a confluence of a few things, I think that are kind of combining here to create more of an issue than we've seen in years past.

And we'll go to Juan Sanabria, Bank of America.

Just on supply, again. Could you talk to when you expect peak deliveries in each of your major markets? And has that shifted at all as the year has progressed?

Yes, Juan, this is Sean. Each of the major markets, going across, that's about 16 of them for us, so that might be a better topic to handle off-line. I can say it maybe across the larger regions, maybe to kind of run through it. We're expecting pretty much flat supply when you look at New York, New Jersey, mid-Atlantic and Pacific Northwest, between 2017 and '18. Like I said in my earlier comment, some of the '17 deliveries might get delayed, but net-net, probably pretty similar levels, a slight increase in both Northern and Southern California when you get into 2018 relative to '17. And then in New England, we're expecting it to thin out a little bit and come down maybe 50 basis points or so. So there's a lot of deviations at the market level, when you run through all those regions. But hopefully, that provides kind of a high-level overview for you.

That's great. And then, I was just hoping you could talk to expenses. They kicked up in DC and Boston, kind of what's driving that? Is it more discounting going on? Or anything unusual in those 2 markets that drove the higher same-store expense growth?

Not necessarily. I mean the things that are really driving our revision to guidance are really 3 components. Two, pretty easily identifiable. About a 1/3 of it's bad debt, about 40% of it's uninsured losses associated with the storms we had in the West Coast earlier this year, and then the balance is a whole mix of things, some of it is maintenance-related costs from the storms, timing of government licenses and fees, a little bit of unusual carpet replacement in some markets, things of that sort. It's not necessarily just one thing, either across the portfolio or in the markets you've specified, that's driving the differences.

Sean, maybe one thing, Juan did ask about customer discounts. So to be clear, that doesn't run through expenses, it runs through revenue, in our case, as it relates to...

In the case of concessions for new move-ins, that's a contra revenue account for us. The only customer incentive that would be expensed would be for apartments that are not habitable for some related issue. If it's a storm-related event or something like that, that they can't really occupy their home, then we give them customer service discount for a hotel or a thing of that sort to make sure that they're covered during the duration of the time that their home is not habitable.

Okay. And then, any color on that bad debt increase?

Yes. Bad debt is kind of a mixed bag of things, to be honest. Some of it relates to an increase in identity fraud across the markets. Particularly, it's most concentrated in L.A, I would say, and other parts of Southern California. It's also related to issues we've had in the court system in the Greater New York region, particularly the suburban markets, where it's not been as easy to get judgments as it's been in the past. Where judges have been pivoting on us more so. So it's not necessarily one specific factor, but sort of a confluence of factors that are impacting bad debt this year.

And we'll go to Drew Babin, Robert W. Baird.

A quick question on DC with some of the other companies that have reported, there has been some variability of performance between Northern Virginia and Maryland et cetera and then within the district. I was hoping you kind of give a breakdown of how that's shaking out, especially as it pertains to leasing in the last few months?

Yes. Happy to chat about it. It's Sean. I mean, in general, what we've seen is that performance in suburban Maryland has been leading, mainly a function of mix of assets. We've got some value-oriented assets there that are performing well. And then that's followed by Northern Virginia. And then after that, the district, which has been -- you know, it's quite choppy, given the amount of supply that's been delivered. To give you some sense of indicators, from a rent change basis in Q2, suburban Maryland trended in the 2.5% range, Northern Virginia kind of 1.7%, and DC has basically been flat at positive 20 basis points. So that's somewhat indicative of what we've been seeing, and would expect that to continue as you look at the second half in the year. And supply is expected to increase pretty meaningfully in the district. So still expect DC to be the softest of the 3 markets within the mid-Atlantic.

That's helpful. And then a quick question on New York Metro. How was New York Metro kind of shaking out by submarket this year versus expectations? Has the city itself been a little more resilient than you might have expected? And I did note that from 1Q, 2Q, there was a bit of deceleration in suburban New York. So I was hoping you could talk some about that and the dynamics going on there?

