Essex Property Trust Inc (ESS) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to the Essex Property Trust third-quarter 2015 earnings conference call. As a reminder, today's conference is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs as well as information available to the Company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the Company's filings with the SEC.

When we get to the question and answer portion, Management asks that you be respectful of everyone's time and limit yourself to one question and one follow-up question. It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall, you may begin.

Thank you, April. Thank you for joining us today and welcome to our third-quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments. John Eudy and Erik Alexander are here in attendance for Q&A.

This past quarter John Burkart assumed leadership of our Asset Management and Operations functions and, thus, he will provide commentary for those activities today and in the future. Also, as you know, Angela became CFO on October 1 upon Mike Dance's retirement. Please join me in welcoming both of them to their new roles on the quarterly call.

I'll cover the following topics on the call. First, Q3 results and activities. Second, an update on rent control discussions. Third, review of investment markets and, fourth, comments on our 2016 preliminary market forecast. On to the first topic.

Yesterday, we were pleased to report another impressive quarter driven by strong West Coast economies. As expected, demand from robust job growth led to continued high occupancy for apartments and significant increases in for-sale home prices. Thus our reported results for same-property revenue, NOI, and core FFO per share growth exceeded our expectations and led the multi-family industry. As to the quarterly results, I would like to recognize the Essex team for their tremendous effort and for exceeding expectations once again.

With a few exceptions, rents at B quality property and locations are growing faster than As, exemplified in the Oakland Metro with 12.7% same property revenue growth, the highest in our portfolio. Despite the fact that the Oakland Metro generated only 2.2% year-over-year job growth for the nine months ended September, that significantly lagged San Francisco and San Jose at 4.6% and 5.5% respectively. This occurred because affordability and commute time are two critical considerations for most apartment seekers. With traffic congestion growing, the accessibility to major employment centers has become incredibly challenging and more people are doubling up, living with relatives, or moving to less expensive areas. Thus, we believe that B locations closest to jobs and public transit will continue to perform best in 2016.

In recent investor meetings we have heard concerns about tech hiring and changing housing preferences favoring homeownership. As to tech hiring, we closely follow tech job growth, especially in the current environment given broader economic issues such as the strength of the US dollar, weak commodity prices, weak global growth and the divergence and performance of key sectors of the economy. The Essex portfolio will normally experience softness in traffic and pricing a month or two before slowdown in hiring is picked up by the data vendors. This is complicated to some extent by the normal seasonal slowdown that is typical in the apartment business this time of year. At this point, we have not experienced a slowdown beyond normal seasonal patterns and reported job growth has been excellent. Perhaps the best way to demonstrate the current condition is the 2% improvement in loss to lead at the end of Q3 from 5% at the end of September 2014 to 7% at September 30, 2015.

As to the home ownership rate, we continue to focus on the relationship between the number of new homes, both rental and for sale, that are being delivered compared to household formations estimated from employment growth. We have heard some economists use national data when discussing this relationship, which we believe is often misleading. Apartments are a local business and therefore, our valuation of supply and demand is regionally focused. For a variety of reasons, including the California Global Warming Solutions Act of 2006 and related law, we continue to expect very muted production of for-sale housing in the coastal metros of California as cities implement an urban village housing concept accessed by a robust public transit system. This new concept is likely to take years to implement and will favor apartments and condos. Therefore, we believe it is the unlikely that there will be a significant increase in for-sale housing production that is necessary to materially increase the home ownership rate in Coastal California.

On a second topic, rent control. I commented last quarter that proposals for local rent control ordinances are being discussed in several West Coast cities, particularly in California. Cities are generally protective of their rental stock and voters that live in apartments, and there is a growing concern that high-income tech workers will displace other residents that have not received large increases in compensation. I have commented on previous calls about Richmond, California, which is the first city to approve in preliminary form a draft of rent control ordinance. Opposition lead by the California Apartment Association has been able to force the Richmond rent control proposal to the voters in 2016.

For context, California State law supersedes city ordinances. Fortunately for landlords, state law mandates vacancy decontrol and prohibits rent control on apartments completed after 1995. We have also seen some cities and community organizations focused on the long-term impact of inadequate housing supply, particularly at lower income levels, and acknowledge that rent control has unintended negative consequences and ignores the real issue, that is the shortage of housing production.

Our view is that there is no near-term solution to the housing shortages, especially in Northern California, because cities are generally not supportive of pro growth strategies. Entitlements for new housing continue to be challenging and costly to obtain, and construction costs have spiked around 10% in each of the past two years. Therefore, we don't expect the rent control discussion to end any time soon. We encourage landlords to self-regulate by considering these factors as part of their lease renewal strategies.

