Equity Residential Properties Trust (EQR) — Q4 2015 Transcript

Thank you, Angela. Good morning and thank you for joining us to discuss Equity Residential's fourth quarter 2015 results and outlook for 2016. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer, and Mark Parrell, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn the call over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. We have got a lot to go over today and we will start with David Santee providing some color on operations. Talk a little bit about how last year ended up, a discussion on our core markets and our overall outlook for 2016. I will then discuss the acquisition and disposition activity that we are planning this year that will be in addition to the recently completed $5.365 billion sale to Starwood. And finally, Mark Parrell will take you through how our operating outlook and transaction and other assumptions impact our 2016 earnings guidance, our regular and special dividends, our recent debt repayment activities following the Starwood sales and liquidity. Now before we get started, I want to make a couple of general comments because we all read and listen to the same things the rest of you do and we know that there is a lot of volatility around the globe and across the financial markets. And there are a lot of questions about how that is currently impacting or might soon impact the domestic economy in general and our business in particular. Because there have also been some reports of increasing apartment vacancy and declining rental rates. Like you, we don't have a crystal ball. All we can tell you is what we are seeing real-time in our business and what we're seeing is some markets are a bit behind where we had expected at this point and others a bit ahead. But in total portfolio-wide, we are where we expected to be one month into the year with 30 days forward visibility. And as in recent years, renewals tell a lot of the story. Renewal increases in November, December, and January were all plus 6% and we will also achieve plus 6% growth in renewal rents in February. Portfolio occupancy today is 96.1%, very much in line with our expectations and quite strong for this time of year. All in all, we are pretty much right where we thought we would be when we gave our initial guidance for 2016 back in late October. So with that said, I will let David go into more detail about our markets, our current outlook for 2016 and why we think this year will be another good year for the apartment business and for Equity Residential.

