Equity Residential Properties Trust (EQR) — Q2 2016 Transcript

Good day and welcome to the Equity Residential 2Q 2016 Earnings Conference Call. This call is being recorded. Now at this time, I'll turn the call to your host Marty McKenna. Please go ahead sir. Thanks, Jay. Good morning and thank you for joining us to discuss Equity Residential’s second quarter 2016 results and outlook for the year. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our CFO. 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 over to David Neithercut.

Thank you, Marty. Good morning, everybody. Thanks for joining us. Clearly 2016 will not turn out to be the year we had originally expected due to deteriorating market conditions in San Francisco and New York City, which combined made up 50% of our initial growth forecast for the year. As David Santee will address in greater detail in just a moment. At the time of our first quarter earnings call nearly all indicators suggested that while the top end of our original expectations was off the table, another year of solid growth with 4% growth in same-store revenue was most likely, as strong demand continued to absorb new supply with little impact to existing inventory. The month of May, however, brought sudden and material changes to the fundamental picture particularly in San Francisco and a 50 basis point reduction in the Company’s expected revenue growth for the year. Over the last 60 days, fundamentals have continued to weaken in these markets causing us to yet again reduce our expectations for full year revenue growth, in which for the first time in many years we now expected to have a free handle. And as a result, after five years of extraordinarily strong fundamentals, revenue growth this year will not be more in line with historical trends. Like many of the participants on today’s call, we too would prefer revenue growth with a four or even a five handle, but markets do reset from time to time either due to new supply or changes in the demand side of the equation. Unfortunately, at the present time we’re experiencing both factors in two of our most important markets. The weakness we’re experiencing in San Francisco and New York City is driving reductions in our revenue growth expectations for the year. So with that said I’ll let David Santee go into more detail about what’s occurred over the last 60 to 90 days, how it’s impacted us during the primary leasing season and our expected results for the year.