Third topic, investments. As commented previously, we've become more selective as to our external growth activities, although we continue to be very active in our search for both acquisition and development deals. As noted previously, construction cost increases are pressuring developing yields and some development deals are likely to solve. The flip side of a more selective acquisition market is a better market for property sales. You should expect to see the level of dispositions increase modestly in 2016.

Cap rates remained low throughout our markets. Using the cap rate methodology of the most active buyers, our best estimate is that the highest quality property and locations trade around 4% cap while B quality property and locations trade around a 4.5% cap rate. Lesser quality properties trade at higher cap rates than periodically and aggressively under written or trophy property will trade in the high 3% cap rate range. Some buyers make more aggressive assumptions that can add 25 to 50 basis points to the cap rate, compared again to the yields underwritten by more active buyers.

On to the fourth topic, which is our market outlook for 2016. Page S16 of the supplement provides an overview of the key housing supply, demand, and economic assumptions supporting our market rent growth expectations for 2016. As before, we assume each of our West Coast metros, except Ventura, will outperform the national average job growth assumed to be 2%. While we are not projecting the continuation of the exceptional job growth that we have enjoyed in 2015, we have no specific reason that hiring is going to moderate other than the concerns about the global economy noted previously. Note that we do not need extraordinary job growth to generate favorable supply/demand relationship and great results. Should job growth continue at the pace experienced in 2015, we are likely to exceed the forecasted results for market rents shown on our market outlook.

Finally, the 2016 same-property revenue growth expectations for the Essex portfolio are likely to exceed the forecasted 6% economic rent growth on S16 due to our healthy loss to lease and other factors, all of which will be discussed as part of our 2016 guidance on the next call. This concludes my comments. Thank you for joining the call today. I'll turn the call over to John Burkart.

Thank you, Mike. I really appreciate the hard work the Operations and Asset Management teams this last quarter, executing our plan which has enabled our great results. Third quarter was robust and we continue to have a positive outlook for all our markets. Higher than expected job growth continues to be the primary catalyst for increasing rents and high occupancies throughout the portfolio. The strong demand pushed economic rents higher, leading to our fourth consecutive quarter of 10% increases in same-store property NOI growth.

Gains from renewal activity increased 6.6% portfolio wide in the quarter, and our turnover was down across the portfolio from 63% in 2014 to 60% this quarter. As of yesterday, the same property portfolio in all regions had occupancy at or above 96% with a 30-day availability of just over 4.7%. All of our markets are benefiting from the combination of strong job and income growth and insufficient supply to keep up with the demand. According to Axiometrics, market rent growth was stronger in September 2015 year-over-year than last year at this time in each of our regions, Seattle, Bay Area, and Southern California. So while we're not giving guidance for next year, we conclude from this that our markets are as strong or stronger than last year at this time, which bodes well for next year.

Ramping up our redevelopment pipeline has been a major focus for 2015, including the restart of the program for the legacy BRE properties. Our renovations team completed over 1,000 apartment home renovations during the third quarter, an increase of 50% compared to the third quarter of 2014. A little over 30% of the unit renovations are currently focused on the legacy BRE portfolio, which negatively impacted occupancy during the quarter.

We continue to make progress on our merger integration Phase II and Phase III as outlined in the June NAREIT presentation available on our website. The Resource Management efforts, renovation, and refinement of the Revenue Management Unit amenity pricing are ongoing efforts that will continue for the foreseeable future. We're making good progress on Phase III which is focused on improving our customer experience, growing our employees, and increasing our efficiency, the results of which will be realized after 2016. Now, I will share some highlights for each region, beginning with Southern California.

Los Angeles, Orange County, and San Diego continue to be strong performers this quarter driven by job growth of 2.3%, 3.3%, and 3.2% respectively, all exceeding our initial expectations and US averages. Personal income growth continues to grow well above the national average in all three metros. Northern California continues to perform above expectations due to exceptional job growth in San Francisco and San Jose which was reported for September at 4.6% and 5.5% respectively. The robust personal income growth in the Bay Area forecasted to be 4.6% in San Francisco and 6.5% in San Jose is enabling the strong market rent growth with a limited impact on affordability.

Oakland continues to perform well due to its strong income and job growth, as well as its proximity to both San Francisco and Silicon Valley. Uber purchased Uptown Station in downtown Oakland and was expected to accommodate 2,500 to 3,000 employees beginning in 2017. Several other tech companies are following Uber's path having announced that they are moving or expanding to Oakland to take advantage of the lower cost office space and shorter commutes for their employees, a trend that we expect to continue over the next several years.

