住宅地產 (EQR) 2016 Q3 法說會逐字稿

Good day and welcome to the Equity Residential 3Q 2016 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.

Thank you, Cynthia. Good morning and thank you for joining us to discuss Equity Residential's third-quarter 2016 results. Our featured speakers today are David Neithercut, our President and CEO, David Santee, our Chief Operating Office, and Mark Parrell, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn it over to David Neithercut.

Thanks, Marty. Good morning, everyone. Thank you for joining us for this morning's call. As we've discussed over the last several quarters, 2016 will not turn out to be the year we had originally expected, due to elevated levels of new supply in both San Francisco and New York City, which combined made up a large share of our initial growth forecast for the year. And as a result, after five years of extraordinarily strong fundamentals, revenue growth this year will now be more in line with long-term historical trends.

The good news, however, is that exceptionally strong demand continues unabated across our markets, with current occupancies remaining at or near 96% and low exposure on the horizon. Turnover across all markets, when excluding same-property movement, is actually decreased for the first nine months of the year compared to the same period last year. Move-outs to buy single-family homes remain a non factor in our high cost of housing markets, and our recently completed development properties are absorbing units significantly faster and at rates above or close to our original excitations.

Furthermore, while our markets have experienced a slowdown in the growth of high income jobs, the absolute number of new high income jobs remains relatively strong and our preliminary indication is that the trend may be reversing. Perhaps more importantly, for the first time since recovery began, there are abundant signs of wage growth occurring in all industries across the country, which obviously is a very good sign for the apartment business.

So as we look forward to what we see as peak deliveries next year, our teams across the country will work very hard caring for our existing residents, welcoming prospects, and turning them into new residents; and we remain extraordinarily excited about the outlook for our business, portfolio and the Company. So with that said, we'll let David Santee go into more detail about what we're seeing across our markets today.

Thank you, David. Good morning, everyone. Today I'll update you on our Q3 results, discuss the current state of each market in which we operate, as well as providing additional color on the 2017 deliveries.

As David said, demand for quality apartments remains very robust, as occupancies in our markets averaging 96% or better and resident turnover continuing to decline. Year-to-date turnover net of same-property transfers decreased 30 basis points versus the 10 basis point increase in the gross turnover that we reported, demonstrating the strong customer satisfaction that our employees strive to deliver each and every day and the great locations our portfolio continues to enjoy. Renewal rates achieved for the quarter continue to be well above historical averages, at 5.3%, while new lease-over-lease pricing was plus 90 basis points. Combined results were in line with our revised expectations, at 3.1%.

Moving onto the markets, in Seattle, new lease-over-lease growth averaged 4.9% for the quarter, while renewals achieved were 8.1%. Seattle continues to distinguish itself as the epicenter of cloud computing services, as Amazon remains the catalyst for the rapid downtown expansion of both jobs and new apartment deliveries. Through August, Seattle, Bellevue and Redmond realized job growth of [3.2]%. That allows the 7,200 new apartment deliveries this year to be easily absorbed with virtually zero pricing pressure.

With 7,000 new deliveries expected in 2017 and job growth well above the national average, we see Seattle as our best revenue growth market next year. Again, using Amazon job openings as a proxy for demand, last week there were 8,000 openings in Seattle, almost double from the same time last year, 3,300 of which are for high paying software developer positions.

This concentration of intellectual capital is also forcing the large well-established tech companies to expand their presence in Seattle to better compete for talent. Microsoft, the region's second largest employer, recently committed to a significant investment in a new artificial intelligence group and most recently announced record operating results. With cloud computing in early beginnings and Boeing, the area's largest employer, having a seven-year backlog in airplane production, Seattle is poised for continued growth, as rents are the lowest of all markets in which we operate, likely delivering strong revenue results that are slightly lower next year.

Down to San Francisco. While operations were quite volatile during the summer peak leasing season, more recently the market has been more stable across the key drivers of revenue growth. Occupancy has improved to 96% versus the low 95% that we saw only a few months ago. The percent of residents renewing are at peak levels and, contrary to some reports of rents being down double digits, our San Francisco portfolio average asking rents are down only 1.4% versus same week last year.

Growth in higher paying tech jobs is not as robust as 2015, but the growth is nonetheless positive. And while VC capital investment has slowed, the actual amount of VC funds available for investment have increased. All the fundamentals are still in place for the market to absorb 2017 deliveries. However, elevated supply and a slower pace of VC investment that drives the tech sector will continue to have a negative impact on pricing power in the sub markets that see the most deliveries.

Achieved renewal rates for the quarter in San Francisco were 6.2%, and new lease-over-lease rates average minus 30 basis points. The modest increase in turnover is more than accounted for by same-property transfers. Netting these out, year-to-date turnover has actually declined 70 basis points on top of the improvement we saw last year.

2017 will see the market deliver 8,400 new apartments, with deliveries that are less concentrated than in 2016. In the downtown area, Some will see 50% fewer units delivered, with the balance spread across Mission Bay and the Dogpatch areas. The mid-Peninsula will also be more dispersed, with only 1,600 units spread across all directions of San Mateo and Redwood City. San Jose and Santa Clara will see the majority of deliveries in the South Bay and will be less geographically competitive with our same-store portfolio. Based on current delivery estimates, the 2017 supply appears to be more front loaded in the year, which means most of the supply will begin leasing up in periods of peak demand.