Okay. Thank you, David. Good morning, everyone. This morning I’ll address our same-store revenue guidance and give you some color on overall operations. As Boston, DC, Seattle, and Southern California are all generally performing in line with our expectations. I’ll focus my commentary on San Francisco and New York. We welcome any questions you have on our other markets in the Q&A. Today Mark will address our same-store expenses in his remarks. As David said, we would not meet revenue expectations that we announced in June, and that is due in large part to the continued volatility that we’re seeing in San Francisco and to a lesser extent New York, as these markets work to absorb new supply. Together, these two markets accounted for approximately 50% of our expected revenue growth in 2016. The deterioration in both markets is driving more volatility than we have experienced in our portfolio over the last half dozen years. Now that markets are less stable as a result of elevated supply and pressure on the highly compensated job sector, optimizing occupancy comes at a cost for rate growth. Now when we gave revised guidance in June, San Francisco's new lease rents had gone from being up 5% in Q1 down to flat in a matter of weeks. We assumed as a result of some of the irrational pricing we saw on new lease-ups that we would see rates deteriorate further into negative territory, but that we could still achieve similar occupancy as we move through peak leasing season. We felt comfortable about occupancy because the last week of May occupancy was 20 basis points higher than the same week last year and exposure was 20 basis points lower. We thought certainly if Seattle could absorb elevated supply with minimal disruption, San Francisco could do the same. Our forecast for San Francisco new lease rents to go negative proved to be true very quickly as new lease rents are now negative 3% versus the same week last year. Unfortunately, over the next four weeks, our occupancy assumptions for San Francisco missed the mark and today we sit at 95.8% occupied, a 110 basis points lower than the same week last year. The deterioration of both metrics and the knowledge that new supply continues to be delivered into the rest of this year and heavily in the first half of next has led us to lower our full year growth expectation for San Francisco to be around 6.5%, down from our expected 7.75% in June and the original 9.5% growth we expected when we gave you our original guidance in Q4 of last year. San Francisco accounted for about a third of our same-store revenue growth in 2016 and so this decline along with New York City accounts for the 100 basis points off of the entire portfolio. In San Francisco, we have seen a sizable amount of new supply, over 8,000 units being delivered in 2016 and it is all at the high end of the market. This supply has hit the market at the same time that job growth in the tech sector has hit the pause button. We still see good demand for units as evidenced by how well our newly completed developments are leasing up, but we are feeling the impact of our target demographic having more choices than before. In the second quarter, our lease-over-lease delta was up 2.1%, in July was up 95 basis points, while renewals were up 8.6%. Occupancy was 96.2% and turnover excluding same property transfers increased 30 basis points from the same quarter last year. Through Q2 turnover excluding transfers is down 30 basis points from 25% to 24.7%. Looking forward, new lease rents are expected to remain in the minus 3% range for July and August, our renewals achieved for July are 8% and currently 6.9% for August. Again, occupancy is 95.8%, but is on the expected seasonal upswing as students return to school. Now switching to New York, when we gave guidance in June, it was clear that New York was going to deteriorate further. We are comfortable that we have forecasted the appropriate mix of rate and occupancy for the balance of the year. New York job growth expectations were at the time stable. While the economy there appears to be on solid footing and the overall job growth is at expected levels, the bulk of jobs added today are mid-level compensation types jobs dominated by hospitality, leisure, followed by healthcare. Professional services, our demographic typically higher paying jobs held by our target demographic was a close third. The New York market continues to work to absorb nearly 9,000 units this year and with the great majority of that supply at the high end, absorption has not been as robust as we would expect. As a result, it’s possible that 2016 deliveries will carry over into 2017 lease-ups. We are already expecting a more elevated pipeline of new products scheduled for delivery in both 2017 and 2018. The concern in New York is that these elevated levels of supply, mainly private and fee managers, elevate upfront move-in concessions beginning in the fourth quarter of 2016. Now in our shop, as we immediately take a cash charge in our same-store revenue of the full concession in the month of move-in our revenue stream would be more impacted this year than if we amortized those concessions over the term of the lease. For example, year-to-date we would have reported a 4.5% if we have straight-line concessions versus the 4.4% that we reported. As a result, sequential quarter-over-quarter and full-year revenue growth will be more impacted this year. Much of the new supply delivered in 2016 has been focused on the left side, Jersey City and Brooklyn, all very competitive to our same-store portfolio in the market. 2017 we’ll see deliveries across a number of submarkets especially Long Island City and Brooklyn, but the left side we’ll see continued deliveries as well. Our current expectation for full year same-store revenue growth for New York is now around 1.5%, which is down from the 2.25% growth expectation we had at the beginning of June and the 3.75% growth expectation we had to start the year. New York accounted for about 15% of our expected 2016 same-store revenue growth. In the second quarter, our lease-over-lease delta was minus 80 basis points, in July is minus 95 basis points. Renewal rates achieved were 4.3% for the quarter with July at 3.3%. Renewals achieved thus far for August and September are 3.4% and 2.8% respectively. Turnover excluding same-store, same property transfers increased a 100 basis points quarter-over-quarter to 10.1% and a 100 basis points year-to-date to 17.4%. Today occupancy is 96.2% with new lease rates slightly negative. Now before I close, I want to assure you that no one is more disappointed about having to lower our guidance again than the entire team here at EQR as well as myself. I can also say that each stop along the way we were diligently trying to give you our best estimate at the time based on our collective experience. As David said, at the end of April occupancy, exposure, turnover, renewal rents, new lease rents, all indicated another good year in San Francisco. Unfortunately, as we continued to raise rents in May, the market decided to get conservative, and we had to react accordingly. We are obviously experiencing extremely volatile markets and this volatility is very difficult to predict. Perhaps in hindsight we were initially overly optimistic on San Francisco given the levels of new supply. Bottom line this year, but based on our dashboards at the end of April and later in the early June, we would never have predicted the fall-off in new lease rents and occupancy that we experience today.

