住宅地產 (EQR) 2015 Q3 法說會逐字稿

Good day and welcome to the Equity Residential third-quarter 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to today's speakers. Please go ahead.

Thanks, Joe. Good morning and thank you for joining us to discuss Equity Residential's third-quarter 2015 results and our asset sale to Starwood. David Neithercut, our President and CEO, will be our featured speaker this morning. David Santee, our Chief Operating Officer, and Mark Parrell, our CFO, are here for the Q&A.

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 will turn the call over to David Neithercut.

Thank you, Marty, and good morning, everyone. And thank you all for joining us on such short notice.

Because of the additional news we released this morning, we're going to break from our normal earnings call routine where we would go through prepared remarks on our markets, quarterly acquisition, disposition and development activity as well as comments on any capital market balance sheet and liquidity topics. Instead, I'm just going to make a few brief comments about -- first about the earnings release and then about the portfolio sale to Starwood and as Marty mentioned, after that, we will open it up for questions where Mark Parrell and David Santee will also be able to jump in with their insights.

So first as to our third-quarter earnings release in the last 20 years, we have only four years in which same-store revenue growth was 5% or better and three of these have been in the last five years including 2015. We have had only five instances in the last 20 years when annual same-store NOI growth was 6% or better and three of these have occurred in the last five years, again including this year. And our current outlook for 2016 in which we have given an initial range of same-store revenue growth with a midpoint of nearly 4.9% suggests that 2016 is expected to be yet another year of extremely strong growth.

Now you've heard us say numerous times since the recovery that we felt we were looking at an extended runway of above trend performance and that continues to be the case. It's no secret that fundamentals remain very good. The demographic picture is incredibly favorable. The economy continues to improve perhaps not at the rate many would like but improve nonetheless, which is generating job growth. Again, less than some might hope for but the employment rate has continued to drop which creates new household millennials that have a high propensity to rent housing, many of which wish to do so in 24/7 cities across the country that have very high cost of single-family homeownership.

And this trend will continue because even with the improvement in jobs and the growth in new household, there still remains an elevated level of these young adults continuing to live at home with their parents. And I know because I've got one of them myself and we're quite confident and in my case quite hopeful, that they will sometimes someday leave home and create even more new households and this new households will be renters.

As we sit here today, occupancy has held strong and were at 96.3%. Achieved renewal rates averaged 7% in the third quarter with October, November and December at 6.7%, 6.1% and 6.3% respectively. We are very excited about delivering 5.2% same-store revenue growth this year and same-store NOI growth of 6.2%. In addition, we currently expect normalized FFO to grow nearly 9% this year over last year.

So like every call we've had with you the last several years, we're pleased to tell you it remains a very good time to be in the multifamily business and we think we are extraordinarily well positioned to benefit from the continued strength in demand for high-quality rental housing in the high density urban coastal markets.

That leads me to the other release we put out this morning regarding the sale of 23,000 units to Starwood for $5.365 billion. The decision to sell these assets was the result of a process that began late last spring were looking at a stock price that was trading at a meaningful discount to NAV and we were assessing the best course of action. We thought about selling core assets, we thought about bringing some JV partners into some core assets. We kept coming back asking ourselves about what to do with assets in those markets that we did not consider long-term core markets and assets in core markets that might not fit our longer-term strategic vision for the Company. These assets would generally be described as older mostly suburban in nature with limited access to public transportation services, the majority of which are surface parks, two- to four-story walk-up garden properties, not the high density urban assets with high walk scores that we've been focused on the past 10 years or so.

And while we have historically considered all of these assets as warehouses of capital that could at some time or another be sold and reinvested into core assets, over time we became more and more concerned that recycling $6 million of capital was going to be a real challenge going forward because of the strong institutional demand for core assets in gateway coastal cities and the competitive pricing that as a result of that demand causing very dilutive trades between what we want to sell and that which would like to buy. Yet we thought that absolute valuations of the assets we knew were not long term holds were quite good and that those valuations might be at risk by any upward movement in interest rates as well as with any future changes in liquidity provided in the multifamily space by Fannie and Freddie.

So we began to think that maybe the best thing to do would be to monetize the value we have of these assets the day and do a special dividend. The more we thought about that, the more we became convinced that it was the best capital allocation decision we could make for our shareholders which kind of ironically is also very similar to what we've seen take place in our space several times recently -- associate estates, home properties and campus crest communities kind of a partial go private for cash deal.

So we talked to a handful of folks able to acquire a portfolio of this size and worked with Starwood over the last few weeks to put a deal together. That accomplishes several things for us.

First, we realized a very good pricing on assets in markets not considered core for us and on assets in our core markets that do not fit a long-term strategic vision. The second thing we accomplished is that we can now focus solely on our strategy of owning, building and operating assets in higher density urban locations with close proximity to public transportation, job centers and other amenities that cities have to offer.

In the investor presentation circulated last night, you can see that our urban concentration increases 13% to a total of 78% as a result of these transactions. Our NOI for mid- and high-rise properties increased 21% to a total of 69% and that our total walk scores increased 9% to a score of 75.