San Francisco remains ground zero for innovation and tech stalwarts continue to expand their footprint. As artificial intelligence and the Internet of Things continues to grow legs, we would expect San Francisco to continue to lead the world in tech and overcome any short-term challenges with supply. Time and time again, San Francisco has proven to come back faster and stronger than peaks of the past, but we would expect San Fran to deliver revenue growth in 2017 that is much lower than 2016.

Dropping down to LA, job growth continues to be very strong, but is dominated more by lower paying hospitality and leisure sector. However, as downtown LA focuses on its Renaissance efforts and Silicon Beach continues to develop and build out, the higher paying professional services sector is expected to lead job growth through 2020. As non-traditional entertainment content continues to grow, Southern California is poised to capture this additional investment, as well.

Demand for apartments continues to be strong, with occupancy across our LA portfolio at 96.3%. Renewal rates achieved for the quarter were 6.8% and new lease-over-lease growth was 2.5%, for lower turnover for the quarter. Based on current estimates, LA will see peak deliveries of 10,000 units through 2017, with over 80% of these units spread across three sub markets. Downtown Hollywood will represent 50% of the 80%; Glendale-Pasadena, 20% of the 80%; and then Koreatown mid-Wilshire at 14% of the 80%.

To date, deliveries in the urban core and West LA have had modest impact on revenue growth, which today is in the 3% to 5% range. As LA continues to add supply in the urban core, downtown continues to be a more attractive lifestyle that has been non-existent for many years. With virtually no units being delivered this year or next, the East and West San Fernando Valley, Ventura County and Inland Empire continue to show signs of accelerated revenue growth upwards of 6% to 7% for the current month billings. For 2017, we would expect greater LA County to deliver modestly lower revenue growth, pressured by the level of new supply in the urban core.

Orange County, at 96% occupancy today, achieved renewals for the quarter of 7.6%, and that was the strongest across our portfolio, and new lease-over-lease growth of 4.4%. After taking a breather from elevated deliveries in 2015, and for the most part, 2016, Orange County is expected to deliver 5,700 units in 2017, with about 50% concentration in Irvine, Newport Beach sub markets, and the balance spread from Anaheim up through Huntington Beach. With almost 65% of our portfolio in South Orange County, we would expect slightly lower revenue growth as a result of the concentration of deliveries in Irvine, where we have 35% of our revenues.

San Diego, with extremely strong job growth in the first half of the year, has seen strong demand for apartments with very little supply. San Diego is distinguishing itself as the life science medical device tech manufacturing center and continues to have high paying jobs in these sectors, albeit at a slower rate. Second only to Orange County, achieved renewal rate growth for the quarter averaged 7.4%, with new lease-over-lease growth of 4.4%, again, on lower turnover.

San Diego will deliver 2,300 units in 2017, which appear to be disbursed equally between downtown and the I-15 corridor, on lower expected job growth. The I-15 sub market is already showing modest acceleration and we would expect revenue results in 2017 to be somewhat lower next year.

Jumping over to Boston. As we previously said, 2016 would be a window of opportunity in the urban core, and especially Cambridge, where deliveries were few. To date, that has played out, where we have seen modest acceleration in revenue growth, with more pressure on rents in the suburbs than downtown. New lease-over-lease growth of 1.6% for Q3 was the strongest quarter since Q3 of 2015. Achieved renewal rate growth was 4.9%, and again, on lower turnover.

As Boston continues to position itself as a major tech, biotech hub, and an endorsement with the GE Headquarter relocation, the future of Boston and professional services job growth is very bright, as professional services sector moved from 35% of jobs created to 45% of new jobs created this year. In the near term, Boston is expected to deliver approximately 6,200 units in 2017, split evenly between downtown Cambridge and then North and West suburbs. Given the concentrations of the new supply to our portfolio, we see continued deceleration across the market and expect revenue growth to be lower than 2016.

New York for the quarter achieved an average renewal rate of 3% and minus 2% on new lease-over-lease growth, again, on slightly lower turnover. With the trend toward affordability over neighborhood loyalty, prospective renters are proving to be more flexible in where they choose to live. To date, 55% of the 2016 deliveries have been absorbed. Concessions have yet to become widespread and appear to be more targeted to specific unit types at stabilized communities.

The Upper West Side and West Side down to Chelsea are currently the weakest neighborhoods in our portfolio and are delivering slightly negative revenue growth for the current month. The New York MSA will see 14,000 units in 2017, and to clarify, these are units that identified and, I'll say, very conservatively to be within the competitive boundaries defined by our portfolio. They will not match the higher MSA numbers provided by third-party data shops.

It should be no surprise that Brooklyn will deliver the lion's share of new units, where we have less than 8% of total New York Metro revenue, followed by a Long Island City, where we have no presence. Midtown West will deliver a good portion, as Hudson Yard comes online, and then the Hudson Waterfront, specifically Jersey City. These four sub markets will account for a little more than 70% of all deliveries, with a balance spread across various Manhattan neighborhoods.