Yes, sure. When you look across New York, New Jersey for us, I think it is a fair statement that the city has performed a little bit better than we might have expected, to be honest. And the markets that have been a little bit stronger, include New York City. Long Island's been performing well, and then central New Jersey. Those are the 3 that are leading in terms of performance in the greater region. In terms of the issue you identified in New York suburban, one thing you have to keep in mind there is it's 1,200 apartment homes in that market. So if you have a little bit of a sneeze, one does affect the basket. And we had a couple of assets that normally have nice short term activity during the summer period that, as you lead up to it in Q2, they kind of kick in late April, May, and then goes through the summer. Just not quite as much demand this year for that short-term activity, with prices at a premium, and therefore impacted couple of assets in Westchester. So I wouldn't read too much into that when you're talking about a basket of 1,200 units.

And Austin Wurschmidt, KeyBanc Capital Markets.

Was just curious, you mentioned the increases in supply in Northern California and Southern California next year. Any particular submarkets that are seeing outsized increases?

For this year versus next year?

Correct.

Yes. I mean it's typically the usual places. So what I can tell you, in Southern California, where you typically see it is Downtown L.A., and then, if you move down into -- there's a little bit in the Marina. And then, if you move down into Orange County, it's Anaheim and Irvine. You typically see a tick up there. And then, if you move down into San Diego, I believe it's Mira Mesa, and downtown you'd see a little bit of an uptick. And then, in terms of northern California, for '17 versus '18, you do see an uptick in the city, and there's a few different places where it comes into play. Some of it is not the core part of the city, but you are seeing an increase in the financial district more than doubles as you move into '18 as an example. There's more in south San Francisco, but then there's also pockets like Burlingame that does not have any deliveries expected this year, but they're expecting about 500 units next year. So it's kind of spread around, and the one thing that you do need to keep in mind, as I mentioned, is some of the deliveries that have been pushed into Q4 this year, probably will slip into next year. So it's a little early to make a final call on what '18 is going to look like.

Great. And then I was just curious if you had the detail on what like -- or what rent growth would be, if you were to include short-term leases in that number?

Yes. I don't have that right in front of me. It's a relatively small percentage. And you have to realize it's a pretty volatile number. It spikes in Q2 and Q3, in terms of pulling up total rent change for all terms. But it's softened materially in Q4 and Q1 and pulls everything down. So I can -- Jason and I can address that with you offline, if you'd like though.

Yes, that would be great. And then just last one, was curious, when you look at the capital plan through the balance of the year, just curious what the most attractive sources are, and how we should be thinking about the funding plans for the back half of the year?

Sure, Austin. This is Kevin. It's really -- not much has changed from where it's been over the past 6 months to 1 year or so. Obviously, as you're aware, the 3 principal markets that we look to tap to fund the business, unsecured debt, asset sale and common equity. To varying degrees all are reasonably attractive at a minimum. Though among them unsecured debt ranks as most attractive, followed by asset sales.

And Dennis McGill, Zelman & Associates.

I just wanted to tie together a couple of thoughts that wouldn't relate what they were relating to the supply delay, and then how you think about the year progressing relative to your initial expectations. I mean, I look at your own delays and then seen that in the market as well and still seeing deceleration in the first half of the year. Do you look at that as though the risk has just shifted within the year, so the year looks as though you would've thought it would look, but the back half is more decelerated than the front half because of the timing? Or is the quarterly progression playing out as you would have thought as well?

Dennis, this is Sean. I think generally it's playing out, if you think of the trajectory or slope of what's happening with market rents and therefore the rent change in our portfolio, it's playing out about as we expected. I would agree that the risk has probably shifted a little bit more to the back half of the year. But the way I looked at it is, when I see the 6,000 or 7,000 units that have been delayed and pretty much everybody says they're still going to make it this year, I don't think that's likely to occur in that way. So we have certainly done some things to try and protect the downside. Going a little bit farther out on renewal offers, trying to lock up some people in certain markets where we see an increase in the supply, and specific submarkets in the third and fourth quarter, relative to what we experienced in the first half. And things like that, that are kind of tactical. So I think we've done a good job of trying to shore it up, if you want to think about it that way. As I mentioned already in August, which is sort of the last of the peak leasing months, we're starting out the month about 25 basis points higher in occupancy and about 30 basis points lower in availability. That is intentional to try and make sure that we have a slightly more defensive posture as we encounter more supply in kind of late Q3 and Q4 in some of these places, where it presents some risk. So I think your comment about the risk being more in the back half is probably a fair statement if you're addressing it from a supply perspective. And then also the fact that job growth has been a little bit weaker across the footprint in the first half of the year. It's only running about 2/3 of the pace of last year and that will likely manifest itself in demand in late Q3 and Q4, so we're just trying to be thoughtful about how we position the portfolio for those periods of time.