On each of these and other metrics we clearly lead the multifamily space and our belief is that long-term risk-adjusted returns in the urban core will exceed those in other markets.

So in summary, fundamentals continue to be very strong and to remain strong for quite some time. We feel very good about how we are positioned going into 2016 and beyond. We are also very pleased to be able to monetize our interest in a large portfolio of assets that don't fit our longer-term strategic vision of the Company in a single transaction and believe that returning this capital to our shareholders and delivering an unleveraged internal rate of return of 11.1% is a good capital allocation decision. And by doing so in a leverage neutral way, we retain a lot of balance sheet flexibility going forward.

So with all that said, Joe will be happy to open the call to questions.

(Operator Instructions). Dave Bragg, Green Street Advisors.

Thank you, good morning. The first question relates to the [5-5] cap rate. Can I just confirm is that a forward nominal cap rate or something else?

That our forward 12 with about a $300 replacement reserve, Dave.

Okay, thank you. Can you share a little bit more about the process itself including how big -- was it bidding 10 for portfolio of this size?

Well again, as I noted, Dave, we just talked to a handful of players that we thought had demonstrated the ability to do a deal of this magnitude as well as the ability to move quickly on a deal of this magnitude. After a short period of time, we decided to move forward with Starwood.

Okay, great. And a question for Mark. Could you just address the 2016 debt maturities?

Sure. So the thought process is that Atlas, which is our name for this process, will generate give or take $2 billion of cash that we were used to repay debt. So we may end up repaying the vast majority and probably will of our 2016 maturities but we are going to undertake a liability management discussion and process and it may end up that we also do some later maturities as well and retire some of that debt.

Okay, thank you.

Nick Joseph, Citigroup.

Yes, good morning, its Michael Bilerman here with Nick. David, I was wondering if you can talk a little bit about use of proceeds and the decision on the special? I think back to last summer when Taubman did their big sale actually to Starwood as well and they sort of left the door open a little bit to potential acquisitions which they said were going to be very unlikely given the marketplace. But also to share buybacks and then ultimately through a special dividend which is what they ended up doing. We've seen a lot of volatility just this year in REIT valuations and I'm just curious are you completely wedded to doing the full $9 to $11 special or would you consider potentially one, if an acquisition came up doing an acquisition? Or two, buying back stock?

Hey, Michael, it's Mark Parrell, I will start and I'm sure we'll get some supplement from David Neithercut as well.

So as you know, we bought back material amounts of stock before and we would do so again. But this particular transaction had a huge amount of embedded gain in it and in order to keep the balance sheet -- by that, I mean tax embedded gain -- and to do just a leverage neutral transaction really requires us for every dollar of sales to put about $0.35 towards our debt maturities. Our gain percentage here approaches 75%. So as you can see, there really wasn't any room to capably or easily do a stock buyback with the excess proceeds. That said, there is flexibility on the margin. We certainly could do 1031 transactions and tax-free exchanges if we wanted to or if the opportunity presented itself.

Just out of curiosity, did you look at Stuy Town at all? The numbers sort of shape up pretty well from a $5.3 billion perspective.

We did not, no. Not this time nor the last time. Nor the first time I guess I should say.

Thanks and this is Nick here. For the 2016, the same-store revenue growth guidance that you gave, does that exclude the assets in the markets that you are selling?

This is David Santee. Yes, the guidance is based upon 69,240 units for next year which really isn't that dissimilar than what we are doing this year.

So if we stripped out the assets that you're planning on selling, what would same-store revenue guidance for 2015 be?

It would be about 10 basis points less.

Okay so a slight deceleration from call it [51249] roughly is what is assumed?

Roughly yes.

Great. Just in terms of the market commentary, are you able to go into expectations for DC Northern California kind of the six core markets for 2016?

Sure. I can go around the horn pretty quick. Let's start with Boston. I think if you looked at our Boston results, I was a little bit bearish on our ability to achieve a 3 but I think Boston had a great lease up. I think a lot of the head-to-head competition has been leased up and so I'm a little more bullish. Definitely more bullish on this year and going into next year.

New York, I think is just -- New York Manhattan specifically is going to be stable. Again this year it's our lead submarket, I think 4.8 for the quarter. Then you jump over to Jersey City. It's a 3.8 and then everything else is a 2.8. So Manhattan continues to be a strong steady market for us and we wouldn't expect anything different next year.

Washington DC; Washington DC is still I would say bouncing along the bottom. We are going to produce positive revenue growth. We have in our guidance we factored in some modest improvement, call it 100, 150 basis points for next year but really it's just about where the new product is, and what proximity it is to current assets. But DC we see deliveries are going to be 10 or less next year. And with a lot of the chatter in the government sector, it seems like DC has turned the corner and the largest sector of job growth in that sector job growth is professional services which bodes well for our portfolio.

Seattle, Seattle we are expecting another strong year. Still a lot of companies' regional headquarters moving into downtown. With Amazon continuing to produce profitability, that bodes well for the urban core. Boeing is doing great backlogs. So we don't really see any change for Seattle next year. Kind of expect very similar growth to what we've seen this year.