The exceptional demand in the Bay Area is evident by the strength of our lease ups. One South Market in downtown San Jose has averaged over 40 leases per month, Epic has averaged about 39 leases per month, and MB360 Phase II in San Francisco, which is close to being rebuilt following the tragic fire in March 2014, is already 26% pre-leased with the first move-in scheduled for the fourth quarter of this year upon completion.

Finally, in Seattle, the employment growth in this region continues to be strong at 3.3%, and personal incomes are expected to grow 5.7% for 2015, maintaining rental market affordability. CBD Seattle continued to perform with revenue growth about 4% quarter-over-quarter while the other markets, Eastside, Snohomish, and South King grew at approximately 8% quarter-over-quarter; 25% of the 6 million square feet of office development in the region is being delivered into downtown Bellevue with the first tower expected to be completed in the fourth quarter. Sales force has announced that it signed a lease for 75,000 square feet in Bellevue and it plans to double its current workforce in the area.

We expect housing supply to decline slightly in 2016 as rising construction costs begin to limit apartment development. We are very pleased with our results year-to-date and I think our momentum should position us well into 2016. Thank you, and I will now turn the call over to Angela Kleiman.

Thank you, John. Today, I'll discuss our third quarter results, the revised outlook for the year, and provide an update on our balance sheet. For the third quarter, we exceeded the mid point of our core FFO guidance by $0.06 per share. $0.03 of the outperformance resulted from higher revenue primarily driven by the strong job growth in our markets which accelerated the rate of lease-up absorption at higher than projected rents. $0.02 of the outperformance resulted from lower expenses within our consolidated properties, although part of the favorable expense variance is timing related; therefore, we expect our year-over-year same property operating expense growth to be between 3% to 4% for the combined portfolio in the fourth quarter. Following two previous revenue guidance increases totaling 115 basis points at the midpoint, we are reaffirming our same-store revenue growth forecast and are pleased to report that we are currently tracking slightly above the midpoint of that range.

Now, turning to the balance sheet. Our balance sheet remains strong. Our net debt to EBITDA has now declined to 6.1 times, which is one-quarter ahead of our target due to stronger-than-anticipated growth in EBITDA. Based on our market rent growth outlook, we expect this metric to decline to the high 5s in 2016. In addition, we are currently evaluating our options to refinance $140 million of Fannie Mae credit-enhanced bonds in the fourth quarter. In doing so, we anticipate potential savings of $1.4 million annually over the seven-year term and we would incur approximately $6 million in write-offs of which $4.25 million is non-cash. These costs would be excluded from core FFO, but included in total FFO, and are shown as non-core adjustments on S14 in the supplemental.

As for our plans for the $350 million debt maturity in 2016, we have good flexibility with access to multiple options. For example, our $1 billion revolver has virtually no outstanding, and if we leave this debt floating, our variable rate debt exposure will only increase to approximately 10% on a low leverage balance sheet. Although this is not our preference, if we were making this decision today, we favor refinancing most of the maturing debt with a 5- to 7-year term loan and/or a 10-year unsecured public bond execution depending on the interest rate curve and the related threat.

Lastly, we have classified one property as held for sale, our corporate headquarters in Palo Alto, which we expect to sell in the fourth quarter. We will be moving to a newly leased space in San Mateo. We're presenting the final steps in the office relocation plans which will consolidate the BRE corporate office in San Francisco with the Essex corporate office in Palo Alto.

I'll now turn the call back to the operator for questions.

We'll now take your questions.

(Operator Instructions)

Nick Joseph of Citi.

Thanks. Wondering if you can frame the 7% loss to lease in historical context? You mentioned last year it was 5%, but is this the largest loss to lease you've seen at the end of September?

Nick, hi. It's Mike Schall.

I don't have that statistic going back each year historically for a long time, but I know that as of July, that typically is the high point of loss to lease as you go through the year and the low point is in December. So July 2014 was 8%, July 2015 was 8%. The low point was December, so December 2013 was around 4%, and -- or I'm sorry, December 2014 was about 4% and 2013 was about 4%, so it gives you some idea.

Those are obviously during very strong periods of time. I've seen loss to lease at zero at the end of December and at 5% to 6%, I would guess, is probably the more normal high for loss to lease in a typical year. Again, these are from my view extraordinary years, and that metric I think at 8% in July is near the strongest that we've seen it historically in my 30 -- almost 30-year career.

Thanks. And just staying with that, the 6% economic rent growth outlook for next year is actually higher than the 5.6% you had predicted at the same time last year. So what gives you the confidence to make that prediction today?