Thank you, David. Good morning, everyone. During Q4 turnover continued to decline with the quarter-over-quarter reduction of 7% in gross move-outs. For the full year turnover declined 40 basis points from 54.9% to 54.5% and then net of intra-property transfers turnover decreased 50 basis points to 48.5% from 49%. Our continued focus on minimizing Q4 and Q1 lease expirations continues to produce more operational stability as occupancy once again remains stronger through the historical Q4 seasonal slowdown. Moveouts to buy homes increased only slightly across many markets for the quarter and the full year. With rents continuing their rapid ascent across most markets, it should come as no surprise that affordability, our second-largest category for moveouts, increased from 13% to 14.1% for the full year. Yet demand for quality apartments in great locations has remained steady thus far. Similar to 2015, we again start the year from a solid foundation of occupancy, exposure and pricing levels across most of our markets. Today occupancy is 96.1% and exposure is 20 basis points lower with the net effective new lease rents up 3% year-over-year versus the same week last year. While not the record-setting renewal increases we enjoyed in 2015, we achieved a 6.4% increase on our January offers and February will deliver in the same range. These early indicators coupled with continued favorable job growth, fewer deliveries on our core markets but more importantly the submarkets that we operate in, gives us the confidence to stand by our preliminary revenue guidance range of 4.5% to 5.25%. However, we are mindful of the headwinds from the headlines and the potential odds and impact of the U.S. economy entering a recessionary environment. Our 2016 revenue guidance is available by the West Coast with San Francisco leading the way followed by Los Angeles which continues to show momentum in both new lease and renewal gains. Our 2016 buckets of revenue growth again include San Francisco, Los Angeles, Seattle, and the remainder of Southern California, all expected to exceed 5% revenue growth for the full year. Boston and New York Metro remain in the 3% to 5% bucket as concentrated new supply in each of our submarkets continue to dampen pricing power for new leases. Washington DC once again remains in a bucket of their own but we have projected revenue growth of 1% to 1.3% for the full year 2016. Our total portfolio assumptions based on 75,123 same-store units that drive the midpoint of guidance, our 2.3% embedded growth from 2015, 3.5% average new lease rent growth and 6% average gain on renewals. Occupancy and turnover for 2016 are modeled to be flat. Expense results of 2% for the quarter were extremely favorable versus our forecast of 4.3%. Even with our optimistic adjustments that were made prior to our last earnings release, we were unable to predict the full impact of a commodities route and record temperature which allowed us to deliver full-year expense growth of 2.5% versus guidance of 3.1%. The two drivers of the 230 basis point pick up or approximately $4 million in Q4 were spread almost evenly between utilities and payroll with the unseasonably warm weather materially influencing both. The rapid price decline across all relevant commodities combined with record warm temperatures through December allowed us to beat our original forecasted savings almost threefold for the quarter, resulting in an additional $2 million pick up across heating oil, natural gas, and electric. Also, the warm temperatures combined with a 7% decline in Q4 moveouts allowed us to achieve our historical salary forecast, but the need for contract labor and overtime was virtually nonexistent. This in addition to favorable employee bonus and health insurance accruals allowed us to achieve an additional $1.7 million in payroll savings for Q4, bringing our forecasted total of 4.3% down to the 2% for the quarter and 2.5% for the full-year. Expense guidance for 2016 of 2.5% to 3.5% is once again driven by real estate tax growth of 5.25% with 190 basis points of that 5.25% attributable to our New York portfolio 421 tax abatement burn of. Like 2015, we would expect minimal growth, if any, across the utility accounts. Payroll should come in between 2.5% and 3% and all other account lines will show flat to minimal growth as the impact of increased minimum wages and Affordable Care Act cost incurred by our outside vendors are already absorbed into our cost structure over the past two years. So, going around the horn and starting with Seattle, I will give some brief market highlights, some revenue expectations and expected delivery, that combined influence our thought process for a full year of 2016 revenue guidance. Seattle will see an 8% decline in new deliveries from a little over 9000 units in 2015 to approximately 7200. Knowing that Amazon will continue its large capital investment and delivery of almost 4 million square feet of new office space in downtown and the continued migration of regional and corporate headquarters from the suburbs, Seattle should be able to absorb this new inventory with minimal disruption just as it has done over the past two years and as evidenced by the 3100 units that have been absorbed over the past two quarters. San Francisco will once again lead all EQR markets and constraints of new development are all around. However, like any market where there is a concentration of new supply, near-term pricing pressure will always follow. As a result of the new deliveries in the urban core, pricing has appeared to revert to normal seasonal patterns with net effective new lease rents up only 4% today. As expected, properties closest to the urban core are experiencing the most pressure while properties further down the peninsula continue to enjoy year-over-year rental rate growth in the mid-teens. With lease-up velocity exceeding normalized expectations, San Francisco Metro should experience rapid absorption and deliver another year of high single-digit revenue growth as evidenced by our year-to-date billings that exceed 9.6%. While headlines are quick to recognize the slowdown of DC tech spending, the large-cap giants continue to buy, lease, or build new office space in anticipation of future growth and elevated hiring. But as we all know, trees don't grow to the sky but our dashboard tells us that fundamentals remain strong. Renewal offers issued through March remain in double digits and if history plays out, we would expect new lease rents to seasonally adjust up from the mid-single digits we see today to higher levels as we move closer to peak leasing season. With embedded revenue growth of 5.5%, renewal rates achieved averaging almost 10% and new lease rents everything 7+ percent, for the full year we would expect our portfolio to deliver full-year revenue growth in the high single digits. Los Angeles fundamentals appear to be coming on strong with the anticipation of a breakout year for the LA economy and the pro-business city government, the rebranding of downtown as a world-class city coupled with meaningful additions to infrastructure and transportation cause us to be very optimistic in LA's ability to absorb the 7600 new deliveries expected in 2016. Given the concentrated nature of deliveries in the South Park and Hollywood submarkets, we see no major hurdles to strengthening fundamentals in revenue growth as net effective new lease rents are up 7.3% with both occupancy and exposure significantly better positioned versus the same week last year. Orange County in San Diego should continue to see about average growth with 2016 deliveries of 3600 and 2400 respectively. These levels are on par or slightly less than 2015. With the concentration of assets delivered during 2015 being in Irvine and in close proximity to a large percentage of our assets, we would expect to see better results in 2016 as pressure on new lease pricing subsides. Our Boston portfolio continues to face pricing pressure as 2015 backloaded deliveries remain in lease-up. With only 2200 deliveries scheduled for 2016, which is a 62% decline and a lower concentration in the financial district and downtown, we would anticipate a window of improvement late this year and early into 2017 before an estimated 5000 units are again delivered in 2017. To date, 19,000 units have been absorbed in the past two years without the disruption that one might expect. With GE announcing their headquarter relocation and the continued biotech-related job growth, Boston should deliver results very similar to what we achieved in 2015. For New York Metro, we expect to deliver 3% revenue growth as new supply affects certain submarkets. After delivering average annual revenue growth of 4.9% for the last 16 quarters, the performance of our Manhattan portfolio will be greatly influenced by almost 2000 new units on the Upper West Side which makes up almost 30% of total revenue for our New York Metro area. Most of the projects are luxury with unit mixes that skew towards two- and three-bedroom apartments and have been more difficult to lease, resulting in a greater economic vacancy loss. While occupancies remain above 95%, we expect Upper West Side new lease rates to be flat or slightly positive until the majority of these new deliveries are absorbed. We continue to see strong fundamentals in pricing in our other Manhattan submarkets, the financial district, Gramercy, and Chelsea. Collectively, these neighborhoods should deliver revenue growth in line with our historical averages that I noted earlier. Another New York Metro hotspot is Jersey City, or the Hudson waterfront, where over 1000 new units were delivered in late 2015 and another 1500 expected in 2016, all concentrated in a one- to two-mile radius. Thus far, we have not felt the full impact as year-to-date revenue growth is holding at 3%. Brooklyn will also deliver a number of new buildings, but these are north and further east of downtown with the new supply being smaller in unit count and less desirable based on amenities and location. We would expect moderate impact in Williamsburg and less so in downtown Brooklyn as both EQR communities in this location are delivering in excess of 4.8% revenue growth through February. Again, as new supply comes online in concentrated areas, new lease pricing will be under pressure, and we see that in our net effective rents today. However, occupancy remains strong across the portfolio at 96.1%. Renewal rate growth should average plus 4% for the portfolio, which combined will produce full-year revenue growth of approximately 3%. Washington DC will experience declines in deliveries to approximately 11,000 units in 2016 after absorbing over 28,000 units in the previous two years. With positive revenue growth in Q4 and full-year, we are cautiously optimistic about near-term performance. Should absorption maintain its velocity, DC should begin to deliver more favorable revenue growth as new lease pricing pressures ease. With job growth in the professional services sector continuing to improve, an increase in DC business activity as a result of the election year and more of the 2016 deliveries in the suburbs versus Arlington and DC, we continue to be optimistic about the long-term performance of our portfolio. In summary, we continue to see favorable fundamentals across all of our markets. At this point in the apartment rental cycle, it is much too early to be influenced by the negative headlines that we all read each and every day. We remain focused on what the data tells us and we will respond appropriately. Today our dashboards tell us that not much has changed in that apartment fundamentals, at least for the first quarter remain strong leading us to believe that 2016 will be yet another year of performance above long-term trend.