San Francisco, you know we are always -- we keep moderating with -- it's probably going to be less next year but we've been wrong the last four years. So we are backing off a little bit in San Francisco but certainly deliveries are not going to be an issue. A lot of the deliveries are downtown so we kind of expect more of the same out of San Francisco.

And then all of SoCal really is just it's going to be a plus 5 if not better market. All three of those submarkets continue to just deliver solid steady growth. There might be a little pressure in downtown with the new deliveries but that will be more than made up by the coastal communities like Marina Del Ray.

So to summarize it, Washington DC will be in its own bucket next year. Seattle, all the West Coast markets will be in the plus 5 bucket and then New York and Boston will be in that 3% to 5% bucket.

Thanks.

Nick Yulico, UBS.

Hi, it is Ross Nussbaum here with Nick. David, when you went through the process to sell these assets, did you also entertain selling the whole company or were you exclusively focused just on this portfolio?

This process was focused strictly on this portfolio.

Did any of the people you were talking to try to make an offer or you just didn't go tell them no?

The conversation never came up.

As I'm sure you might imagine some folks this morning are drawing some parallels to when Sam accepted the Godfather offer back in 2007 for Equity Office. It seems pretty clear what you are doing here to focus on your urban CBD high-rise assets. Is there a message that you want to deliver on Sam's behalf that should people be reading in somehow that Sam is going to call the market -- top of the marketplace in a row?

Well I don't speak for Sam but I think my opening remarks I think pretty much described what the process was and my conversations with Sam on the matter. It was we achieved a couple of things we thought were very important here. I think suggesting that this is Sam calling any kind of market call is crazy because I'm not selling the company, we're selling a portfolio of assets and we remain firmly committed to what we are doing in the high density urban core markets. So I think that's a bit of a stretch and I think this was just a smart portfolio move and a smart capital allocation execution.

I think Nick has got a question as well.

Yes thanks. Just a question in terms of next year. Are you using any sort of tax planning strategy pulling forward income from a future year that's going to affect your special dividend payment in relation to these sales?

Hey, Nick, it's Mark Parrell. We are going to pull forward somewhere between call it $300 million to $500 million of 2017 dividends into 2016 is what our base case model implies right now. As we get closer and get into next year, we will give you more details on that. If you recall my prior comment in this call when I said $0.35 plus $0.75, well that gets you more than $1 of sales proceeds and by pulling those dividends from 2017 to 2016, we balance the transaction out slightly lower the dividend and give ourselves enough cash to keep our debt metrics even.

Got it, okay. So to the extent that you sell more, you are a net seller of more on top of what you've announced today, it would likely require more special dividends next year?

I should be careful there. The thought process, the $3.8 billion projected dividend and the $2 billion projected debt paydown encompass all of the sales, the sale of the Starwood today for $5.365 billion as well as the additional $700 million. And the reconciling item is both some costs which are active actually relatively low sale costs and also $200 million to $3 million of 10-31 exchanges that we must do in 2016 due to obligations we have to with various OP unitholders.

Okay, got it. Thanks, Mark.

Steve Sakwa, Evercore ISI.

Thanks. A lot of my questions have been answered but I guess too, David, just in terms of shrinking the footprint, does this do anything to G&A? Should we be thinking about any kind of costs savings?

And then secondly, where is your thought process on development today as we get later in the cycle? How do you think about maybe purchasing land today?

As to your first question, Steve, we lose a little bit of efficiencies both in property management and in G&A as a result of this. We are able to scale up very easily very efficiently and it sort of works against you when you go backwards. But we think it's an outcome that is satisfactory just given the execution that we think we're getting.

And then we talked a lot about development over the last two earnings calls and we sort of begun to back away from really chasing land at current pricing. We did announce the acquisition of a couple of sites that will be assembled with the third site that we had acquired previously this year. So we've done a lot a little bit of land acquisition in San Francisco but generally we've talked about we've been adding land to our inventory at a much slower rate than what we've been putting into under construction and what we've completed. So after elevated levels of new development starts last year and this year, you begin to see that reduce going forward.

Okay, thanks.

Haendel St. Juste, Morgan Stanley.

Good morning. Thanks for taking my questions. Some of them have been answered already. Got one or two here in addition. I'd like to start on I guess a question on the portfolio of assets you are selling and maybe some potential read throughs.

As you mentioned in your comments, you have been contemplating the sale of these assets for over a year going back to last spring. So trying to figure out if you're trying to tell us anything or the market on either secondary market or suburban asset value by selling these assets today. Do you think that suburban or secondary asset values have peaked or at least the cap rates have stopped compressing? And then maybe some color on the differential between the IR for what you're selling versus the retained core portfolio?

Well, I guess last spring is not a year ago. We're talking about more of a six-month process as opposed to a 12-month process. But I guess this is just a reaction to a recognition as I said in my remarks that we owned assets that we didn't think were long-term core assets. We were looking at a challenging market in which to redeploy that capital going forward as well as what we thought was a pretty decent bid on those assets today. So rather than treat these assets like we have in the past where they were reservoirs of capital that we'd used to sell assets and redeploy that in our core markets, we just didn't feel that might be as successful going forward.