Well, a couple things. If you go back to our original guidance that you noted for 2015, it was based on 2.5% job growth and we are tracking using September year-to-date numbers at 3.3%, so we pretty dramatically outperformed that number. And so we're carrying momentum into this next year, and our view is you add limited amounts of supply -- in other words as the supply/demand relationship is moving in your favor you will build pricing power, so there's a little bit of an incremental pricing power just from the supply/demand situation and the consequent impacts on market occupancy levels in the place where people want to live most.

Thanks.

Next we'll hear from Jordan Sadler of KeyBanc.

Hi. It's Austin Wurschmidt here with Jordan. You commented that conditions were as strong as they were last year. Is it conceivable to think that you'd be able to push rents at a pace that was higher than what you achieved this year?

Again, this is Michael Schall.

I would just go back to the job question, and if we exceed the 2.5% job growth that is the basis for our 6% market rent growth then I'd say yes, again we will exceed it once again. We are concerned about affordability. We are concerned about all of the issues with the global economy that were noted before. Although, one compelling factor is the personal income growth that we're seeing, especially in the tech markets, which is in the 5% to 6% range.

So if you're getting 5% to 6% personal income growth and rents are, let's say, growing at 8% or 9%, it doesn't have that big of impact on affordability. And, again, not everyone is going to get the big increase in income. The personal income growth is driven largely by people, the new tech worker coming in making a lot of money and displacing someone that is not getting a big increase in their compensation, who is then forced to move to a place that's farther away from the employment center. So, this transition is ongoing through the renter pool, but if we bring in high income tech workers in greater numbers than we have projected on S16 then, yes, we would expect rent growth to be higher.

Thanks for the detail there. And then you mentioned in your prepared remarks also about a decline in housing supply in 2016. I was wondering if you could expand on that a bit and give a little bit of detail by market?

I don't think that we actually have much of a decline in supply, so I'm not sure exactly what you're referring to. I think that it's very nominal. Who has those numbers? Let's see, 2015 versus 2016. I think the supply decrease is somewhere around like 0.1%. So overall -- so we are not expecting supply to decrease. But, again, we don't have complete certainty.

We have some factors that would lead us to believe that supply could decrease, i.e., construction costs going up at 10% in each of the last two years, and John Eudy is here and he's looking for development deals every day and he's having trouble with the underwriting, because costs have moved so quickly and pro formas sometimes don't reflect the most current cost structure. So when John and I talk about new deals, we're finding it more difficult for us to underwrite and if we're having trouble underwriting them, I can pretty much assure you others are having trouble as well. John do I have that right?

Yes. Right on. With these actions we are seeing, cities are getting tougher in their requirements. Nothing is going in the favor of over supplying the market.

Thanks. And then just on your comments there about the aggressive bidding going on for new deals. You mentioned being a net seller next year by a little bit amount. Are there any markets that you're looking to lighten up in, and how should we think about the assets that you're typing to sell? Are these are more BRE assets, or are they legacy Essex assets?

Yes, just to be clear, I don't think that we'll be a net seller next year, but I don't have complete clarity on that. I think what I said was we will likely sell more next year than we sold this year and so to be clear, the way we look at this is there are two sides of this coin. One is what's going on, on the capital side. In other words, what's the relationship between where REIT stocks are valued and the private real estate markets?

Is there a disparity there between the two? And if REIT stocks are trading at an evaluation above where private real estate markets are, then we want to be buying real estate. And the flip we want to be selling real estate and our is view is that we're currently somewhere around parity, which means we cull the portfolio. So that's the capital side.

On the real estate side we have very few assets that we put into the two bottom categories, the two categories we're most motivated to sell, which are substandard operating properties and marginal properties that's trading like good properties for whatever reason that people are forced to take substandard properties. But we don't believe when the economy changes that they will be the beneficiary.

So, those are the culling assets. And then the other categories of property that we are more interested in selling again if this relationship between REIT stock values and private real estate values is appropriate would be the properties that have some other -- maybe some minor physical or operational impairments and/or the properties that we consider to be market performers. But about half our portfolio just by way of background we consider to be within the in irreplaceable category, which we're unlikely to sell almost at any price. So we have a ranking process that ranks the properties in terms of our desirability of sale, again, within the constraints of how we look at the capital side, and that's how we run our disposition function.

Thank you for the clarification and the details.

Next we'll hear from Dan Oppenheim of Zelman & Associates.

Thanks very much. Was wondering related to the dispositions, would you have more of an emphasis on the pre-1995 community, where there would be subject to rent control if they were to be passed in those municipalities?

Hi, Dan. It's Mike Schall again.