That's very helpful. And when you think about pricing power by month, when would you typically see the peak seasonally?

Typically, the peak is in July or August, depending on the year. Probably would've been July this year.

Okay. And then last question. Just on Northern California, when you think more broadly about how that market might recover from -- going from really strong increases to moderating, going negative and even probably bouncing back faster in the last quarter, so -- then we would've expected, at least. As you look forward, is that a market where you'd be comfortable if it just got back to stability relative to long-term averages? Or do you think that it can reaccelerate even beyond that, just given the demand out there?

Yes. I'm happy to comment about that, and then Tim or others can. I'd say where you could've most likely see reacceleration that would be meaningful at some point, would likely be in the city, just because the nature of the product types that you're building there which is pipeline, concrete, high-rise. It's a pretty long gestation period. So to the extent that we see supply falling off, say in the back half of '18 as an example, going into '19, that next round of communities that would be built, there's likely some kind of gap in there, and there is -- may have been a stress in the system in terms of finding the right kind of land opportunities, blending it with our construction costs or a constrained financing environment, that there's certainly pressure on starts, generally across the country, and that's something we've talked about. But particularly in San Francisco, with that kind of product type, it might be a little more meaningful than you'd see a woodframe job in San Jose or the East Bay as an example. So you'd probably see the acceleration in that market potentially. It's the core, that's where people like to live, and then it kind of reverberates out from there down the Peninsula and over to the East Bay. So Tim, do you want to add something to that?

Yes, certainly we've seen it in the past. We saw it in 2000, 2001, where we had a pretty meaningful reacceleration after a bit of a slowdown in the late '90s. And obviously that was on the back of what was going on in NASDAQ. This is a market that where hiring is a function to a large degree of what's happening in the equity markets, and it's been a nice run, obviously, in the equity markets. I don't think it's as dependent as it's been in the past. But I think that would be sort of the argument or the case in which you might see a more meaningful reacceleration than just sort of getting back to equilibrium.

We'll go to Wes Golladay, RBC Capital Markets.

Looking at the development pipeline for next year Matt mentioned that the initial occupancies are where you see the most risk. And how do you see the projects at Avalon, Maplewood and AVA North Point kind of going right now? And if there was anything behind at this stage, is there something you can do to mitigate risk for those projects?

Sure, Wes. This is Matt. North Point's going great. In fact, it's making strong progress and Cambridge is not perhaps as overwhelmed with the supply relative to its history. I don't expect there to be any risk there. There might even be an opportunity, we'll see, to pull forward a little bit. And Maplewood, that's obviously the rebuild from the fire that we had earlier in the year, and that's also actually gone if anything probably a little better than expected. So I think we're feeling very good about the possibility, that's another one. I guess, the current schedule shows us opening the doors for occupancy, first quarter of '18. I would -- we may even be able to get that pulled into the end of this year, but certainly we feel good about opening the doors there beginning of next year.

Okay. So, I guess, it would be fair to characterize what happened this year as more of a transitory issue?

Well those are just the 2 you asked about. There are a couple, where there's probably a little bit more challenges, but I think it's a reflection of -- every job has its own unique circumstances. But it's a reflection of where we are in the cycle. As Tim was saying, it is an industry that is at kind of full capacity. So we have seen some subcontractors fail that we've had to replace. We have had some challenges in some of the jurisdictions. And in years past, we've had -- the 2 you mentioned, let's see, we might actually have good surprises that might potentially offset if we have slipped somewhere else.