While there have been lingering pressures on the financial services sector, high paying tech jobs and venture capital continue to migrate to the area. Some believe that Brexit could bring back additional financial services jobs, and that would be a good thing. While supply pressures are driven largely by the expiration of the 421-a program, the lack of any existing replacement legislation will create a scenario in the near future of significantly reduced supply.

With expectations of more affordability in any future legislation and increasing consumption costs, it's hard to imagine deliveries that come close to historical norms. Given all of these factors and the deceleration we see today, we see New York as our worst performing market, with a high probability of revenue growth turning negative during the year.

Last but not least, DC, the metro area continues to improve, coming off of its best job growth since 2000. Eight out of our 10 sub markets are currently delivering accelerated revenue growth, where our current month growth exceeds year-to-date growth, anywhere from 100 to 300 basis points. For the quarter, renewal rates achieved were 4.6%, the strongest in the last seven quarters, and new lease-over-lease growth was plus 20 basis points, again, the strongest in seven quarters, with flat occupancy and turnover.

With expectations of future job growth being very favorable, and over half of the 10,000 units being delivered concentrated in the Southeast and Southwest sub markets, would expect continued favorable absorption and accelerating revenue growth in the sub markets in which we operate.

Like LA, living in downtown DC 10 years ago was not a consideration for most. As more apartments come online, more restaurants and activities are creating an urban environment that did not exist previously, bringing in suburban renters who find downtown a more attractive and active lifestyle, given the traffic congestion and commuting costs that currently exist in the region. We expect the acceleration in revenue growth that we see today to continue into next year.

In closing, 2017 revenue growth will certainly be lower than 2016. Job growth and job sectors will dictate the ability of each market to absorb these levels of elevated supply. The degree of management sophistication and discipline will determine how we price it, and overall impact to revenue growth. With occupancies still in the 96% range, demand remains strong, but elevated supplies that are not supported by the necessary job growth will face varying degrees of pricing pressure in the near term. With that said, I will turn it over to Mark Parrell. Mark?

Thank you, David. Today I will be giving some color behind our same-store expense growth in the quarter and our normalized FFO guidance. And I'm going to move on to talk a bit about our recent debt deal.

On the same-store expense side, we moved our annual same-store expense range to 2.8% to 3.2%, which moves the center of our range back to the midpoint of our original February guidance range into the high end of our July guidance range of 2.5% to 3%. This is a relatively modest change for us. 25 basis points of annual expense growth is about $1.5 million.

Our same-store expenses through June 30 grew at a rate of only 0.9%. Therefore, as we mentioned on the second-quarter call, we always expected our second-half expenses to grow at a considerably higher rate, somewhere in the mid-4% range, in order to meet our July guidance range of 2.5% to 3%.

In a moment, I will give some detail on payroll expense and on leasing and advertising expense, which were the two main drivers of our change in expense guidance. But first, I want mention one of the bigger drivers of our overall same-store expense growth this year, and that's the recent adverse legal decision regarding the calculation of property taxes for several of our properties in Jersey City that I noted on our second-quarter call. The same-store impact of this decision was an increase in 2016 annual real estate tax expense of $1.6 million. We were aware of this in maintaining our same-store expense range of 2.5% to 3% back in July, but still thought that we could stay within that range. So overall for 2016, we expect property tax expense to grow by 6%.

Getting back to the change in same-store expense guidance, on the payroll side, costs in the third quarter were about $1 million more than we had originally planned, because we ran our properties in the third quarter at higher employment levels to keep our properties competitive in some of these challenging markets. We also made aggressive efforts to retain our field personnel in the face of the great demand for them in our markets as new supply gets delivered and needs to be staffed up.

In the leasing and advertising line, we incurred promotional expenses at the high end of our expectations, mostly in New York and San Francisco, in response to higher supply in these markets. This heightened spending of about $1 million included about $670,000 in gift cards given new residents and payment of broker commissions on a few high-rent units. We did anticipate some gift card usage in the third quarter, but the order of magnitude was higher than we expected back in July. We also spent a bit more on Internet lifting services in the quarter.

Please do remember that we had higher occupancy in 2015 and we were able to reduce such spending in the comparable quarter. We expect additional promotional spending to continue in the fourth quarter, though at a lesser pace.

Just an accounting note, those rules, the accounting rules, require that we account for gift card spending as an expense. However, if we had accounted for the cards as a reduction in revenue, the impact to the Company's results would have been a reduction in quarterly same-store revenue of 12 basis points, which would have reduced our reported 3.4% quarterly same-store revenue growth number to 3.3%. The impact on our full-year stage door revenue as a result of the gift cards we gave in the third quarter, the ones I just discussed, and that we expect to give in the fourth quarter, would be even less, about five basis points, if they were to be treated as a contra to revenue.

So now I'm going to switch over and talk about move-in concessions on our same-store portfolio, and those we do treat as reductions in revenue. So again, on the same-store portfolio, in the third quarter we gave approximately $190,000 in these concessions versus the $235,000 in move-in concessions we gave in the third quarter of 2015.