It comes up as a consideration, but I don't think it's one of the key considerations, primarily because of California State law. Again, in California State law there's vacancy decontrols mandated, so even though you may have rent control upon move out, you're moving people to market at that point in time. We operate in several rent control cities including San Francisco, Los Angeles, San Jose, and so I don't think that that would necessarily change things.

Our experience in San Francisco, for example, in our rent controlled buildings in San Francisco is that fewer people move out so your turnover rates are lower, which means you can't capture the loss to lease as quickly, and you'd think that might be a real problem. But the flip of that is there are people that otherwise would have moved out of that building if not for the subsidy and bought a home or moved somewhere else, and those people now are occupying a unit which effectively makes the availability of units that are vacating smaller and giving us more pricing power on the other side. So, again, rent control cities are not necessarily horrible for us as long as State law remains in place.

Got it. Okay. Thanks.

And other question, wondering about the magnitude of the rent increases and the turnover, which clearly was down year-over-year? But just wondering, in some of the areas with Santa Clara, San Jose where you've seen the higher levels of rent growth, are you also seeing more move outs on account of those rent increases, or is it actually lower based on the strong income growth in those markets, so that it's not actually a function of the rent growth, but it's more the income growth that is driving it so that those rent increases aren't an issue?

Yes, this is Erik. I would say no that we haven't seen a significant increase due to financial reasons. If you look back over the last couple of years, that number has bounced around between 15% and 18%, as people are citing financial reasons, and so that's where it is today, as well. The one caveat is that there has been some uptick in people citing relocation out of the area as a reason, and we believe that some of that is probably related to financial reasons. But, again, that hasn't moved enough for me to believe that it's significant.

Thanks very much.

Thank you.

Alexander Goldfarb of Sandler O'Neill.

Good afternoon, or good morning out there. Angela, welcome to the hot seat. Just quickly a few questions here.

The first one, Mike, is you said that you were considering increasing dispositions for next year. If we look going back, you have harvested some of your funds over time, unloading of meaningful parts of the portfolio. There's also a focus, I think, of Essex to always grow FFO. So would you ever contemplate a transaction where if you thought that the pricing was so dramatic that you could get to do a sale of properties that would result in earnings coming down because you sold a significant part, even though you may generate huge gains for shareholders? Or, the view is always prune in smaller amounts and leave the larger portfolio stuff to your joint ventures?

Yes, Alex, good question. No, I think if there's a compelling opportunity to sell assets and distribute to a special dividend, I think we would absolutely do that. Again, right now we're in this what I just described as sort of the parity phase on the capital side, where the stock obviously is bouncing all over the place, so maybe in and out of parity. But we're at that point where there's no compelling arbitrage between the REIT stock price and the private real estate values, and so our motivation in that environment is not as great as it would be if, let's say, share prices and private real estate values diverge again as they have over the last several years.

So there is some concern about whether people will remember -- whether investors will remember that we paid a special dividend and that will properly get factored into our track record. But that's a relatively minor concern and since that is the only reality with respect to selling assets with large gains and distributing money, you obviously can use a 1031 exchange. But if that's a reality and that's the right thing to do then we're going to do it.

Okay.

And then switching to Oakland. Last cycle you guys did some investments over there; there is a high rise tower that you got involved in. And then if memory serves I thought you exited the market or weren't as pleased with the results that you got. But at the beginning of the call you spoke highly of the market as far as just the accessibility to San Francisco and the low cost options. So, is this a market that we should see you increasingly invest in, or is it still maybe attractive right now, you may be hesitant to put longer term roots there?

Yes, I think there's maybe a little definitional issue here. The City of Oakland is different from the Oakland Metro. The Oakland Metro includes Freemont and Pleasanton and Walnut Creek, et cetera. And so we're seeing that the Oakland Metro, which is what generated the 12.7% same-store revenue growth is the broader metro and there are places within that metro that are very high quality and are accessible to San Francisco and some of the major job hubs.

The one thing the Bay Area really got right was the Bay Area rapid transit district, which essentially has trains that go from a variety of locations into San Francisco. And many, many people including myself, I live in Freemont, which is in the Oakland MSA, and getting to San Francisco is a heck of a lot easier than driving. So, it's the one thing they got very right, so there are locations within the Oakland Metro area that we think are high quality, commutable into San Francisco, et cetera.

We also believe, as John said, that as costs on the office side increase that some employers will start looking at different options that will benefit some of the other metros, including downtown Oakland in this case, but I wouldn't limit it to just downtown Oakland. There could be some businesses, or some parts of businesses that will move up and down the coast, and/or potentially other markets, as well, as the cost of business increases.