Wes, maybe just to add to that. To the extent we see it coming, like months in advance, we're generally able to put together, or often able to put together a recovery plan to make up some of the time. It's really, in events where you don't see it coming, like Matt mentioned, where it's a failed subcontractor or just an inspection issue, in which you just -- there's really no time in which to recover, and that's generally where we run into the biggest schedule issues.

We'll go to Alexander Goldfarb, Sandler O'Neill.

Two questions here. First, Kevin, just on the balance sheet, noticed that you have some 1031 proceeds. I'm guessing that's some of the Seattle sales. So 2 part: One, do you expect to acquire another asset? Or is there a potential for a special dividend? And two, are there any other Seattle-type student housing-oriented assets in your portfolio that you may seek to sell?

Alex, this is Kevin. I may start, and Matt may want to add here. The 1031 proceeds you see on our balance sheet relate to a sale that was accomplished earlier this year, Avalon Pines in Eastern Long Island. So whether or not we're able to use that will be ascertained in the third quarter here. And if we can match with something, we will. If we can't, we will retain the proceeds, because based on our current estimate we can absorb the capital gains that would flow from that prior sale.

Okay. And then Matt, on the opportunity for other student-oriented buildings to harvest?

Yes. There may be 1 or 2 others in our portfolio that have a heavy student population. We do have other assets in the market right now for disposition that don't happen to meet that criteria. That particular one was a little bit unique, and a combination of things but -- so we will, obviously, continue to be selling assets. I don't know that any of the next kind of 3, 4, 5 assets we sell probably not likely to be ones that we'd sell to a student housing operator. That was as a little bit of a unique situation there.

Okay. And then the second question is, on the rent control out in Mountain View, I assume this is the standard where there's vacancy decontrol, so you can bring it to market on turn. So one, just wanted to verify that. And two, are there any other markets that you think could have this, that you'd expect communities to be impacted by further rent control?

Alex, this is Sean. Your first point is correct, in that there is vacancy decontrol associated with the Mountain View ordinance. Really what was somewhat punitive about that one, as Tim alluded to, there was a rent roll back. The rents were rolled back from current levels to October 15, 2015 levels. And no rent increases were allowed for people that run to those leases that remain in their home until September of 2017. So that -- that's pretty unusual. And that impacted our outlook for this year. But, ultimately, as you have turnover activity, you'll get it. The question is, what the duration is, so we'll see on that. And then, in terms of other challenges, I mean, there has been chatter in Northern California, primarily from other jurisdictions. There's only a couple of locations where it's actually passed. Mountain View being one of those. And so we continue to keep an eye on it. Typically, at this point in the cycle, you know, the last couple of cycles included, there's a lot of this chatter in Northern California, and then it slowly abates. So we'll see how it plays out. But right now, it's sort of addressed at the jurisdictional level in terms of whether it's Mountain View or Richmond or Santa Rosa et cetera that pop up from time to time.

We'll go to Vincent Chao, Deutsche Bank.

I think we've probably touched on it already, but as you look at the changes -- the slight changes in the same-store revenue outlook by region, we just talked about Mountain View. But are the other changes that we're seeing here largely driven by the shifts in supply? And we could also, at a broad level say that job growth has been a little softer? Just curious sort of what are the deltas to what your original outlook were that's driving some of the change here.

Yes, this is Sean. Happy to address that. I mean it's really 3 regions or markets that are underperforming their original expectation. The first is L.A. which is projected to be off about 50 basis points from what we expected, coming in closer to 4%, instead of 4.5%. There's really 2 factors there, one is job growth in L.A. in the first half of the year is only running about half the pace of last year. So there has been softness on the demand side. And then for us, we had a headwind in the San Fernando valley in terms of some unusual rent premiums we achieved last year, that presented a difficult comp for this year. So L.A. is the first sort of market. And then, in terms of 2 other regions, Northern California is expected to be off about 40 basis points from our original expectation. About half of that relates to the Mountain View ordinance that I mentioned, the other half relates to performance in the East Bay, which has been a little bit softer than anticipated. And then thirdly in the mid-Atlantic, the mid-Atlantic's projected to be off about 20 basis points from what we expected. Just general softness. Both the combination of demand, where job growth is running about 2/3 of the pace of last year as well as just estimating a lot of things that move around. So unfortunately, the other markets, New England, New York, New Jersey, Seattle, San Diego as an example are somewhere between 20, 30 basis points ahead of plan, kind of offsetting that. So net-net, we kind of sum it all up and we come out to about even.