Okay. Thank you, David. As noted in last night’s earnings release, we’ve also made some changes toward expected transaction activity for the year. Dispositions have now been reduced to $6.9 billion down from $7.4 billion. This $500 million reduction has resulted from three factors. First, about $150 million of the non-Boston assets that are in various stages of the disposition process will not likely close this year and will carry over into the first quarter of 2017. Second, the original disposition guidance included a $200 million portfolio of assets we have decided to hold for the present time as we see continued upside in both operations and valuations there and think that sale at this time would be premature. And lastly, as noted in last night’s release, we did not acquire any assets in the second quarter and reduced our acquisitions expectations for the year by $150 million. Since any incremental acquisitions will be funded by sales proceeds, we’ve reduced dispositions by a similar amount. During the second quarter, we did sell three non-core assets for $112.5 million at a 5.7% disposition yield and a 9.3% unleveraged IRR. In addition to selling these assets in Arizona, Massachusetts, and Connecticut, last quarter we also sold our entire interest in the military housing at Joint Base Lewis McChord in Tacoma, Washington, realizing a gain of $52.4 million. Now we’ve been involved with Lewis McChord since 2002, during which time we renovated over 2,200 homes and built more than 800 new homes for men and women who called the McChord Joint Base Home while serving our country. We’re very proud of our work at Lewis McChord for the last 14 years and it was really our honor and privilege to be involved there. With regard to our development business, we commenced construction of one small development project in the second quarter in Washington D.C., we’re building 222 units at a cost of $88 million or $396,000 a unit. At an expected yield on cost at today’s rents in the mid-5s. The deal was in the NoMa market and will be delivered in late 2018 and is expected to stabilize in late 2019. We’re also currently working on two small projects totaling $90 million that could start construction yet this year, with a weighted average cost on today’s rents in the mid to high 5s. During the second quarter, we also completed construction in our lease-up of three new development deals, all in the San Francisco market, two in downtown and one in North San Jose. These assets are leasing extremely well and are experiencing monthly absorption rates in excess of original expectations. From a pricing standpoint like our same-store portfolio, we’re not achieving the rents we’d hoped at the beginning of the year, but the rents we are achieving are well in excess of those underwritten at the time these sites were acquired and construction commenced. And as a result, these assets will provide stabilized yields from the high 5s to high 7s, which are well in excess of our original expectations. I’ll turn the call now over to Mark Parrell.