So is downtown Oakland is that something you may revisit, or right now it's not on the radar?

To be clear just downtown Oakland, we have a high rise building that we built down the street from the one you're referring to, and I don't think that we're looking at anything else in downtown Oakland. It has to be so specific, because there's some areas of downtown Oakland that we really, really don't like and so we would avoid them, but we would be highly, highly selective in Oakland, maybe less, so at some of the other locations within the Oakland metro, the broader metro.

Okay. Thanks, Mike.

Thanks.

Next we'll hear from Tom Lesnick of Capital One Securities.

Hello. Just quickly on the same-store guidance range. Obviously, on the full 43,000 units the ranges were unchanged, but on the 28,000 units OpEx was revised lower, implying that on the BRE portfolio there was a revision higher and hence the range was unchanged. I was just wondering what was driving that?

It's not because of that. We revised the Essex same-store because we have realized the savings from the first quarter and we have not revised it for the combined portfolio, because we're still waiting on primarily the taxes. As you know, that's the biggest component of expenses. We've only received 75% of the taxes from the BRE acquisition, and so although that has come in slightly favorable, there's still a quarter of it left and so we're just waiting on that first before we make any decisions.

Makes sense. That's helpful. And then on the insurance reimbursement accounting. I saw there was about $3.1 million on the income statement and then 1.8 was backed out for FFO and then another 600 was backed out for core, implying that there was a piece in there that was considered core. Could you clarify what that was?

Yes, yes, happy to, and we did move the geography a little bit this quarter. And so but the net-net is it's all non-core, and we added a line in our, I think it's in the S or the supplementals, S-2, that shows insurance reimbursements. And so there were -- because of that we did a prior period adjustment, so it looks like some ended up in core, but it's not. But if you want, we can talk after the call and I can walk you through the math.

Sure, happy to follow up on that. And then quickly, what was the recurring CapEx number for the quarter?

The recurring CapEx is about $18 million for the quarter and you'll see that in our Q3 that's coming out next week.

Alright great. Thank you very much.

Next we'll hear from [Greg Van Winkle], Morgan Stanley.

Hello. Going back to your market forecast in the last phase of your supplement. You talked about how job growth versus supply growth still looks really good in all your markets, which is leading to the strong rent growth forecast for 2016. If you had to think about the risk, though, and where you might be wrong, where are you the least certain about your projections and are there any of those markets or forecasts where you think are more at risk than others, whether it be through the upside or the downside?

Hi, this is Mike. That's a good question.

We think about risk in really two different ways. One is the risk that in a major economic blip it seems like all the job growth across the nation goes to zero, and so the market with the highest overhang of new construction as a percentage of stock is the greatest hit. So Seattle from that perspective at 1.3% has the most overhang with respect to deliveries potentially. In an environment, again, of demand or job growth close to zero across the nation it would have the greatest impact.

In terms of the supply side of the equation, we expect to do enough diligence to have a very high degree of confidence that the supply numbers in this document are accurate. The one piece is you can throw up or build single-family homes relatively quickly if you can entitle them, whereas the apartments and condos it takes a very long lead time and it takes a couple years to build those buildings. So we should be able to get them 100% right.

So we feel very confident as it relates to the supply estimates, which leaves us with of course the job forecast. And on this obviously no one has the right answer. None of us have a crystal ball. We try to take a middle-of-the-road type of approach and maybe with an element of conservatism and again last year if you look at how we approach the same document we were pretty conservative. This year we're not estimating that. We're going to continue with this incredible job growth that we've had in 2015.

We moderated it somewhat, but the reality is we don't know. We think this is our expected case scenario, so therefore we expect the West Coast coastal metros to outperform the nation, the nation at 2%, by what is that, around 20%-25% and I think that's a rational relationship over a longer period of time. So we put this as maybe it tends to be a little bit conservative, and we hope to outperform it. But we view it as essentially a balanced forecast, and I think the risks are really the economy and what happens with the economy. Because that is going to drive whether we hit these job growth forecasts, and whether the nation hits its job growth forecasts, and then would you rank these and say Seattle would be your greatest exposure if you end up with a major economic issue.

Okay, and absent any nationwide economic slowdown, there aren't any three major geographies for you that are more or less at risk in the job growth side just from market specific issues?

Well, Southern California is a more diverse economy so you would say the chances are that if you're going to have widespread dislocation in Southern California it has to come from a variety of sectors. Obviously we have more tech focus in Northern California and Seattle, so you would say if something happens to technology, you have a somewhat greater exposure there, just as it relates to the components that are driving the economy.