In terms of the sensitivity of our revised guidance range, or expense range, leasing and advertising and payroll are the two likeliest pressure points that could move our annual expenses to the higher end of our new range of 2.8% to 3.2%. On the leasing and advertising side, we expect less gift card spending through the rest of the year because of the lower turnover we expect in the fourth quarter and our strong current occupancy.

If we are incorrect in these assumptions, our expense growth could be pressured. Another possible pressure point is if payroll costs continue to escalate, due to wage pressure or service levels required by heightened competition in our markets. On the revenue side, we have left our midpoint of 3.75% unchanged, and David Santee has already provided you a bit of color on that.

We just fine-tuned a few other guidance numbers, so we'll just talk about that for a minute. We continue to see normalized FFO as remaining within our prior range, so we narrowed that range, as we customarily do at this time of year. Our current annual normalized FFO midpoint of $3.08 per share is nearly identical to the $3.10 per share midpoint of the range we originally gave you back in February, as reductions in same-store NOI were offset by changes in transaction timing and amounts.

Now just a note on our debt deal. On October 12, we closed on a $500 million 10-year unsecured note offering with a coupon of 2.85% and an all-in effective rate of approximately 3.1%, which includes underwriters' fees and the termination of a small interest rate hedge we had. There is great demand for this debt, and we printed the lowest 10-year in our history and one of the lowest ever by a REIT, and we thank our unsecured bond investors for their support of the Company. Proceeds from this issuance were used for working capital and general corporate purposes.

Our projected combined line of credit and commercial paper amounts outstanding, so those two combined, at December 31, 2016 is now anticipated to be $130 million versus the $430 million we previously estimated back in July. And that's due to proceeds from the $500 million debt deal reducing line usage and that's offset by a net $100 million reduction in disposition proceeds that we now expect in 2016.

I'll now turn the call over to Cynthia for the question-and-answer period.

(Operator Instructions)

Nick Yulico, UBS.

I think the primary worry for your Company and some of the other multi-family REITs remains New York City and San Francisco and how bad these markets can get in 2017. You gave some commentary on it, but I was hoping to get some more parameters on how you're thinking about the downside for same-store revenue or rent growth in these two markets next year.

I think we probably said all that we intend to say at this juncture, Nick. And we'll say more detail, more color when we actually give more complete guidance on our next-quarter conference call. I think David was pretty clear about directionally what was happening and the supply and what had been happening in jobs, et cetera, so what our expectations were directionally, but we won't go any further than that at this time.

Okay. Can you just remind us for those markets what the assumptions are for fourth quarter this year same-store revenue growth?

I'm sorry. Do you mean the overall or by market?

For San Francisco and New York separately. What are the assumptions for fourth quarter this year?

I'm going to talk just for a second about the overall assumption. Our guidance implies about a 3% fourth-quarter same-store revenue number, about a 4.5% or so same-store expense number in the fourth quarter. I'm not sure if we have market-by-market numbers right here in front of us. And we don't.

Okay. And then just going back to, David, if we think about multi-family valuations in the private market, do you think cap rates have changed in the past year for your core markets, particularly in New York or San Francisco, if rent growth has come down? Do you think, if you were to sell assets in those markets today versus a year ago, has the pricing changed?

I think it's tough to tell, Nick. I'm not sure there's been sufficient price discovery. But if there has been some modest change in cap rates, I'm not sure that it's had a big impact on value.

We have had, even in San Francisco, we'll still have strong, decent NOI growth on a year-over-year basis. So any modest change in cap rates there doesn't necessarily mean values have decreased. We've certainly seen fewer players in the marketplace looking for assets. But I will tell you, not a week goes by when Alan George is not showing me some deal that traded at some very strong price across these markets.

So we're watching it closely. Certainly, revenue is not growing at the same rate and bottom lines will not grow at the same rate that they had. But bottom lines, by and large, continue to improve, continue to grow. There continues to be a need or demand for yield. So when deals do trade, they continue to trade at fairly strong prices.

Okay. So given that's the case, that valuation seems to be holding up in the private market and your stock is at a big discount to NAV, what point do you think about, does the Board think about, selling more assets, doing a stock buyback to exploit that arbitrage in pricing? And also, did the asset sales year-to-date and the special dividend delay any sort of process you might have had to sell assets this year and do a buyback to force that discussion until 2017? Thanks.

The answer to your second question is no. I can tell you that very specifically at the Board table as we talked about the large portfolio sale and the special dividend distribution back to the shareholders, we spoke very specifically with the Board that that did not, would not impact any other things or steps we might take to address the discount that you note. Those things were not precluded by having done what we did do.

In terms of when does the Board do that, there's no sort of bright line. Every situation will be different. But I can tell you, as I guess I have on this most recent call, and the call even before that, that we talk about that at the Board level, and the Board just believes that that activity requires probably a bigger discount than what many on the Street might suggest with the answers they get with their arithmetic. We've got a significant amount of gain built into most of our assets, and there's just not a lot of capacity after doing things on a debt-neutral basis and distributing dealing with the gain to actually buy much stock back with the proceeds.

And then with respect to borrowing to buy stock back, you get relatively few bites at the apple and we want to make sure that if and when we do, they're the appropriate time and we will continue to monitor this, as we do on a regular and consistent basis with the Board, and if it makes sense to do something down the road, we're certainly would be willing to do that.