All right. Thank you, David. We are very pleased to have recently closed our sale of 72 non-core assets totaling 23,262 apartment units to Starwood for $5.365 billion or $231,000 per unit. I am particularly pleased to realize an 11.1% unleveraged IRR on these investments inclusive of indirect management costs over an extremely long hold period. This sale was a result of an incredible effort by a lot of folks here at EQR who worked practically around the clock to get this deal done. And I thank all of them for their dedication and commitment. And I also thank those who left the company with the sale of this portfolio. Some of them have been with us for more than 20 years. We are most grateful to all of these people for their service to our residents and the company. On our last earnings call when this transaction with Starwood was first announced, we explained that this disposition accomplished several things for us. First, we realized very good pricing on assets in markets not considered core for us and on some assets in our core markets that didn't quite fit our 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. As we have discussed with many of you since the original announcement, this sale and the sale of $700 million of additional assets in 2016 would result in a special dividend of $9 to $11 per share. That decision was made due to the challenge we saw trying to recycle $6 billion of capital in today's marketplace where we continue to see strong institutional demand for core assets in Gateway coastal cities and very competitive pricing as a result of the demand. We continue to believe and are grateful for the support of so many of you who did agree with us for returning much of these proceeds to our investors through a special dividend in a balance sheet neutral way is the best capital allocation decision we can make on behalf of our shareholders. Since our original announcement of the Starwood transaction, demand for multifamily assets in our core markets has continued unabated and so we have considered the sale of several additional assets that due to either operational challenges or submarket issues, or pricing potential that we simply thought too good to pass up, might represent additional timing opportunities to monetize our interest in certain assets and modestly increase the size of this year's special dividend. Last week, for instance, we sold one of three assets acquired from the Macklowe family in 2010 when we paid a total of $475 million for the entire portfolio. This particular property, RiverTower was sold for $390 million, or $1.2 million per door at a yield in the low 3s, for a five-year unleveraged IRR inclusive of indirect management costs of 14%. This sale was previously contemplated and was accounted for in our original special dividend guidance of $9 to $11 per share. In addition, we have also started work on the potential disposition of another $600 million of possible sales that if consummated could increase the dividend by another dollar or so per share and hence the new range of $10 to $12 per share noted in last night's press release. I want to be publicly clear because I am sure many of you will have questions about this. We backed up the truck once with the sale to Starwood, we have no intention of doing so again. And as I have said, we are working on a limited number of additional sales yet this year that could bring our special dividend up to the $10 to $12 per share. Our guidance also assumes that we will sell an additional $300 million by the end of the year, 100% of which would be redeployed in new acquisitions. And that level of activity is accounted for in our guidance towards the back half of the year at a negative yield spread of 75 basis points. This additional $300 million of activity will only occur if we can find suitable investments for which we are willing to trade out of current assets. So the guidance provided in the press release is for $7.4 billion of dispositions comprised of the $6.1 billion we announced last October, nearly $400 million for RiverTower, another $600 million expected to be sold during the year adding an additional dollar per share to our special dividend and $300 million of sales that will occur if and only if we can find suitable reinvestment opportunities. Our acquisition guidance for $600 million is roughly $300 million of 1031 reinvestments to cover some very large tax gains of certain unaffiliated limited partners as a result of the Starwood transaction and $300 million of additional possible acquisitions in the back half of the year matched up with dispositions in the normal course of managing our portfolio.