For those that are doing better, Northwest (inaudible) Delta, is it just the demand side coming in better or is there some supply...

I'm sorry, could you repeat the question? You got muffled a little bit.

Yes, sorry. Just on the marks that are doing a little bit better than expected, the Pacific Northwest being the biggest positive delta, is that more demand-driven -- just better demand than you thought?

You know, not really. Pacific Northwest is -- to be totally honest, a bit of enigma to us. Job growth across all the West Coast markets has fallen off pretty materially this year. Seattle included. And Seattle's delivering at kind of 4% of inventory in terms of supply. What it has had is pretty strong wage growth, and it's a very difficult, very tight, single-family market. So we're getting disproportionate share there in terms of kind of marginal propensity. And so we would have expected a little more easing off this year in Seattle. I think, us and our peers though have been saying that for 3 straight years. So there's probably a little more risk in the second half of the year in Seattle, I would say, just given what's happened with job growth in the first half. But it's a little difficult to put your finger on it precisely for Seattle, to be honest.

We'll go to Conor Wagner, Green Street Advisors.

Could you comment or give us some color on the land parcels that you bought in the quarter?

Sure, Conor. This is Matt. I think it was 2 parcels, and both of them were suburban Boston, 1 is in Sudberry which is a job, which will be a start here in the next quarter or two, which is a development that we've partnered with a retail group there that's actually developing a Whole Foods anchored shopping center, and then we're doing I think about 250 apartments as part of that same master development. And the second one is the former Hilltop Steakhouse in Saugus on Route 1, north of Boston. Where -- actually there's also a small retail component to that project as well as about, I think, close to 300 units -- maybe 280 units, that should start here before the end of the year.

And have you seen any changes in the land market in the last year?

Well it's definitely been more challenging for us to continue to find development rights to back fill. Both of those are deals we've been working on for probably 18 to 24 months at least. So it's definitely getting harder. I think less land deals are getting struck right now probably. Just as a reflection of the fact, as we've been saying for a while, that construction costs are growing faster than rents. So it is putting some stress on development underwriting on future deals.

And given that where you develop these markets are, generally perceived to be higher barrier, more difficult to build. That's obviously good for a long-term rent growth perspective but it can make it challenging for you to replenish your development pipeline. As you look forward to the next couple of years, do you have any thoughts to expanding your market footprint, to give yourself more opportunity to develop if you can't make a pencil in Bay Area, Southern California et cetera?

Conor, this is Tim. We talked about this in the past certainly, but we're always looking at whether it makes sense to enter new markets. I think, as we've shared with you and others, it's -- we're looking for -- to the extent we do that, we're looking for markets to share a lot of the same attributes in terms of high value-added jobs, just over-indexing to those parts of the economy. And generally looking for highly educated workforces, attributes that would support new development. And we have pricing that would allow new development to be economic. So it is something that we are evaluating. But it's -- I wouldn't say it's not a lot different than, frankly, when we've been evaluating in the past. And then, as it relates to our existing markets, interestingly, the 2 sites that Matt mentioned, those are both repurposed real estate. And I think that is where the opportunities are going to continue to be in our markets, whether it's repurposing suburban office, which is the case on one of those sites, or retail that perhaps is obsolete at this point or not healthy in case of the Hilltop Steakhouse. But it's there. But I think that's going to be probably a theme over the next few years. But as Matt said, I think it is getting a bit more challenged just to make the hurdles work -- to clear the hurdles if you will, just given where construction costs have gone and where rents are today. So I think it's really going to be a combination of things not meeting underwriting parameters, perhaps getting late in the cycle and just not a lot of vacant land.