We've done it in the past, and we certainly will do so in the future, if the circumstances warrant. And we talk about it at the Board all the time. But in terms of when exactly, what's the bright line, I can't tell you. We'll know it when we see it.

All right. Thanks, David.

(Operator Instructions)

Nick Joseph, Citi.

Thanks. Giving the operating environment is at inflection point, how do you think about setting the 2017 same-store revenue growth guidance range? Historically, you've had a pretty tight range of 75 to 100 basis points with that initial range. So how wide could that be in 2017?

I guess we won't tell you how wide it could be, but I will tell you it will likely be wider, to your point. We acknowledge that by now operating in fewer markets, there's a risk of more volatility in our results and that we will likely provide wider guidance than we have been able to do in the past. In terms of how wide that will be, remains to be seen and you'll certainly see when we share those results with you, or that guidance, on our next earnings call.

Thanks. Appreciate the details on the concessions and the gift cards. But from an operating standpoint, how do you think about incentivizing with free rent versus using gift cards or other basic incentives?

Nick, this is David Santee. As we've always said, even in the last downturn, we were very committed toward net effective pricing. And that is our preferred method of pricing, because it provides complete transparency. It's easier to manage from here. So that will always be our tried and true method.

Occasionally, you get into some sub markets, or different owners that do different things that cater to certain niches in our prospect base, and we try to stick to our guns, as far as net effective pricing. But at times we find that we have to match the market. I think that's been our philosophy for the last seven or eight years, and that will be our philosophy going forward.

Thanks. Just finally on supply, I appreciate the detailed walk through by market. But if you step back and think about all of your markets blended together, what are your expectations for next year's supply deliveries of the urban versus suburban sub markets? We heard from one of your peers yesterday that they think there will be two times the amount of supply in urban sub markets as suburban.

I guess that I would say that we don't necessarily look at it urban-suburban. We look at it as what set of properties are in a reasonable and conservative geographic area that could potentially compete with us.

And probably New York is a great example of where we have nothing in Long Island City. There will be a lot of new supply in Long Island City. And the price point may be very attractive that could draw people from Brooklyn, or from Manhattan, or what have you, into Long Island City, just because of an affordability issue. Our all-in numbers for 2017 are 65,000 units. I would say a very high percentage of those are in the urban core.

Thanks.

You're welcome, Nick.

Rich Hightower, Evercore ISI.

Good morning, guys.

Good morning, Rich.

I want to go back to one of the prepared comments related to San Francisco, I think when David Santee was giving the market detail there. I thought I picked up on some comments around a potential stabilization there. Is that accurate, just in terms of how new and renewals are trading today, or is that just a function of lower turnover at this point in the leasing season, or a shift in timing of supply, or some other factor?

I guess I would say stable relative to what we experienced over the past four of five months. I would say, certainly not, the market is not moving back up. It's kind of moving sideways right now.

We started off with going from rents that were up 5%, 6% that within a couple of months went down to negative 2%. We saw occupancies that were well above 96% fall off over 100 basis point in the peak leasing season, which is not a time that you would expect lower demand. The market was just zigging and zagging for most of the summer.

So today our exposure is right back where it was. Our occupancy is, for the most part, right on top of last year. We don't see any crazy pricing mechanisms in the market. The new lease-ups will continue to offer the 1, 1.5 months free rent, and we expect that. But for the most part, I would really just say the market appears to be more disciplined today. Instead of stable, it's just more disciplined today than it has been over the last four months.

Would you say then that properties that are in lease-up currently, the market overall is just getting a little more rational, in that sense? So it would indeed be a positive change that we could extrapolate from here, or anything else?

Yes. You had a very large concentration of assets in the Soma area, which really trickled across, as well as South San Francisco. And I go back to the original underwriting where the market rent growth in San Francisco far outpaced underwriting on new assets. Even looking at our own assets, the market went well above what we underwrote on our new deliveries.

Owners had a lot of wiggle room to price discover. There hasn't really been any high-rise, brand new, vertical glass, great views of the Bay assets delivered in San Francisco for years. So there was some element of price discovery, and I feel like some could have probably achieved higher rents, when you look at the pace of lease-up.

I think you'll see, obviously you'll see less of that type of product in 2017, probably more podium traditional developments that you see down in San Jose and what have you. And pricing should, we expect and hope that it would be more reasonable than what we saw last year, for this year.

All right. That's actually very helpful color. Second, and final question, it's another twist on the 2017 question. But would you be able to rank order your markets next year, just in terms of top to bottom, strongest versus weakest?

Okay. I already said Seattle, we would expect would be the best. I think Southern, all three of the Southern California markets would probably be in the middle. Boston would probably be below that, and there would be a wide range between SoCal and Boston. Well, actually, let me put DC well before Boston. I'm sorry.

So DC would be between Southern Cal and Boston. DC continues to improve. Great acceleration. Great job growth. Boston will be at the bottom, and probably only slightly above our worst market, New York.

All right. Great. Thanks, David.

Connor Wagner, Green Street Advisors.

Good morning.

Hello, Connor.

I noticed that you guys are offering some 24-month leases in New York and in the Bay area. What was the uptake on that? And is that something that you're going to continue to offer going into 2017?