Thank you, David. I want to take a few minutes this morning to talk about our guidance for 2016 that includes both the annual dividend and the special dividends, our recent debt prepayment activity and then I will close with a discussion of sources and usage in 2016. Our range for normalized FFO for 2016 is $3 to $3.20 per share. This range is larger than usual due to some of the uncertainties over transaction timing. I am going to walk you through some of the bigger highlights at this point. The biggest reconciling item between 2015 and 2016 normalized FFO is, of course, the reduction we will experience in net operating income of about $345 million, that's about $.90 per share, from our transaction activity including Starwood. The second big item going the other way is the use of approximately $1.7 billion of those disposition proceeds to prepay debt. That creates an $80 million or $.21 per share benefit or improvement in interest expense. I will pause here and note that we are expecting about $10 million decline in capitalized interest in 2016 versus 2015 and I did include that in the $.21 per share improvement number that I just gave you. So once you get past the transaction and debt activity, our normalized FFO is driven by the usual suspects. And that includes an increase of $.23 per share in same-store NOI and an increase of $.12 per share from lease outs. The final items are just a variety of other individually less material items that reduced our normalized FFO estimate for 2016 by about two cents per share. And they include, among other things, lower income from unconsolidated entities and that's due to the sales in 2015 as the last few Archstone JV operating assets. So this brings our normalized FFO guidance midpoint for 2016 to $3.10 per share. So now I am going to move on to the dividends. For the annual dividend, as you know, it is our intention to pay 65% of the midpoint of our normalized FFO guidance as our annual common share dividend. Given the midpoint I just discussed of $3.10 per share, we would expect to take $2.015 per share for the year or 50.375 cents per share per quarter in 2016. Also, we expect to pay two special dividends which will total between $10 and $12 a share. The first special dividend is anticipated to be paid in the second quarter and is expected to be about $8 per share. There is less variability in our minds about the size and timing of this first special dividend, given that the Starwood sales and some of these other sales have already occurred. But of course, our board of trustees retains discretion on all dividend matters. The second special dividend has been modeled in our guidance at $3 per share based on our existing disposition guidance number as well as numerous assumptions we had to make about the exact timing and amount of the gain per asset and our 2016 operating income and other tax variables. Similarly, the timing of the payment of the second special dividend is less certain in our minds and we will like the amount of that dividend ultimately depend on when these sales close, the number of sales that close and certain other tax variables. Now on to the bond tender and our other recent debt repayment activities. Consistent with what we have said on the earnings call back in October, over the last two weeks the company has prepaid prior to maturity a total of $1.7 billion in debt through an unsecured bond tender and early repayment of a large secured debt pool. In mid-March we also repaid using the cash we now have on hand. The $270 million of March 2016 unsecured bonds that were not tender. Collectively, the company will incur approximately $112 million in prepayment penalties and that will be recorded as additional interest expense in the first quarter and it will impact EPS and FFO but will not impact normalized funds from operations. These debt repayment activities were funded with a portion of the proceeds from the Starwood sale and our other recent sales and are intended to maintain and they do in fact actually slightly enhance the company's already strong credit profile. We now expect net debt to EBITDA for 2016 to be about 5.8 times and fixed charge coverage to be about 3.6 times and this compares for our already strong 2015 net debt to EBITDA ratio of 6.1 times and fixed charge coverage of 3.5 times. I am computing all these fixed charge coverage ratios using the more stringent rating agency methodology which does not reduce interest expense by capitalized interest. Also, our near-term maturities are now greatly reduced and in fact we currently have only approximately $330 million of debt maturing in 2016 consisting of $60 million in secured debt that matures a little later in 2016 plus the $270 million of unsecured notes due in March 2016 that were not tendered as I discussed previously. Our 2017 maturities have now been cut in half and now total about $600 million. The company's liquidity position is excellent. Currently, we have $3.5 billion in cash and our $2.5 billion revolving line of credit is undrawn. We also have no commercial paper outstanding. At the end of 2016, we expect to have about $50 million in cash and the revolving line of credit and the commercial paper program between the two will have about $300 million balance. And that is certainly a lot of inflows and outflows in one year. So I am going to take a minute and just give you a little background on that and the bigger pieces. For the full year 2016, we expect net inflows from buys and sells of about $6.8 billion. To date we have sold approximately $5.9 billion which is inclusive of Starwood and we have not acquired any properties. We have assumed paying about $4.25 billion in special dividends. As I just said, we expect to pay the first and in the second quarter of 2016 in the amount of about $30 billion, and the second later in 2016 in the amount of approximately $1.25 billion. We anticipate repaying approximately $2.1 billion in total debt during 2016. As mentioned earlier, we have already retired approximately $1.7 billion. We further expect to spend about $250 million during the year. That’s mostly for the prepayment penalties I referred to previously and about $40 million or $45 million of transaction cost on the dispositions. We expect to spend about $600 million in development activities during 2016 and the final piece of the puzzle is positive cash flow from operations of about $200 million. And that $200 million number is net of our annual dividend and our capital expenditures. In order to balance our sources and usage, we have included in guidance a $200 million to $250 million borrowing later in 2016, which we have assumed will be a secured loan and we expect to have the revolver drawn or to have CP outstanding equal to about $300 million.

David, I appreciate your comments on the uncertain macro environment but from your comments it doesn't sound like there's been a large impact to the transaction market. So, I'm wondering if we were to enter a recession, how do you think asset values would hold up in the gateway markets versus the secondary markets?

Thanks, Nick. Good question. Look I think that history has demonstrated that these gateway market asset values hold up better and recover more quickly. I think we have experienced that certainly through the last recession and the markets in which we are focused today we saw rent recover quickly and surpass the established new highs and values perform similarly. So we are quite comfortable and confident that we are in the right markets for the long term and think we are in the markets that will perform and should outperform if there is any sort of recession on the horizon.

Thanks. And with all the asset sales, the same-store pool is changing considerably in 2016. It looks like it's about 70,000 units. So I'm wondering if you can give, for the 2016 same-store pool, what their revenue expense and NOI growth was in 2015.

It's Mark Parrell, Nick. It was broadly similar. Revenue was slightly lower as you might guess from losing Denver which was a strong market. But it was within a couple tens of a percent of the same numbers we reported for 2015 for the existing same-store set.

Okay. So, you're not expecting, for those existing same stores, there's not much of a deceleration expected in 2016?

Correct.

Not applicable to the same store as in 2015.

So comparing the 93,000 units in 2015 to the 70,000 we expect in 2016, there is no meaningful difference in our lines.

Okay. Thanks. And then, finally, for the same-store buckets that you laid out earlier, have any of the market outlooks changed materially since you gave the preliminary guidance three months ago?

No. I would say that when we go through the budget process that we just wrapped up and Mark reviews, I would say that some started off the year a little differently than we expected but we still feel that full year results are intact. LA is definitely much stronger than we expected. Orange County, San Diego is much stronger than we expected. San Francisco starting off a little slower than we expected primarily due to just some of the lease-ups and the impact on the closer-in assets. But everything else is really right where we thought it would be.

Maybe David Santee, could you just comment a little bit more on San Francisco? It's clearly a market that has captured everybody's attention. Just curious if you're seeing anything in terms of just the leasing activity, traffic, roommates' situation, just any color that you could offer. I can appreciate the difference between the urban core and maybe the Peninsula. But just any more color you could give us around that market, what you're seeing in terms of future renewals and traffic coming in would be great.