And the fact of the matter is we are now very much firmly in each of our core markets and have got good portfolios and have got good allocations in those markets. And didn't have the need to take that capital and put it in a markets so as to achieve some kind of toehold.

So whether or not we are a $40 billion company with capital deployed across these six coastal markets or $35 billion of capital deployed across the six markets didn't really matter and so as we were seeing what we thought would be the private equity bid for these sort of assets, we thought it made sense to go ahead and see what we could achieve from that segment and if it meant the special dividend, we thought that was okay.

Okay, I appreciate that. And then a follow-up on the process itself. You mentioned that there was decent interest. You focused on a group of bidders who you felt were more certain to close and quickly close. Curious if there was any negotiation back and forth on the price given perhaps the more limited group of buyers you are discussing and the size of the deal itself?

There was sufficient negotiation for us to get a price that was acceptable to us at terms that were satisfactory to us and again, it came together very quickly.

Okay but to be clear, was there any type of discount given here to what you were expecting more of the pricing came in spot on to what you were underwriting?

I think we were very pleased with the pricing that we achieved in the transaction and in the entire process.

Fair enough, thank you.

Ian Weissman, Credit Suisse.

Hi, guys. This is Chris for Ian. I was just wondering if you could walk through each of the disposition markets and talk a little bit about the pricing on potentially cap rates on how they rolled up to the 5.5% overall cap rate?

Well I guess that's a level of detail that I'm not quite sure we're prepared to go into. We really looked at this as a portfolio. I'm not sure that there is a wide range of cap rate spread between the individual markets but we really looked at this not as a collection of individual assets but as one large portfolio.

Got you. Okay. When we look at the overall portfolio, Orange County and San Diego kind of stick out as the submarket assets that are left in -- or the suburban assets left in the Company. Did you give any thought to selling or downsizing those markets? And I guess secondly, was there any other assets that you were trying to -- when you were negotiating on the sale that you'd like to have included in the disposition?

Look, Southern California is sort of by its nature mostly suburban. I mean all of California of our assets -- we've got some downtown San Francisco, we've got some downtown LA but generally if you look at the difference between what I said was our urban concentration and our what was that that is not high-rise or midrise, that's really a lot of California.

So no, we did not consider selling anything more in any of those markets. We sold everything in this portfolio that we wanted to. The only things we did not include in this portfolio are those assets that we've indicated in the release this morning that we intend to sell during the balance of 2016 which we thought were not necessarily additive to this portfolio but would be a better execution in a one-off small portfolio like execution throughout 2016.

Okay, fantastic, thank you.

Jana Galan, Bank of America Merrill Lynch.

Good morning. Thank you. I'm also here with Jeff Spector. David, maybe following up on those comments, I'm curious whether you think the private market is giving portfolios a premium or a discount and maybe why you chose to earmark those assets for a portfolio versus the 26 assets where you will look to do individual or small portfolio sales?

Well, I guess I would want to tell you we are obviously satisfied with the execution of this pricing and we had an expectation that we get good pricing just because of the activity we had seen in the marketplace and we did not want to go through a lengthy process of trying to sell these on a one-off basis. This makes sense in one big portfolio that we can then think about a one-time special dividend and just have the whole thing make sense. This would have been a very difficult process to achieve in any other manner and we do not believe we had to give anything on pricing in order to get it done in one fell swoop and we are very satisfied with the overall pricing.

Thank you.

Great. David, this is Jeff. Just one quick question. The key focus for us has been the rise of secondary cities. And I'm just curious if EQR is messaging here or making a statement that EQR does not really believe in the longevity of the rise of these secondary cities, let's call them becoming 24/7. Although, realistically, there's not that many 24 /7 cities in the world, but I understand your strategy, and it's consistent with what you've said. Just on these other markets, is it just not something you believe in long term?

I think all these markets are really good apartment markets, Jeff; we really do. We think Denver is a good apartment market and we think South Florida is a good apartment market. We've been unable to see our way into owning these higher density assets in those markets and believe that the suburban garden-like product we are selling to Starwood are better owned by people that have a different capital structure than we do and that our focus has been for owning what we consider to be more forever-like assets in the high density urban core are better assets in our capital structure. I think that these are terrific markets; they do very well. I think they are a little more susceptible to supply over the longer term and we think that, within our capital structure, the long-term risk-adjusted returns will be better in the urban core than in the suburban product.

Okay, thank you. Congratulations.

[Tony Pellow], JPMorgan.

Thanks and good morning. Can you talk a little about what you think the longer-term delta is between the NOI growth and your six key markets versus say these assets that you are shedding here? Because it seems like, in the short run, it's not that appreciably different, but wandering longer term what you think.

Look, as David indicated, selling these assets would actually be dilutive to 2015 same-store revenue growth, but we think about total return over an extended time period. And if you think about what a real cash on cash return of these assets would be as opposed to just the cap rate, it's less than this level. We also think that there is more risk to value of these assets as I said during my opening remarks with respect to rising interest rates or any change in liquidity that Fannie and Freddie can provide. So this is not simply a call about long-term revenue growth. Although I do believe that history would prove out that the urban core has over an extended time period done better in longer-term top line and probably bottom-line [growth], but it's also just I think a little bit a hedge about potential valuations and we just think it's the right longer-term perspective.