We've tried different ways. We had a better take rate with no step-up. We tried it with built-in step-ups. I think our customer is well educated enough to know what's going into the market.

So when we built in the step-up, meaning, call it, a 2% or 3% increase in year two, our take-rate fell to basically zero. We did that in DC when we expected rates to fall in DC. We had probably in the neighborhood of a 15% take-rate. That's what we're seeing today is about a 15% take-rate. And we will continue to experiment with that, but monitor it so that we don't get too committed.

And in the Bay area, how is the performance your East Bay assets versus the overall Bay area versus San Francisco?

The East Bay is obviously the best. I think we're billing, when you just look at where we fit today, obviously it's not decelerating as much. As an example, year to date East Bay is 7.5% on revenue growth at current month. Billings are 5%. The East Bay is still hanging in there, and then obviously, Berkeley is helping that, as well.

And then a question for David Neithercut. You mentioned the challenges of doing a stock buyback due to the gains. What do you view as your most attractive use of capital going into 2017?

Right now, completing our developments. We've made a significant amount of money and will make a significant amount of money on the developments that we've got yet to complete and feel much of the free cash flow that we have for the next couple of years will complete that. And we've made significant returns. In fact, we've got a page in the most recent investor information we put up on our website that shows how we've done throughout the cycle.

And then after that, we've not started much development at all, so that the development spend will slow. We continue to do very well with our redevelopment, with our kitchen and bath rehab spend. That's been a $50-plus million of spend per year, which we've been realizing very strong low to mid double-digit returns. So for the foreseeable future, we look at those as great uses of capital.

And then as kitchen and bath spend has been elevated this year versus last year, have there been any markets that you've been particularly focused in with that, or has it been broad-based?

It's been rather based.

Okay. And do you have an estimate on what contribution that's been to revenue growth this year?

Year to date, Connor, it's Mark Parrell, it's about 10 basis points. And remember, it varies around that. It can be zero to 20. It doesn't move the meter that considerably.

And just to be clear, when we talk about this program, because others talk about programs that they call rehab, or whatever, we're spending, depending on the property, $10,000 to maybe $14,000 per door on kitchen and baths. This is not the $30,000, $60,000, $80,000 a door total renovation that some people undertake, who maybe move that from same-store. And if we did, we maybe have done that very limited, we removed that from same-store ourselves when we do something of that magnitude.

Thank you guys very much.

You bet.

[Wans Nabria], Bank of America Merrill Lynch.

Good morning. I was hoping you could comment a little bit on the performance of A's and B's you're seeing across the market and maybe specifically between New York and San Francisco?

I guess I would say that San Francisco especially, all of our communities down the Peninsula, what have you, are mostly B communities, garden communities. I'm not sure it's about A's and B's. I think it's more about location, supply, pricing of that supply. So there's no definitive obvious answer to your question.

And across the portfolio? Any comments you could make about A versus B?

Again, it's sub-market by sub-market. We can tell you that one sub-market may be doing, as David just did, about downtown San Francisco versus East Bay, but that's more sub-market versus sub-market rather than A are versus B.

A lot of it has to do with market momentum. You look at our DC portfolio in the District. We have high-end buildings that we bought in the last downturn that were built to condo specs that are doing just as well as the 30-year-old Charles E. Smith portfolio up Connecticut Avenue. So again, it's probably more about location and the impact of supply.

Okay. Great. Thank you. And you made some comments earlier about concessions and gift cards. But if we combine those two, what was the change 2017 over 2016, and do you have those numbers for New York and San Fran?

It's Mark Parrell. I gave it for the whole portfolio a moment ago. And it would have moved the number 0.01, so 0.01 lower. We actually have lower concessions than we had last year. So that isn't going to make any difference.

Concessions right now are $100,000 a quarter. They're just not that material. They were more significant in the first quarter of this year.

And that includes the gift cards, or that's a separate bucket?

So gift cards are expenses, accounted for under leasing and advertising. Concessions are accounted for in the month that they're given as a reduction in revenue.

But if you combine the two, because they're essentially getting to the same ends --

You have combined the two, because the same-store revenue number is reported on a cash basis, and the deduction is already made for the concession. So all you need to do is subtract the gift cards, which was the number I gave earlier.

Got you. Okay, thank you for that. And just one quick question on 2017 and how we should be thinking about renewal spreads versus new with how you're thinking about things today or maybe for the fourth quarter and how that may trend going forward?

I guess I would say going back to the last downturn, which is probably the best comparison, we were still able to maintain positive renewal growth. And most recently, DC, which is probably a market that many markets could mirror in the next year, we were able to achieve high 2s to mid 3s on renewals. So I think regardless of what the markets do, we should be able to achieve favorable renewal revenue growth.

Thank you.

You're welcome.

Rob Stevenson, Janney.

A few questions away from San Francisco and New York, if I might. David Santee, I think when you were talking in your prepared comments about DC, you mentioned, I think, 8 of 10 of the sub markets there showing strong growth or accelerating growth. Can you just talk a little bit about those two that aren't, what are they and is that just all supply related?

Yes, it is. Let me get to it. Give me one second.