And I'd say the same is true of all of this divergence within the economy where certain sectors are doing really well and others are doing poorly. Look at what happened with energy, for example. Anything that has a greater concentration of any part of the economy potentially is more exposed.

Makes total sense. And then last one here. If we think about upside from redevelopment and also optimizing lease expirations in the BRE portfolio, how much of a tail wind do you think that could be to same-store revenue growth in 2016?

This is John.

On the BRE on the renovation side we will probably add about 50 basis points to their growth rate toward the second half of 2016. It will still take a little while to ramp up and have the impact at the bottom line.

As it relates to hitting the expirations in better order and the amenity pricing in better order, that's an ongoing process. That took us several years for the revenue management team. They worked very hard to make adjustments in the system for the Essex assets and we see that continuing on for the next couple of years. I can't quite quantify the impact other than to say as Erik had mentioned earlier we had some issues earlier on this year because of the expirations, and it's not as simple as just solving it at that point in time, as most people in the marketplace want a standard 12-month lease, and so by trying to force a new expiration schedule you don't necessarily get the best results, so you solve that type of a problem through a couple of rentals innovations and it takes a few years.

Alright, that's great. Thanks.

Next we'll hear from Drew Babin of Robert W. Baird.

Hi. Great quarter. Looking into next year in the BRE portfolio integration in terms of your expense line items, any visibility at this point on which line items we may see shift one direction or the other as the different cost savings initiatives take deeper effect? And also what G&A run rate expectation is -- the same factors?

Yes, this is John again.

I'll be careful not to get into forward guidance, but just to give some flavor. Right now Erik and his team worked very hard when he first looked over the portfolio and we ultimately have our expenses with BRE expected on a unit per unit basis pretty close. So from a go-forward basis we don't expect large changes that relate to one portfolio or the other. We are working, as we mentioned on our Phase III of the merger integration, which includes procurement, and we do expect to see some savings there. We don't have our hands around all of that at this point in time.

We also have benefit of Resource Management, as we mentioned previously, and that is really largely focused on the BRE portfolio. We expect it from the onset to save as much as $100 a unit in utilities as we implement that. That's pretty tedious. It takes several years to implement each of the programs and do it well, so that will work its way into the BRE portfolio over, say, a three-year period, some of which we've already completed.

And any impacts noticeably on the G&A front with the office consolidation?

We are in the process of rolling up our 2015 budget, and so on the office front -- let's put it this way. I think G&A as a whole probably would expect a modest increase, but it's not going to be materially different from what we're seeing right now.

I think there will be a little bit of a geography difference, because we'll take the proceeds from the sale of the office building and reinvest them, and that will offset some of the G&A that will come in from the office relocation. So we expect the net core FFO impact to be modest, but the geography will be a little different.

Okay. That's helpful. Thank you.

Wes Golladay of RBC Capital Markets.

Wes?

Wes, if you can release your mute function, we are unable to hear you.

Sorry about that. Good quarter, everyone.

Real quick on the job forecast, how did you derive that? Was that a third party, or are you looking at individual office leasing data that you're seeing and coming up with your own forecast and how granular does it get?

This is Mike, Wes.

We use a variety of data vendors, economy.com, Rosen, a variety of others, and so we try to build a consensus as to the US job growth, and from there we look at historical relationships of if the US is doing this, what is the likely impact on the West Coast and our metros, and we have given consideration to specific sectors. So it isn't granular in the sense of we've got an estimate for what's happened at HP, but it starts with the broader macro expectations for the US and then it looks through to the sectors and tries to predict what is going to happen. And then of course we take that information and we create a supply/demand model for our each of our metros, our 25 some-odd sub markets, and then we rank them from the perspective of what we expect rents to do over the next four years. And that's how we make our capital allocation decisions.

Okay. And then you mentioned more about rent control this quarter, as well. Quick question for you on that. How much of your tenant base is that customer that you don't want to displace the teacher, the police officer versus the tech workforce, which is growing their income faster than you're growing the rent?

This is going to be completely anecdotal, but I think that it's a significant part of our renter base. I'm guessing in Northern California, Seattle, it's somewhere in the 40% range, 30% to 40% range and, again, those people -- this is an ongoing process. Essentially people coming in making a lot of money, able to rent that expensive unit, and displacing someone that doesn't get a huge increase in compensation, and they move to next rung out let's say, and so it's hard to tell.