And have you had any conversations or anything to move forward on retail? Again, this opportunity. It's a thought on many people's minds, but have you started to act on that beyond the smaller deals or looking at other retail players or bigger sites?

Sure. And we have been. Actually in the last couple of years we've done a number of deals, whether it's Hunt Valley, which was one of the completions of this quarter up in Baltimore. Mosaic was certainly an example. Assembly Row is an example of that. But as you know, there's a lot of whether it's office or retail guys out there thinking about their portfolios from an asset management standpoint, perhaps even more aggressively than they have in years past, and we suspect that there'll be more opportunities to work with them, to help repurpose some real estate.

(Operator Instructions) And we'll next move to Rich Hill, Morgan Stanley.

Just wanted to maybe take a step back. You've talked about a lot of various different markets, but I wanted to get your perspective holistically, maybe what markets were surprising to the upside and downside as it relates to demand?

Rich, this is Sean. They kind of ran through the markets that we expected to see some outperformance as compared to underperformance this year, kind of a function of several different factors. If you look at it purely from a demand perspective, and one thing you have to remember is that, there's typically some lag. But in terms of where we've seen better job growth, it should led to better demand in the short run, being in the next quarter or 2. Job growth in New England is up on a year-over-year basis, which has been fine. New York, New Jersey, relatively flat. And then with the other markets we have seen -- our markets at least, we have seen softening trends recently in terms of job growth, which gives us a little bit of concern about demand in the second half of the year. So as I mentioned, we've positioned the portfolio slightly more defensively for the back half. When you consider that demand outlook, which is potentially a little bit of softening with the fact that a number of markets are going to see an increase in supply in Q3 and Q4. So that's probably the most crude way to look at demand, in terms of what you expect in the next quarter or two.

We'll next go to Rob Stevenson, Janney.

Tim, Fund II is winding down here. I mean I think you only have 1 asset in there right now. What's your thought about doing sort of similar type of structures going forward? Is there a situation where you're happy to do it and you see value there? Or given your size and scale and ability to deploy capital at this point, you're going to basically hold all of the best deals you see on the acquisition side for yourself?

Well Rob, I guess I'd answer that in a couple of ways. You know, one, as we mentioned in the past, I mean by being in the fund business, it does create some issues as it relates to being able to be active portfolio managers, and we have tried to be more aggressive in that area in terms of repositioning the portfolio. Just given the number of deals that we have in development in the Northeast, for instance, we're just going to need to be able to be -- able to recycle capital there and redeploy that into some other markets at times. And being in the fund business, when it's an exclusive acquisition vehicle, impacts your ability to do that. So that's been -- that's one issue. And I guess the other thing I'd say is, when we did the first couple of funds, it really came off a long extensive period where we were trading at a meaningful discount to NAV, and there was really an opportunity to activate that lever, if you will, and we're able to do so, generally successfully, as it relates to the performance of those 2 funds combined. But I think, just given some of the other strategic priorities, it's just not likely that we would do it in the near term.

The multifamily partners unconsolidated deals. Do those have sunset provisions? Or are they coming up on sort of end of their life? I mean, what's the remaining JV stuff that you have? What's the sort of light at the end of the tunnel there?

So with respect to the -- I think you're referring to fund that we picked up from Archstone. I believe the termination date on that fund is 2021.

On both of those? There was like, one with 7 and one with 3 in it?

Yes. So the seed fund is more of a straight up joint venture, that doesn't have a fixed termination date, whereas the U.S. multifamily fund, with 7 assets, has a termination date of 2021.

And do you have the ability to, if the market conditions are robust, to sell assets out of there sooner? Or is it until the end?

Sure. And we're in constant consultation with the partners in those vehicles and have been actively, from time to time, selling assets out of one of those vehicles in the past year and currently.

And it appears there are no further questions. I will now turn the call back over to Tim Naughton for any additional or closing remarks.

Thank you, Belinda. And thanks, everyone, for being on the call. Enjoy the rest of your summer, and I look forward to seeing you at some upcoming conferences in the fall. Take care.

And that does conclude today's conference call. We thank you all for your participation. Have a great day.