Okay, got you. Mark, I think you went through this and I'm probably going to make you repeat this for a second, but the $2 billion in cash available to repay debt next year, that's inclusive of the Northeast assets that you intend to sell?

Yes, sir.

Is that right? Okay, so should think about it as like $6.1 billion producing the $2 billion of cash roughly?

Yes, so just to reconstruct that for you, the sources and uses, so call it about $6.1 billion of sale proceeds, call it around $300 million that we have to reinvest in assets where you have to do tax-free exchanges for, so that leaves you $5.8 billion. When you try and solve backwards to keep your credit metrics about constant, that means, of that $5.8 billion, $2 billion will be used to repay debt and about $3.8 billion will remain for the special dividend. There are some immaterial costs and rounding in there as well, but it's not significant, Tony.

Okay, got it, thanks for clarifying that. My last question on 4.5 to 5.25 revenue guide for 2016, can you put some maybe broader economic brackets around that in terms of what kind of job growth do we need to see to come in at the higher end or lower end of that range and perhaps maybe what's in the bag at this point from just the earn-in? Just trying to understand the sensitivity around that right now.

We kind of think about it in very simple terms. So we have about 2.3% embedded growth in our rent roll. And we think, just like this year, with the new portfolio, we'll see rent growth in the call it 5.5. And you figure that the easy math is you'll get about 45% of that, which is 2.5, 2.75. So 2.3 embedded, 2.5, 2.75 gets you to 4.95. We are not underwriting any additional pickups in occupancy. Although that certainly could be the case if the markets continue to tighten, but as far as forecasting next year, we are just kind of holding occupancy flat.

Does that imply though that job growth in your six key markets needs to equate to something fairly comparable to 2015 to kind of hit that similar top-line number? Is that fair or --?

I would say as long as we hover around 175 to 200 [jobs], that we will be just fine.

Perfect. Got you. Thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning. Thanks for lightening up the earnings week; I appreciate it. Quick questions here. Mark, the common dividend, should we anticipate that getting resized or you guys will maintain it?

As we said in the release, just to be clear, the dividend that we are going to pay in January that will be declared in December won't be affected by this transaction. Whatever the trustees do they do, but it won't be affected by this transaction. I would expect us to resize the annual run rate dividend that would be then payable in April 2016.

Okay. You guys in the market with one of your apartment towers here in New York to a condo converter. Are your thoughts to contemplate other condo conversion sales?

So we are offering for sale a property on the east side of Manhattan, which we think is one that lends itself better to condominium-type ownership. This is the kind of activity I think you will see us more do going forward, Alex and we're now focused solely on our core markets. Here's an opportunity we think to monetize hopefully good value of this asset and redeploy that into something that might be a better longer-term rental play. So it's possible; we'll see what happens, but if we don't get a number we like, we won't trade. If we do, it will be because we think it's a good price and a good value relative to how we think we can redeploy that capital into another asset either in New York or in one of our other core markets.

Okay. And just finally the military assets, it seems like that one would be sort of next for disposition, but don't know if there's anything contractual or tax or anything like that that would make it stay within EQR. So the future of the military assets?

Well, we have no contractual obligation to continue to do that. The sale does require some approvals from lenders in the Army. If and when that happens, it would be subject to their approval. We have no contractual obligation to continue for any length of time our management and ownership of that asset.

Okay, thanks a lot.

Rob Stevenson, Janney.

Good morning, guys. Mark, I know you use 300 of CapEx in the cap rate calculation, but on a real dollar basis, what's the maintenance CapEx per unit on the sales portfolio versus EQR as a whole for 2015?

We don't have that level of detail right here in front of us, I don't think.

I can tell you though that on a forward run rate, the 5.5 cap rate in this portfolio we think after CapEx is more like a 5.3, so on a real sort of AFFO basis, Rob.

Okay, helpful. And then is there anything that you sitting here today that you guys see hitting same-store expenses materially over the next five quarters other than the typical property tax and wage growth that's going to drive you much above the 3, 3.25 run rate on these same-store expenses that you guys have been averaging recently?

This is David Santee. Here is how we think about 2016 taxes. We know that -- I'm sorry -- expenses -- we know that 2016 real estate taxes are going to have a 5 handle primarily because of the stepup in the 421-a tax abatements. We know that payroll should probably come in 3% or less. We know that we've already locked in material discounts and some commodity costs for next year. So those three categories make up 70% of our total expense. So if you do the math on that, there's no reason why 2016 shouldn't look very similar to 2015.

Okay. And then last question, you talked a little bit about development earlier on, but in terms of the shadow development pipeline and the stuff that's not ready to start yet, how big is that today that you could envision starting over the 2016, 2017 period?

As you know, it's not as big as what we've done in the past several years, Rob. In 2016, we could start call it $500 million or $600 million, I suppose. I think that's a pretty good run rate for us going forward.