We've spent a lot of time over the last week or so as we went through budgets. Traffic really remains identical to last year. Our level of applications, which is really the canary in the coal mine, are identical to last year. I think San Francisco, we looked at rent growth on a property-by-property basis. I would tell you that some of the other developers have different philosophical approaches to lease-ups and different tactics that are probably not warranted in my opinion relative to the strength of the market, but nevertheless we will have to deal with that. Anecdotally, I can tell you that we've had a graphic design guy who's been at equity for probably 14-15 years, took a job in San Francisco and basically he's renting a couch in someone's apartment because there still remains a housing shortage and I think this temporary dislocation, given the seasonality of the market will repair itself over the next 30 days.

Okay, thanks. And I guess just a follow-up question on New York. I noticed on the development page that both of your New York properties had relatively slow leasing and I can appreciate the comments you made about the Upper West Side and maybe the 170 Amsterdam project is falling victim to some of the oversupply on the Upper West Side. But just anything you could comment on in New York. Are the developments, were they below your expectations and if so, what do you attribute that to?

Well, the recent activity, I guess, is attributable to a couple of things, Steve. Number one is, just, you would have less activity in the fourth quarter, particularly in lease-up. So I wouldn’t read too much into the fourth quarter statistics or recent statistics on lease-up. The other thing that happens is that when you get into the later stages of leasing up a building, you have less inventory. And so you are less able to accommodate everybody who walks through the door. You can imagine people walk through the door early on. You have got all the ones, all the studios, all the twos, and can accommodate from a wider price range and whatever product we have. Now you're getting to a point where you have got less inventory in particular ranges and you may not be able to accommodate everyone. So it just will naturally slow. And on the Upper West Side as you know, it's being impacted by other deliveries and we have larger units either sort of with the inventory yet to lease at our Amsterdam deal and that would also just take more time. But all in all, we have been very pleased with those assets. Have been thrilled with the value we have created there and they are going to stabilize and will do extraordinarily well for us.

First, Mark, on the guidance, I wanted to see if it was possible to just get a range for the total NOI in dollars for the portfolio this year?

A range total NOI in dollars.

Right. If you don't have it immediately available, I can maybe just wait on that. And then, secondly, can you talk a little bit about, it looks like you guys may have purchased or are in contract to purchase an asset in DC, which I don't think you've done for a while. Could you talk a little bit about what was behind your thinking there?

As we mentioned when we announced the Starwood transaction, we had nearly $300 million in 1031 exchanges to manage in order to offset some gains for certain unrelated investors. A property became available for sale in the DC area, specifically in the U Street and 14th Street corridor, which we believed we could acquire at an attractive mid-4 cap rate. We considered this a favorable trade and thought it would be a valuable asset to address our needs. Given our substantial operations in DC, we recognized it offered significant value, especially with a walk score of 99 in that highly sought-after demographic area of the city.

If I could just revert back on your question. So for 2016, and this is total NOI so this includes our projected acquisition NOI, this includes a few weeks of Starwood, I mean this is just the totality of it, between $1.6 billion and $1.65 billion would be a good number.

Just a couple questions on your investment activity. So the additional sales, $600 million and then $300 million at the end of the year, where are those assets located?

Well, the additional transactions that we had first announced that we would do in addition to the Starwood transaction are generally sort of in Connecticut and Massachusetts. So it's the residual assets that we acquired with the Globe transaction back in the late 90s. The other properties that, in addition to that, was the RiverTower transaction, which I noted we did in New York. And a couple of properties in California that we are considering selling, that are in various stages of that process. And then of the $300 million that I have talked about, that would be disclosed if and if we can find appropriate trade assets. My guess, so you will see a little bit here and a little bit there. There's been nothing specifically indicated at this time.

Okay. And then the 75 basis point CapEx spread is narrower than the 100 basis points you have been doing for some time now. Is that expected to continue or is it just for this year reflecting the quality of assets that you're selling?

Yes. I guess I can't tell you what that spread will be going forward in the normal course of our business but, yes, it should certainly narrow because the assets we will be trading in the future in the normal process of managing our portfolio will be assets in our core markets. And those will trade at a tighter cap rate to the assets than which we would acquire in those trade markets as opposed to selling assets in the secondary, kind of non-core markets that we have been selling over the past half a dozen or so years. So, yes, it will be a narrower spread than historical. I don’t know exactly if it's 75 or not but certainly much more narrow than what you have seen in the past.

David, a quick question for you on the strategy of shrinking the company. And I guess along the dimensions of, at what point does it become a structural change? And are there any associated G&A impacts or internal management realignments as you go through the year on the dispositions?

The strategy has been to take advantage of strong pricing on assets that we did not want to own long term, rather than to shrink the company. Regarding any changes in general and administrative expenses, there won't be any significant structural changes. There may be minor adjustments needed, but the selling of assets we have completed and plan to sell throughout the year will not lead to a major structural change.

Okay. And then my second question just has to do with your thoughts on the acquisition market. I guess more specifically, what would have to change in the environment in the second half of the year to make acquisitions more attractive from your perspective? Would it just be simply pricing or change in the capital environment?

The investments we make depend on the acquisition market, which is influenced by the disposition market. It’s about finding the right balance between what we can buy and the prices at which we can sell our assets, as this affects the capital available for reinvestment. We're actively engaged in both aspects. There are instances when the price gap is too wide for us to proceed with transactions, and other times when it narrows, making it a more favorable moment to buy or sell. Essentially, our approach is based on comparing the worth of potential purchases to the value of our sales.