Thank you, David. Today, I’ll be giving some color behind our same-store expense guidance and the change to our normalized FFO guidance. I’ll then discuss how the change to our normalized FFO guidance impacted the remaining special dividend payment and our debt issuance guidance. In all these cases, I’m comparing the guidance numbers we gave you in late April 2016 as part of our first quarter earnings call to the revised guidance that we provided last night. As you might recall, the June 1 press release only revised our same-store revenue and NOI ranges. So moving onto the same-store expense side, we have left our annual same-store expense range at an increase of 2.5% to 3% and this is notwithstanding the fact that same-store expenses year-to-date have only grown by 0.9%. This implies that we expect second half same-store expenses to grow at a considerably higher rate of about 4.6%. As usual, our big three expense categories of real estate taxes, utilities, and payroll will drive these numbers. We now expect property taxes to increase at a rate of about 6% versus our previous expectation and our year-to-date number of 5.5%. This increase is due to a recent adverse legal decision regarding the calculation of property taxes, with several of our properties in New Jersey City. We also previously forecast payroll growth of 2.5% to 3% and we still believe that forecast to be accurate. Year-to-date payroll has only increased 0.3%, so we see most of the expected increase in payroll as backend loaded. For the year, we expect utilities expense to decline by approximately 3%, year-to-date utilities expenses are down 8.1%. Most of the expected growth in the second half on the utility side is due to our expectation of somewhat higher commodity prices later in the year compared to the historically low commodity prices we had in the third and fourth quarters of 2015. Moving onto normalized FFO, the reduction in the same-store NOI from a midpoint back in April of 5.5% to a midpoint now of 4%, causes a normalized FFO reduction of about $23 million or about $0.06 per share. Going the other way, an increase in our normalized FFO estimate we now expect an additional $4 million in NOI or about $0.01 per share for the positive due to the reduction in dispositions combined with these asset sales being pushed back further into the year. David Neithercut previously discussed the reasons for this reduction in our disposition activity. Our reduction in acquisition guidance from $600 million to $350 million and disposition guidance from $7.4 billion to $6.9 billion has only had a very modest impact on the amount of taxable gain that we will incur in 2016 and need for the special dividend. This is because the specific assets that we removed from our disposition guidance just specifically had relatively little tax gain and because we have already paid with the $8 per share March 2016 special dividend, the preponderance of the tax gain that we will incur in 2016. We therefore left our guidance for the annual special dividend in the range of $2 to $4 per share with the thought that the ultimate amount that we will pay is likely to be at or slightly lower than that midpoint. Our guidance assumes that this payment will be made in the fourth quarter of 2016. All dividend payments are subject still to the approval of our Board of Trustees. Moving on to the debt side, because our next disposition activity is about $250 million lower than we expected back in April, our projected line balance at December 31, 2016 is anticipated to now be about $430 million versus the $130 million we previously estimated. For now we have left our debt issuance guidance at about $225 million, but if our disposition process goes as expected we may do a larger offering that is now included in our guidance in either the secured or unsecured markets later in 2016. And I’ll now turn the call back over to the operator for the question-and-answer session period.

Hey, it’s Michael Bilerman here with Nick. Santee, thanks for the color surrounding from the guidance moves and look we can certainly appreciate you in the short-term business. Your portfolio is more concentrated in two of the biggest markets that you are in, have some more volatility. And I don’t want to get into the specifics of the numbers, but I want to focus on your processes and procedures in terms of forecasting and the results. Many of us have been to your offices, we've seen all the reams of data, we’ve seen all the pricing systems that you have and you’ve now reduced guidance three times. So we were trying to figure out sort of what are the issues in terms of, is your assets forecasting system not driving the right rates and so are the inputs not right or the outputs not right? Is it an operations issue or is it a FP&A issue that’s causing this because you can have one strike, two strikes, but doing it three times, one could imagine that there are other issues at play here than just the market in terms of how the data is coming in relative to your expectation and also what you put out to the street. And on the slight side, I don’t think a 500 unit building sort of popped up overnight. It would be input that you would, so maybe other, I don’t know if you want to take that, but sort of give some color around some of the processes and procedures that are going on.

Well, I guess I would say that our process is very collaborative. These decisions are not made in a vacuum. There are probably six of us that run our models from different perspectives, but at the end of the day, we all kind of lined up in the same place. I think a lot of the volatility has been very quick and at very inopportune times. One of the things that makes it very difficult to forecast is when we look at the precipitous drop in new lease rents in San Francisco. And look, we’ve had Boston, DC, all of these other markets have delivered outsized supply, but have relatively strong occupancy. And as I said in my prepared remarks, we were prepared for rents to go down. When you look at the new lease ups, if the new lease ups are giving one month free, basically you can move into a brand new building at 2015 rent. If a new lease up is giving two months free, you could move into a brand new building at 2014 rent. I think to some extent, we are a victim of our own success on the renewal side. When you look at San Francisco, 35% of our expirations are almost 5% above current street rents and with volatility ranging from plus 2% to as much as down 10% at certain properties in San Francisco, it really comes down to who moves out and at what property do they move out of. I mean, with rents down 10%, a person could be 6% above current market rents, a 16% decline on $4,000 a month rent and at times a couple hundred, a couple hundred dollars, each month for a couple of months winds down your revenue stream pretty quickly. So I hope that gives you a little more granular explanation of why it is very difficult to predict the rate of decline that we can expect, especially in the peak season where you have 15% of your leases expiring in June, July, and August, each month. So extreme volatility, with the highest number of transactions in the year, with job growth really coming to a halt at the high end of the market, is just making it very difficult to forecast forward. New York is kind of in the same boat with 45% of our expirations.