Okay. Thanks, guys.

Vincent Chao, Deutsche Bank.

Just a quick question going back to the assets that are for sale in New York City. That is above and beyond the $700 million that's contemplated in 2016, I believe. Just curious given all the commentary about how difficult it is to deploy, what would be the most likely use of proceeds there and for any other condo-type conversion or other assets sales similar to that? What do you think the best use of capital is today? It sounds like starts aren't coming down, so I mean developments will be a part of that, but I'm not sure if that's really going to be able to absorb all of that.

Well the difficulty of redeploying capital was really relative to the yields that we would realize on those assets we want to sell. So this is a 5.5 cap rate transaction deal with Starwood. Difficult to think that we could redeploy that at a reasonable relative cap rate seeing how assets in our core markets today are generally trading with a 3 handle. If we are successful in getting the bid that we hope we could tease out of the market on our deal in New York, we may actually be able to redeploy that asset accretively in one of our core markets. So our expectation at the current time with that is what would happen with the proceeds if we are successful selling this particular property in New York City.

Got it, thanks. That makes sense. Just going back to the $700 million of dispositions, 6 to 6.25 cap rate on those Relative to the 5.5 for the Starwood portfolio, assuming that's just general geographies that you are selling being different, as well as maybe some asset quality, but just curious is there any embedded assumption of just general cap rate increases in that 6 to 6.25 given some of the concerns about the non-core non-urban assets you mentioned being more price-sensitive?

The difference in those cap rates has nothing to do with an expectation of a change in cap rates between now and then. It's just simply recognition that it's a different type of property that would likely trade at a slightly wider cap rate.

Okay, thanks. That's all I had.

Dan Oppenheim, Zelman & Associates.

Was wondering if you can just talk about your view in terms of volatility as you narrow the focus into fewer and fewer markets. Probably [infuse] a bit more volatility into the results, but I guess especially in terms of this area out here in terms of NorCal, how you are thinking about that in terms of the exposure going up? We've seen extremely strong rent growth as it's been. You are delivering a couple more projects in here, plus buying more land. It sounds as though you are more bullish, although the comments were about thinking about that it's going to moderate a little bit here. How do you think about the market overall?

Well, we don't suggest for a minute, Dan, that San Francisco has not had its ups and downs. In fact, it's probably had perhaps more downs than many other markets, but we do recognize that it is a marketplace that has always come back and come back fairly quickly and established sort of (inaudible). So when we look at the assets we own there and look at the assets that we are building and the prices per foot per pound that we are building those units, we ask ourselves not how do we feel about this asset assuming these trees continue to grow to the sky, but how do we feel about owning these assets at these levels for the next 25 or 30 years. With that perspective, we are quite comfortable with what we own and comfortable with what we have underway at the present time. Again, that does not mean that things can't soften in that marketplace. We have not underwritten them again with these kinds of year-over-year revenue growth that we've seen over the past half a dozen years and we just think that, over the longer term, these will be good assets to own.

And I will just sort of mention that when we built the tower in Brooklyn half a dozen or so years ago, when that deal was delivered, it was maybe worth what it cost to build. But we knew long term it was a great asset, well-located and we do very well with it and when the market stabilized, we do very well with it and it's worth a considerable premium today for what it cost to build. I think we take the same approach really on anything that we build. We look at the location, look at the quality of the product, our basis per unit per square foot and ask ourselves how do we feel about being in this product over an extended time period. Not just are we going to -- we're not merchant builders. We're just not worried about what the spread is 24 months after delivery, but is it the right asset for us to own for our shareholders over an extended time period.

Great, thanks.

Rich Anderson, Mizuho Securities.

Thanks. Mark, you said $300 million you are obligated to sell or buy through a 1031 exchange. What other tax protections are lingering in the remainco portfolio after the sale, if any?

Yes, I should have been a little more precise, Rich, with that. We aren't obligated or inclined to 1031 that $300 million just because of the implications it has to us in our OP unit program. We don't have to. We have relatively few assets that are covered and I think that would probably be something between around 30 after this transaction that might have some sort of obligation, maybe a little bit less of one kind or another where you would need to do some sort of tax-free exchange or you'd have some amount you would owe your partner.

Let me qualify that just a little, Rich. I want to make it clear that these are unrelated, unaffiliated OP unitholders who would have taxes in the 100%s, very significant tax and we feel inclined, as Mark said, with a limited amount of -- particularly as it relates to the size of this transaction to try and 1031 those deals and we are quite confident that we will be able to do so in assets that we will be really delighted to own over the long term.

And just to finish the thought, we think that protects the OP unit currency. If you are able to take care of these partners even when you don't have to, we think as we go out and try and do more and more deals that do have OP unit components because we do think it's attractive to do that in certain points of the cycle that that will be appreciated by the market and by our sellers.

Got you, thank you. So David, another cut you mentioned, these are markets not necessarily growthier markets over the long term that you're holding, but just better from a perspective of 25 years. So you are saying like, as the environment changes, interest rates go up, these coastal barrier markets you just think will perform better or -- what is the thesis if it's not about growth?