To set this up, Mark, when you said the 5.8 times debt to EBITDA, is that assuming 2016 run rate kind of run rate EBITDA with growth on it? And the debt is net of all the transactions that you guys have announced and planning?

Yes. So the EBITDA number is what our true 2016. So it does include a little bit of Starwood income we won't have next year. It does include the growth and the debt is the year-end number.

Got it. Okay. So, it's not like a perfect run rate to run rate.

No. But I would expect 2017 not to be dissimilar to that 5.8 or to be slightly better, given what we expect on growth. And the fact that we have also effectively covered all our liabilities for a bit.

Got it. So here's what I was going to ask. If you look at UDR today, they've got a three year plan that actually implies their debt to EBITDA will be even lower than this, actually half of where they were in the fourth quarter of 2009. We've had kind of your distant cousins, if you will, in student housing just recently very dramatically taking down their debt to EBITDA even lower than your planned levels. Massive dilution associated with doing that but the stocks have actually behaved very, very well. And I guess my big picture question is, do you think that public REITs need to dramatically change their leverage relative to where they've been historically?

Every REIT has to look at its business model and particular volatility of its income, and we look at ours. You have got a pretty diversified portfolio. You have got debt maturities, we got very little maturing in the near term. And you have got interest expense coverage approaching four times. I mean, you really have outstanding metrics in every regard here and the unencumbered pool at our company is the secret, not so secret credit strength. We have about, even after all the sales this year, about $1.2 billion of our NOI that I quoted earlier, is unencumbered. And that just gives us huge flexibility. So we think here, when we talk to our board and we discuss this, we're always interested in making sure we are comfortable defensively and positioned so we can do things offensively. And honestly with the liquidity we have and with the access to the kind of channels of capital we have, I feel very comfortable with these numbers. Other people with different platforms and different volatility, their income streams probably need to be lower. We also have relatively little development, because of that again we can run the balance sheet in a different manner. So I think it's kind of a custom, no one-size-fits-all. It's just applying thoughtful principles to whatever your strategy is and whatever your income stream is.

Well, in your back pocket you can do a $1 billion equity offering, dilute your earnings, and your stock will probably go up. Thanks for taking the question.

Well, people did that in 2009 and it only lasted for a little while.

Can you spend a little time talking about development? What are your thoughts on the appropriate level of development for you at this point in the cycle given your cost of capital? And what are your plans for development starts in 2016?

Well, after starting an average of $1 billion in each of '13 and '14, we I think communicated pretty directly and quite early to the Street that that number would come down, and it did. Starting only 375 or so million in 2015. And deals that we could start if we feel the desire to do so of a similar amount in 2016, Mark's guidance assumes about $350 million of starts. So as Mark noted in answer to the last question, we have seen our development exposure come down considerably. Land is very expensive. Construction costs are up, yields are down, and as we look at the yields that are available in the marketplace, we just don't think they make sense for us. We are also not inclined to go further out into the suburbs in order to sort of chase yield because our strategy is to be focused on the urban core. We think that the total returns will perform better in the urban core than in the suburbs. So there is not a function of us saying we want this amount as a percentage of our equity footings on our balance sheet or that percentage. We just look for opportunities and when we find ones we think make sense for us, we will not be shy pursuing them, but they are just getting more and more difficult to find. We did acquire some sites in San Francisco in the SoMa district last year, three properties which were assembled. And we will work on those going forward and we will see those might be a potential 2017 start. But we've been quite clear, I think, for quite some time that after an elevated level of starts in that $1 billion range as a result of the land sites that came to us in the Archstone transaction, that that number would likely come down and indeed it has. And we are happy where we are. If we can find opportunities that we think make sense for more, we will be happy to do more. But I don't see us for some time ever getting close to the $1 billion start rate that we saw in '13 and '14.

Okay, great. Thank you for that. And the second question relates to CapEx. What are your expectations for CapEx spending in 2016?

Hey, Dave, it's Mark Parrell. I am just going to refer you to page 23 where we have our CapEx guidance. So what we have done is we have expected, and this is on the 70,000 unit set that will be our new same store we think by the end of the year. That we expect to spend about $2200 per unit. This year being 2015, we spent $1800 effectively. But that was on the 93,000 same store unit set. So what we have done is we have tried to think about this as a percentage of NOI, as a percentage of revenue. And with the company's new higher rent per unit and new higher NOI per unit, when you look at 2200, that’s about 7% of same-store revenue for the new 70,000 units and about 10% of same-store NOI. And that’s exactly, really exactly identical to the $1801 we spend as a percentage of the lower same-store revenue per unit and lower same-store NOI per unit. So really proportionally it's about the same but on a per unit basis it goes up just like our per unit rents are going up. I would say it's our contention that over time high-rise and mid-rise on a capital basis will cost less as a percentage of NOI than running a garden portfolio. That contention will play out over a longer time period than just two years.

Thanks very much. I was just wondering if you could talk, in terms of San Francisco you talked about the expectation that as we go through the spring season, you're hoping that there will be better trends in terms of the new lease growth there. Wondering, in terms of the guidance for the full year, how much of that is based on that expectation of improvement versus being based on the embedded rent growth that you have at this point based on the strength of last year.

Well. So, call it a high single-digit with five and change built-in. We know renewals will deliver in the high single digits which is roughly 50% of our revenue growth. So really as far as contribution of new rental rate to the overall full year revenue growth, it's about 25%.