Let me ask David Neithercut a question, while you're flipping ahead. David, you sold the Berkeley land parcel. It looks like you've got $115 million in the supplement of land for development in the future. How many projects is that? Or are we likely to see any of that starting in the next couple of quarters?

It's possible. We've got some land sites in Boston that were really land sites and dents that we were able to carve out of existing deals that we had previously acquired that could create some development potential. But we're going to watch this all very, very closely, Rob.

We started very little this year. After running about $1 billion average in 2013 and 2014, we cut that about by almost two-thirds in 2015 and cut it by another two-thirds in 2016. We're down considerably. So we're going to watch all that very carefully. I'm not saying that we're not going to start anything, but whatever that starts will be, at least at the present time, will be de minimus relative to what we had been doing.

Okay. And then one for Mark in terms of, what's the $0.05 difference between the fourth-quarter guidance on a nayarit rate and a normalized FFO basis?

We moved, Rob, from the third quarter, the sale of a piece of land that's in the Northeast. So that's the $0.05 difference.

Okay. And back to David Santee on DC.

Okay. The two markets that are not accelerating are the Bethesda Chevy Chase market, which represents about two or three properties for us, 9% of revenue, and then far out Fairfax, which is 5% of revenue. So the bulk of our revenue in DC is accelerating.

And that's just because those two sub-markets are getting hit with supply, or is the demographics moving away from that? What are you identifying as the primary issues there?

So Fairfax, I would say it's probably more supply. Bethesda is probably more of a demographic.

Okay. All right. Perfect. I appreciate it, guys.

You're welcome.

Tom Lesnick, Capital One Securities.

Hello. Thanks for taking my question. Most of them have already been answered, but just curious on the financing side. You guys clearly have one of the lowest cost of capital of all REITs, and I think the most recent bond deal is indicative of that.

But on the working capital side, how do you guys think about using the mix of your line and commercial paper? And are there specific instances in which you would be compelled to use one over the other?

Hi, it's Mark Parrell. Thanks for that question, Tom. Right now we have about $200 million, call it, of commercial paper outstanding and nothing outstanding under the line of credit. And I'll tell you the main reason we use the CP program is that it's another pocket of money, and right now it's just vastly cheaper.

CP now is being priced at one-month LIBOR plus 30 basis points. Our line of credit is LIBOR plus 95. So we're saving more than 0.5% on that. So the way we think about using the CP is an adjunct to our line of credit. And when it's cheaper, or that market is deeper for some reason, or better for some other reason, we will use the CP capability that we have.

All right. Great. Thank you very much.

You're welcome.

[Taro Cassano], Jefferies.

Good morning. Two quick ones from me. First of all, again back to New York and San Francisco. In regards to underlying trends for renewals, I think everyone gets the fact that for new leases, rental rates have come down a lot. Could you just talk a little bit about what you're seeing with renewals? Has the situation with new rents caused existing tenants also to start to become more aggressive about asking for concessions or lower rents, or what have you when they come up for renewal? And how do you see that playing out going into 2017?

I think what we've seen over the eight or nine years that we've been tracking this is that, number one, most residents are just programmed to expect some kind of increase from their landlord. Our expenses go up every year, regardless with what happens with revenue.

The other thing that we see is that, the two things that people don't like most are negotiating, or conflict, and moving. So we see a vast majority, as long as we send out reasonable requests, a great percentage of people will check the box and choose to renew so that they don't have to relocate and go through the hassle of moving.

And then there's a very small percentage, those are always the holdouts that renew at the very last minute. And there are people that are well educated on what's going on in the market, and those are the folks that you have to work with.

Okay. But as a subset of people where there may be some pressure, but again, it's just a subset.

Yes. The majority, again, assuming you're reasonable, it's played out the same, we've tracked it year after year. It's a pretty solid trend.

Okay. Great. That's helpful. And then just another quick one, just in the Bay area and San Francisco again, a lot of conversation around increased rent control initiatives showing up on the ballots during the election season. Can you talk a little bit about what you're seeing from that perspective, and what could be the potential risk to your portfolio out there?

Sure. So in terms of what the exposure that we have, it's about three properties, 6.4% of total NOI of San Francisco only. So it's very small percentage of the total portfolio.

I will tell you that the details are unclear. As an example, Mountain View has two separate items on the ballot. One is put forth by City Council, and the other one is just a voter initiative, both of which have two different approaches to any potential outcome. That's all that I can tell you today. We'll just have to wait and see what the outcome is on the election, and ultimately what the fine print will be.

Okay. Much appreciated. Thank you.

Wes Golladay, RBC Capital Markets.

Good morning, guys. Do you think increased regulation of Airbnb could lead to another step down in demand? As you look to formulate your guidance, is this something you might contemplate? And it looks like you guys might be doing some pilot programs with Airbnb. Do you have a sense of how much overall room demand you get from Airbnb?

This is David Santee. I guess I would say that the legislation that occurred in New York City, I believe, is a benefit to us. Historically, the state or the city would fine the building owner if any transient rentals were discovered, and transient rentals mean anything less than 30 days.

On the other hand, they do allow sharing, as long as the owner is in occupancy. So I'm not really sure how that gets policed. So I would say, to what extent it affects Airbnb, I'm not sure.