I wasn't clear I guess then. One is I was thinking about in terms of absolute value with respect to interest rates.

Okay.

We said in the materials that we sent out as part of the press release that there is a good bid for these assets today from leveraged buyers taking advantage of low interest rates. So I think that these assets, as I had mentioned earlier, are better owned I think by a leveraged buyer and there is favorable debt today at favorable rates. Should that change, we think we'd see a bigger impact on value here than we would if any in the higher density core markets where we have most of our capital invested today.

Perfect, thank you. Did any REITs get involved in the process for the asset sale?

We did not have any conversations with any other REITs.

Okay. And last question, you mentioned the $700 million to go will be kind of one-offish or smaller portfolios. Any chance that that could actually morph into a single buyer situation?

I suppose it is possible. We'd probably be delighted if that were to occur, but just given the nature of these assets and for those of you who have been around the block for a while, these are primarily assets that we acquired in a growth transaction, so there are a lot of smaller assets, smaller unit count, smaller price points and we think we might achieve maximum optimal pricing on a one-off sort of basis. But if there were someone who were interested in meeting our expectations on a one-off deal, we would be delighted for that to happen.

Great. Okay, great transaction. Congratulations.

Tom Lesnick, Capital One Securities.

Thanks for taking my questions. So on the $700 million New England portfolio for next year, it seems like you guys are pretty confident on pricing and have a pretty tight band there on cap rates. I was just wondering how far along you were in the marketing process for that and if you could offer any commentary on timing for next year, whether it's probably more weighted towards the first half or second half or whatever.

Well, I guess we had several of these assets out in the marketplace before we really got underway with this larger process. We had a good sense of pricing. I'll also just tell you that we are active in the markets following deals and so we just have got a really good handle on what we think valuations are. I'll remind you that when we announced the Archstone transaction, we had given our Board some guidance as to what we thought we would achieve in selling the $4.5 billion of assets that we used in the 1031 trade on Archstone and we sold those at something like 99.7% of our expectation. So we've got a terrific team out there that are in these markets every day taking care of these assets, trying to understand them and understand the marketplace and we just have high regard for the intelligence that these guys give us and expectations of what we will be able to achieve on this portfolio.

Makes sense. And then on the land acquisitions in San Francisco, just curious if you could shed some color on where in the city those are exactly and when you might expect commencement of those development starts.

Well, these two sites have been assembled with a third site that we've previously deployed earlier in the year and they are adjacent to our SoMa Square property in the Soma submarket of San Francisco. The expectation there is that we can begin to start in, maybe in the first quarter of 2017, that will be $170 million or so project and again, we love downtown San Francisco. We think we will do very well with that transaction.

Great. And then most of my questions on the Starwood transaction have been answered at this point, but just a housekeeping question. Looking back at your 2Q supplement, the asset count and unit count is slightly different than what's presented in the transaction today exiting the market. I think you guys had 19 assets in Denver and 35 assets in South Florida. I was just wondering what the couple of assets there were that were the difference.

Yes, well, following up on Rich Anderson's question and answer a moment ago, there are a few assets that are tax-protected or are JV assets in Denver and in South Florida and that's the difference in the count. Those will be sold or dealt with separately over the course of 2016.

Okay, sorry about that. Thanks for the clarification.

Wes Golladay, RBC Capital Markets.

Hello, everyone. Congratulations on the transaction and thanks for providing an initial look into 2016. When you look at 2016, which markets were the hardest to forecast?

Well, I guess, by default, Washington DC. We are starting off the year with pretty much flat embedded growth. So anything we achieve we will have to earn next year either through rate or occupancy.

Okay. And then for the transaction, the asset dispositions, is there any deferred CapEx associated with that transaction price?

No.

Okay, thanks a lot.

Tayo Okusanya, Jefferies.

Just along those same lines with the 2016 same-store revenue guidance, could you just talk a little bit about markets where you actually think you should see better same-store revenue growth in 2016 versus 2015 and markets where you actually expect it to slow and then when you kind of roll everything up, you come with a slight slowdown versus overall 2015?

Well, so the markets that we think would do better would be Orange County, potentially LA and Boston and potentially New York and DC. Seattle, I think, is not less, but closer to the same and then San Francisco, we hope it will do the same, but we're just cautious about forecasting any gains over this year into next year.

Makes sense. Thank you.

Drew Babin, Robert W. Baird.

Good morning. I was hoping you could in more detail break down what you are seeing on the supply side in the markets that you are exiting. Are 2016 deliveries across the board higher than they were in 2015 or is it more of a long-term issue?

On those that we are exiting?

Correct.

Well, Denver -- this is David Santee -- Denver is delivering over 12,000 units this year and I would tell you that we would expect this portion of that to bleed into next year with a lot of concentration in the downtown area. Then for 2016, as of today, our forecasts are that it drops down to 6500 units. But when you are talking about garden communities, there is not a lot of barriers to entry in Denver and this 6500 number could grow to 7500 or 8000 very easily.