Are you starting to see a bigger difference in pricing power between A and B quality properties in your core markets?

I'm not sure we've seen any change. I think that there's been very strong demand for the good-quality product and that demand will push other buyers maybe to lesser quality products. So I don't think there's been any real change over the last year, six months, 90 days between the two. Our teams came back from the NMHC meetings in Orlando last month. We are quite confident that there will continue to be really strong demand across all qualities in these core markets and have really seen no let-up whatsoever.

Okay. And we're continuing to see a lot more supply growth in the urban cores and in the suburbs. My question, I guess is, do you think the apartment industry is building the right amount of products in the right places today? And I know you guys talked about, you have a view that the urban core is the place to be in the long run and we are seeing more demand growth there than in the suburbs right now. But do you think in the near term there might be some overbuilding there relative to the suburbs in some markets?

Well, I guess I can only answer the question or judge that by the success we have had leasing up the properties that we have developed in the urban core. And the strength has been just incredible. You know Washington DC over the last several years has delivered 30,000 units and occupancy hardly budged. Now we didn’t have a lot of pricing power for several years but as David indicated, we hope to see that change in 2016. I think there is more product being built downtown because more people want to live downtown. I guess I have questions about how many people want to leave downtown to move to the suburbs that live in a structured box. So we just think long-term that this move to urbanization is not a short-term but a long-term phenomenon and that we are very much positioned where we want to be now. Particularly having sold what we have sold and what we intend to sell for the balance of the year. The statistics will be quite clear as the perspective of the percentage of our income from the urban core, the walk scores of our properties etcetera, etcetera, will be without peer in our space.

All right, great. And then last one, just quickly here. On your occupancy guidance you're expecting it to remain about flat in 2016 at 96%, I think. Do you think there's any room you have to drive occupancies higher? Or would you rather not see it climb much more if it means you're not pushing hard enough on rents?

Yes. I think that was our thesis back in late 2014-2015, was that demand increased organically, we did not do anything to grow our occupancy. And we are pretty much in net effective shop and we will let the rent and demand be the god. Certainly, San Francisco is a great example of where demand far outstrips supply and we saw a 100 basis point pickup in the previous 18 months while still increasing rents 14%, 15%. That's kind of the job of LRO and our pricing team is to optimize that balance with occupancy and rate each and every day.

I had a question on right-sizing your common dividends. I realize it's prudent to maximize retained earnings and keep your CAD ratio low. But some investors unfamiliar with your company may view a cut as a negative event. And I'm wondering if that was factored at all into your decision-making, particularly given the new real estate GICS classification.

Yes. It's Mark Parrell. Honestly, in a year where we are planning to pay our shareholders an $11 special dividend, it didn't occur to us that the annual recurring dividend would be the topmost concern and that going down it needs to make sense relative to our cash flow in good and bad times. It needs to be resilient. So when operations do decline, we're not in a position with the dividends to let some or immediately uncovered. So I guess we have a policy, we think that transparency has a lot of value. So people who are in that, predictability has a lot of value. So we didn't think about freezing the annual dividend in order to just preserve those optics. We think people in the long run will see through that.

Okay. And then are you doing anything different this year as far as marketing to non-REIT investors or maybe something you may change in your reporting? There are some beneficial items such as asset sale gains that are not reflected in earnings and may not be as apparent to equity investors.

Sure. I mean, this is a very important year for REITs. I think it's a terrific opportunity for us to market to a wider set of people whose eyes are open to the benefits of owning real estate in a public format. And so we do intend to be pretty aggressive this year in reaching out to generalists, to people who don’t own. And we are trying to think about things in a more general way instead of giving it to specific statistical information that some of our more longer-term investors are more focused on. I think some of these generalists are more focused on broader demographic trends, broader population usage. You know people being more interested in urban core and maybe not owning cars. Those are facts that are more of interest to some of the generalist investors than per square foot rent numbers or per square foot build numbers. So, yes, we do have a big focus this year on that and we do intend to discuss both earnings in the way they think about it and IRRs in the way we think about. Getting the most you can get out of a portfolio. A lot of our activity this year, as you pointed out, was about maximizing the IRR on some of these assets and returning capital which we think is good for all shareholders generally and are dedicated.

So are you contemplating an alternate to FFO or core FFO?

No.

I think earlier in the call you mentioned some softness in some of the larger units, particularly in New York City. I was just wondering, is there any evidence of that being a more widespread trend? And is there any evidence of a stronger home buying environment being attributable to that?

No, this is David Santee. There is really no change in home buying in our core markets. The focus on two- and three-bedroom units is mainly limited to the Upper West Side and some of our new developments. With over 96% occupancy across most markets, we generally have a good product mix. In New York, most of our units are studios and one-bedrooms, so the scarcity of available larger units and their higher vacancy rates make us prioritize them from a revenue standpoint. I don't see any other issues in different markets regarding the demand for larger apartments.

Well, let me answer your first question. The economic on our business we have no way to determine that. There was no deal signed, there was no agreement in place at the moment. Should we entertain an agreement, I would say that economic benefits would be at the bottom of our priority list and it's really more about gaining transparency and control of what's going on all around us today. So regardless of what happens, I don’t see any direct material economic benefit to our company. Perhaps more so with residents and those who choose to participate in the sharing economy. But I think we have ways to go before anything meaningful comes with that.