We've seen this play out many times in the Bay Area. It's not nearly to the extent that I saw in 1999 and 2000. This went on maybe three or four more years and therefore that transitionary effect continues to happen, but it's not limited by any means to California or San Francisco. Look what goes on in New York City, for example. So this is the ordinary operation of the renter pool and incentivizing the people that make the most money and therefore get the choice of where they want to live. So I view it as entirely again normal part of the marketplace, although I do believe that California would benefit itself and the employers and the whole economy if it would find a way to produce more housing.

Okay, thanks a lot.

Next we'll hear from Nick Yulico of UBS.

Thanks. Mike, being that you sit in Palo Alto, the heart of venture capital land, I was wondering what you're hearing from people on that end about there's been some data showing venture capital funding, number of deals has been coming down for startups? Are you looking at that as a leading indicator for the economy out there, and what is your take on this discussion of late?

Yes, it's a good question, and we are somewhat concerned about venture capital and we do track it. We're less concerned about the valuations and whether there's an exit into the public markets and liquidity as it relates to those entities. We're more concerned about how many people do they have, how many employees do they have, how many people need housing, and in that light I can't stress how different the current environment is from the internet boom in the late 90s.

If you take the top 20 unicorns, for example, I believe that they employ somewhere around 26,000 people. If you take five public companies, Oracle, Apple, Cisco, Google, Facebook, they employ 367,000 people. We are obviously much more concerned about the big tech companies, and what they are doing and it's amazing. We're looking at what, for example, Google's doing with the alphabet companies and all of the different technology-related spinoffs, and combined with the fact that they have an enormous amount of capital to deploy into those entities gives us some comfort that tech hiring is not going to fall off a cliff here. And, in fact, that's why we feel pretty comfortable with our expectations on S16 and our market outlook, because it seems like there's a lot of activity out here and there's a lot of money out here that's pursuing that activity, both DC and some of just some of the major corporate entities.

Alright. Good points.

Turning down to Hollywood. The Nickelodeon site you have, can you just remind us what's the ultimate cost on that project? And a little bit more about where you think the land value is today, because there's a lot of sites trading around there recently or on the market right now for sale? And then just lastly, I want to be clear, whether or not that site is actually listed in your land held for development, or if it's still some other piece of real estate because at one point there was a lease on it?

This is John Eudy.

In general, you're aware of the specific location in Hollywood, I would assume. It is a ground zero core Hollywood location. There have been a number of other transactions in the Hollywood address area that are completely different. As far as it being listed as a future, it is still as an investment, I believe. Is that correct, Angela, the Hollywood asset is as an investment because we leased with Nickelodeon?

Yes.

In terms of our basis, we are, we believe, well below what we would be able to trade it for today if we chose to go in that direction. And we are under the radar in terms of the height of the building that we're going offer and less visibility in terms of pushback on the entitlement side. So long and short is, we expect some time late next year is when we would transfer it over from a leased investment to an active land development transaction.

Okay. That's helpful, but anything more you could tell us on the ultimate -- how to think about FAR and because there are -- I know we can look at land comps in the market, but some idea about how much you could actually build on that site?

Approximately 200 units is what we're going for, and it fits within the FAR fairly nicely. Until we get it all done, we don't like to do a lot of projecting and assumptions until we're ready to announce.

Okay, got it. Thanks.

Thank you.

Our final question today comes from Conor Wagner of Green Street Advisors.

How meaningful a factor are below-market taxes due to Prop 13 in ranking your potential dispositions for next year?

Hi, Conor. It's Mike Schall.

It is a factor and Prop 13 gives us a fair amount of wind to our back relative to what buyers will have to pay if they purchase an asset. And so I'd say number one it's a factor. Number two, we are looking for a variety of different transactional approaches to avoid a Prop 13 reassessment. So it could involve selling less than half, 49%, of a portfolio of assets, for example, to an institutional investor. So there are some ways to manage that, we believe, but management of Prop 13 is a factor for sure.

And then on the dispositions for next year, is there any thought to condo yet, or is it still too early?

I think it's still a bit too early. Again, we can only pull that trigger one time, and so we targeted a 30% to 40% premium to apartment values in order to make it worthwhile to convert from an apartment to a condo, and we're not seeing that 30% to 40% premium anywhere, although in San Francisco and actually a couple of the other Bay Area cities we're starting to see 10% to 15% premiums of condo values over apartments. So we're starting to see that divergence. It has taken longer, not necessarily because condos have done poorly, but because apartments have done so well. So we continue to monitor it.

Great. Thank you very much.

Thanks, Conor.

And there are no further questions at this time.

Thank you. Well, in closing I want to thank you once again for joining the call. We wish you and your families a safe and enjoyable Halloween and look forward to seeing many of you at the NAREIT conference in a few weeks. Good day.

That does conclude today's conference. Thank you all for your participation.