South Florida really is almost the same picture. 10,000 plus units being delivered again in 2015. I think what's different in South Florida is that a lot of these new deliveries are pretty much all along I-95, if not all east of I-95, stretching from Miami all the way up to West Palm Beach. And then very similar to Denver, it drops down to 5500 for 2016, but again with lower barriers to entry, permitting, what have you, to scrape and build two-story, three-story garden walk-up can be done very quickly in those markets.

Thank you. Secondly, just talking about the broader cycle, I was wondering if you could highlight the key differences between the time period now versus going back to 2005, 2006. Cap rates seem to be kind of in the same place or even lower than they were at that point in time. What are the key differences that you are seeing on the supply side or relationship versus that cost, things like that?

I think the debt costs are about the same. There continues to be a great deal of equity chasing these deals. There might be less absolute leverage available, but there's still a lot of debt available at very attractive rates. Anything to add?

No.

Thank you. That's helpful.

Aaron Hecht, JMP Securities.

Just wondering if you could outline your NOI exposure by market following these dispositions.

NOI exposure by [month]? Give us a second here.

Okay.

We are digging for that one. Hold on just a second.

No problem.

So this is after all the expected dispositions.

Between the Starwood transaction and the $700 million that will occur later in the year. So we would expect, and I would say these are all rounded numbers around -- New York to be around 20% of NOI, maybe a bit more; Washington DC to be about 19%, San Francisco to be about 18%, LA about 15%, Boston give or take 11%, Seattle about 8%, and then the rest, really San Diego and Orange County each 4% and that just about gets you a little bit less than Inland Empire that will likely be included the next time we report next year in our Los Angeles count because they are on the far west and really are driven by Orange County or LA more so than the Inland Empire.

Got it. And then just we all saw the article in the Wall Street Journal about the parcel volumes increasing based on Web services and there were some quotes from you guys in that, but just wondering what your take is on how that's impacting expenses and NOI and does this become a bigger issue now with the dispositions given the higher exposure to mid and high rise buildings?

This is David Santee. Certainly, there is a much bigger burden on garden communities because they don't have doormen, they don't have concierge, what have you. We have all been working -- my partner at [Camden] -- we have had conversations with UPS and FedEx and what have you, but we've had a very -- we built a proprietary package notification system probably four or five years ago. Is it a burden on some of the properties? Yes. We have tried several pieces of technology, which are only real partial answers to the problem, but I think over the next year or so, we will be close to providing 100% solution in buildings where we don't have concierge or doormen. But we do believe that if you live in a doormen building or a concierge building that accepting packages is a basic expectation of our residents.

And is the solution in those other buildings electronic lockers? Is that what you are referring to?

No, I don't want to say we've ruled the lockers out, but there's a lot of nuances with the lockers. When someone orders four tires, they don't fit in one of those lockers. And then there's all this unique jockeying between the time the postal person, FedEx and UPS guys deliver and they jockey for last position in hoping the lockers are filled so that they can just dump their packages. So it's a very interesting subject that we hope to solve over the course of the next year or so.

Got it. Well, congrats on the transaction and good luck.

Thank you.

Nick Joseph, Citigroup.

Yes, this is Michael Bilerman with a quick follow-up. Obviously, as a seller, you are most concerned with the buyer's ability to close and fund the transaction. I'm just curious, as I assume this is going to be a leveraged transaction, how much have you already been working with Starwood in terms of the debt financing and what can you tell us about that today?

All I can tell you, Michael, is that we have done the appropriate diligence that we would need to do on a transaction of this magnitude with respect to equity sources and debt sources to give us great comfort that they'll perform as expected, which would be very similar to the way they've performed over the last several weeks between the time we agreed on doing this deal and today's announcement. They have done everything they've said they would do and we've done our diligence to give us comfort that they will be able to continue to do that and close on time as we expect.

Is there any financing contingency at all in the transaction?

No, sir.

And then I noticed there was -- the deal was done in 10 separate purchase and sale agreements and the closing is in seven different buckets. Can you just talk about what the rationale -- are they splitting it up to multiple equity partners? Is there different leverage profiles in the different buckets? Is it timing in terms of getting a debt package? What drove that type of --?

It's really mostly there were some properties that required some consents and approvals. There's some rights of first offer that some counties have. There's also our desire on properties that Mark suggested that we would want to 1031 to have ourselves be able to get a little extra time if need be. So the lion's share of this will happen in one fell swoop, but then there will just be -- and even in those multiple buckets could be at the same time, but it was just a way to facilitate the overall transaction and allow for some of these other consents and approvals to be received.

Is there any G&A savings at all, even a few million dollars that we should be thinking about as we are modeling through what the Company is post the $6 billion of asset sales?

It's Mark Parrell, Michael. At this point, what I would tell you is we run a pretty tight ship already and I think David Neithercut spoke to the scaling comment. It was relatively easy for us to scale up for Archstone, which does imply it's relatively difficult for us to just suddenly scale down. So I, at this point, wouldn't have you project anything meaningful.

And at this time, we have no further questions in the queue.

All right, thank you all again for your time today and look forward to seeing many of you in Las Vegas in just a few weeks. Have a great day.