Thank you. You've given a lot of good detail on San Francisco. I wanted to ask, more specifically, it looks like the Mission Bay development is leasing up a few quarters ahead of schedule, and I was wondering if that's due to maybe getting a little bit more aggressive ahead of some competing new supply, including some other projects you guys are working on. Or if it's more of an organic thing that demand has just been that strong, and actually a similar situation for your Odin development in Seattle.

It's really the latter. I mean you answered your own question. Really, Michael, honestly, just demand is that strong in that marketplace. Now, Mission Bay has been impacted a little bit as of late because of some competing supply in Mission Bay but that's absorbing very quickly. And Odin and in Ballard in Seattle is essentially the same thing. There's just that much demand for this kind of housing in these locations. And so our absorption has been in those assets much faster than what we had thought at rates that met or exceeded expectations. We are obviously very pleased with both of them.

Thanks. And then on New York. Similarly, you've given some good detail on the sub-markets in New York. Last week SL Green made some comments on their call about slowing job growth and retail sales that panicked office investors and maybe apartment investors as well. I'm just wondering, if you're concerned about the job growth picture there. And as you think about your markets where there's risk, so not necessarily the weakest performers like maybe DC, but where there's risk where things could fall off the table. Is New York that market, or is San Francisco that market that might concern you a little?

This is David Santee. You know, I think perhaps there could be some short-term dislocation in the quality of product that is being delivered in New York. The only way you could build an apartment building in New York is through a 421a subsidy. And the rents command the top end of the market. But there are plenty of people that make considerable amounts of money that can afford those types of buildings. So I think what you see is what we see. And in every other market when we have a concentration of deliveries, there is near-term impact. And I don’t see New York falling off the cliff. I mean, it's kind of the number one place that people want to be in the world. And I think should there be any short-term dislocation, it would come back even stronger than it had been before as it has every other time that it's taken a dip. San Francisco, I just think that, look, even though you are delivering the apartments in the urban core, the area is still underserviced as far as affordable housing. And when you look at the job projections across San Jose, San Francisco, and Oakland, you are looking at 122,000 jobs in 2016 and delivering only 6000 apartments. So I don’t see anything materially changing in San Francisco.

Mark Parrell, you mentioned the $2,200 of CapEx. How much of that would you put in the revenue versus non-revenue buckets?

We have about $725 per unit, which equates to about that $40 million we have number. It's hard for me to put a precise percentage. Certainly there is a percentage of that that's more or less deferred maintenance but a great deal of it is optional. We talk about it at the investment committee and, in fact, we would probably also add that there is some sustainability stuff in those numbers that has a pretty good ROI on it. So, I guess, I can't give you a precise number. I think it's probably more revenue-enhancing than it is just necessary capital in that rehab category, but I don't have some specific number for you.

Okay. Thanks. David Neithercut, can you quantify, not quantify, qualify the nature of your buying public here? I know with the $700 million you are expected to sell, that was supposed to be individually or small portfolios. Is that changing at all? And is the audience of potential buyers with FIRPTA and changes in the non-traded REIT world changing along with it?

Well, certainly nothing has changed regarding the assets in Connecticut and Massachusetts that we refer to as our growth assets. These are the additional properties we announced we would sell when we revealed the original Starwood transaction. They are smaller assets. We have some of those under contract today. In our last investment committee discussion, the team managing those properties informed us that the bids were coming in as expected and from the same types of buyers we anticipated. So there is really no change there. Regarding any other changes due to FIRPTA, many of those investors are still trying to navigate the new guidelines. They've been operating under a certain set of rules for a long time and are now determining how to proceed with the new regulations. Therefore, I wouldn't say we've observed any changes at this time.

With the $600 million that you have contemplated in addition to the $700 million, would that be more like a large portfolio all at once or also kind of in piecemeal?

No, there is some larger assets involvement. It's fewer assets than what you might think. So just a small handful.

Just some quick questions. On San Francisco and then comparing it to Seattle and the Peninsula, it sounds like the rent softness in the fourth quarter was purely supply as opposed to a slowdown in jobs. But if you could just provide some perspective with what you're seeing across those three tech-oriented markets on the job front over the past three to six months.

For San Francisco versus Seattle?

Yes. And the Peninsula as well.

Seattle remains highly sought after. Amazon's online job openings are still between 4,600 and 4,800. There's been a lot of movement in supply, which I expect will shift towards Bellevue in 2016. However, job growth in Seattle looks very strong this year, with an anticipated increase of 2.3% and nearly 44,000 new jobs. In San Francisco, we did not observe any downturn in the fourth quarter; the softness appeared more around the holidays and into the New Year. Over the past two years, rents in San Francisco saw an increase of 15% in January compared to the previous year, and in January 2014, they were up by 13%. The pricing dynamics in both San Francisco and the Peninsula are influenced by the new supply hitting the market. Nevertheless, the job growth outlook in the Peninsula seems quite positive, as major companies like Oracle, Apple, Airbnb, and Citi continue to secure office space or initiate the construction of new headquarters. Therefore, I do not foresee any slowdown in job opportunities in San Francisco, with the current rental rate softness mainly driven by the influx of new supply.

Yes. I want to add that we are currently leasing up a property in San Jose and noticed an increase in activity in December compared to the average from previous months since September. Seattle is performing well, as Dave pointed out, particularly our property in Odin and the 99, which are leasing exceptionally. In Mission Bay, we are leasing amidst some competition that has somewhat slowed, but that won't be a problem. Those units will be absorbed quickly.

Great. Well, thank you all for your time today. We look forward to visiting with you all as the year progresses.