But we do have a pilot. One property. We continue to learn. We continue to understand how to build out this platform really for the purpose of transparency and control. This would not be a huge money maker for any particular owner or any particular property. This is more about transparency, control, managing something that is already happening and will happen, regardless.

Do you think as a percentage of demand, it would be relatively small, the people that were in an apartment and then just sublet it out various nights on Airbnb, do you think that's a smaller part versus the people that maybe every once in a while, they're in the apartment and they just rent out the other room they have. Do you think that's a bigger part of the picture?

I don't know. I don't understand Airbnb that much. I know they put out what percentages of people that rent out entire spaces and what percentage of people rent out rooms. I guess I would say if there's a large percentage of people that rent out their entire space in New York, then that's going to be a problem for them.

Okay. I hear you. It's a hard one to track. Thanks a lot.

And it's just not an important part of the overall picture for us. What Airbnb is doing or not doing in any particular market has no impact on the way we think about our expected revenue for the upcoming year.

That's what I was trying to get at. It could be a component of a demand, and it could be just 1% or 10 Bps of overall city demand for people that want to run mini businesses from Airbnb --

We don't allow those people. We don't allow anyone to rent an apartment from us with the sole purpose of running an Airbnb business.

That is one of the benefits of the pilot is to have the transparency to prevent that.

That's exactly what I was trying to get at. So you don't have any of that subletting going on in your unoccupied sub letting. Okay. That's what I was looking for. Thank you.

You're welcome.

Richard Hill, Morgan Stanley.

This is Ronald [Camden] on Richard Hill's line. Thank you for your time. Just two quick ones from me. One, going back to DC, you mentioned bringing in suburban renters to downtown. Just curious which suburbs are they coming from? And is there a way to quantify that for us so we can get a sense?

We did that a year or so ago, when we saw tremendous absorption of units on top of virtually zero job growth. And we just picked a handful of properties and looked to see where people's previous address was when they applied and what have you. And it was clear that a lot of people were just around the Beltway, were choosing to live in the city.

We have our office at 1500 Mass Avenue, downtown DC, and we moved it from Tysons Corner. And we had people that live out near Culpepper and what have you and it can take them two hours just to get to the bridge to get across the river and then another hour just to get across the bridge to the office. If you've ever lived in DC, I've lived there three times, it's a very difficult place to get around. And there's every reason in the world why someone would want to move from the suburbs into the city today.

Great. That's helpful. And then the last one, when I look at, take a step back looking at the portfolio of Southern California with same-store revenue growth above 5%, compared to New York, with the supply issues that you mentioned, when you think of longer term steady-state growth, what do those numbers look like? Is it one where, do they get to 3% to 4% type range. Where do you guys see a sustainable number for those two markets? Thanks.

We won't talk about it specifically about those markets, but in general in the markets in which we have elected to invest our capital.

Yes, that would be great.

And would encourage you to look at the investor presentation we put on our website that does show over extended time periods the outsized revenue growth in these markets, the outsized increase in some underlying asset values in those markets compared to other markets. Like I said about those specifically, but just the long term out performance of these coastal gateway cities we've invested relative to more commodity-like markets in the country in general, we've got several slides on our website that will address that for you.

Great. That's all from my end. Thanks so much, guys.

You're welcome.

Dennis McGill, Zelman and Associates.

Thank you. The first question, sorry if I missed this, but did you give the new-lease growth and renewal growth that was finalized for the third quarter for the Company-wide?

Yes. It was 3.1%.

Separately, the new lease and then the renewal?

Renewal for the quarter, renewal rates achieved were 5.3%, and new lease-over-lease pricing was plus 90 basis points, for a combined number of 3.1%.

Perfect. And do you have the assumption that's baked into 4Q for those same numbers?

No, we do not.

Separately, with regard to the development pipeline, just cost to go vertical, any kind of color you can provide on what you're seeing for both labor and material costs and all-in costs of vertical construction and how you guys think that might trend over the next 12 to 18 months?

Across our markets, we're looking at the growth in hard costs anywhere from 2% to as high as 6% to 7%. And that's on top of 3% to 7% growth a year ago. So we're looking at continued increasing costs, a lot of that driven by labor.

And this is just another reason why we believe that we're going to see a reduction in starts and reduction of new deliveries going out, because land prices are up, these hard costs are up, and build-to-yields are awfully low. So we are certainly seeing solid, middle single digit kind of growth, expected growth year over year, on top of a light growth of one year ago.

And David, if you do get a pull back in supply, whether that's capital driven or some other reason, do you think there's an opportunity to that to alleviate some of this burden and lessen that cost increase?

Costs aren't just been driven by what's going on in apartment supply. Labor is being -- these costs are being driven by what's going on in lots of different places. In Boston, a lot of it's being impacted some casino that's being built. So it's not simply and only exclusively multi-family. But certainly, if there is a reduction, you'd expect there to be a modest, a reduction in construction overall, you'd expect to see these growth rates moderate.

That's helpful. Appreciate it, guys.

You're very welcome.

That concludes today's question-and-answer session. Mr. McKenna, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you all. Appreciate your time today. We look forward to seeing many of you in Phoenix, and go Cubs.

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