You don’t think it’s an input issue for how you are managing your business in terms of, you’re just sort of rolling with market. I think the market has come to expect that you have a little bit better insight into the day-to-day incidents, especially the time where you had to already lower guidance twice, one would imagine that the second time you did it, one would hope that you’ve built enough conservatism. I guess what I’m really asking is the whole processes that you have in place off, right? Is it not producing what you wanted to produce? The markets going to do what the market's going to do, you’ve built some tools and you seem to be disproportionately having to play catch up a little bit. And so that's what I'm more curious about, the processes and procedures you have rather than what's happening in the marketplace.

Well, I guess I would say that our processes that we have in place especially at the top level, the company level, certainly worked with a lot of big numbers. Certainly I don't think with fixed markets today, that you would expect us to give or see us give guidance in October. I think that some of the—I mean basically I think that we were overly optimistic about San Francisco. And really just kind of mirrored at some point in time judgment has to come into play. But what's different also about California, is that California is a 30-day market. All of our other markets are 60-day markets so you have a longer runway to see, who is giving notice. You have longer runway to react to pricing and what have you. And so this is, the San Francisco in the 30-day market with these dramatic changes within 30 days and it is just very hard to forecast and very hard to react as quickly to adjust.

Let me just add one thing there Michael, just general serve the philosophy we have with respect to this. Our intent every time is to give our investors our best guess as to how we see our business performing going forward. Not 90% of that best guess or 80% of that best guess, or 75% of the best guess but rather our best guess based upon the tools we have at our disposal, bills we have on the ground and the judgment of people who have been doing this for a long time. It's not intended to give you the range of all possible outcomes, but those outcomes that we think are most probable based upon the tools that we have and the judgment that we use. And as David said, these markets have turned to become quite volatile, it's become far more difficult to do that, but each step of the way we try and give you our best guess and again, whereas David said, we are as disappointed as anyone about where we are relative to where we ended up but, we believe we have an obligation to be as transparent with the Street as we can. And to give them our absolute best guess, not build in all sorts of cushions but to tell it like we see it. And we think we have done that every step of the way and it is just difficult to do so when things are moving and moving very quickly in markets that were budgeted to deliver 50% of our growth.

Yes, okay. Thanks for the time.

Thank you. Good morning.

Good morning, Dave.

You still have a reputation as an operator that can outperform or perform in line with your comps in your markets. What can you share regarding how your portfolio is performing relative to your comps in your markets?

When you – if you want to talk markets and submarket, I think if you look at San Francisco, we’ve delivered a 9.9% CAGR over the last four or five years. I think if you look back over the last five years, I think all but one we had the highest revenue growth especially in San Francisco. You know, after every quarter we kind of take our portfolio—because a lot of this is just about location, location, location, location. One of our competitors in Boston, they have fewer properties. We have many properties. We go through an exercise where we take our properties that are in the two or three properties that are in the suburbs and the other two or three properties that are up North, and we look at our—we create a similar portfolio to our competitors. And I would say that, every time we are very comfortable with our performance when we create similar portfolios to our competitors.

Thanks, David. So I think your investors are trying to discern the degree to which you are having forecasting versus execution challenges and you're saying that, as far as you can tell, there's no difference in the execution relative to that of your peers this year, than in the past. Is that fair?

Yes. That is fair. And I would add a comment. In the case of San Francisco, I don't think it's, you know, any surprise or secret, that some of our competitors have agreed or self-imposed renewal limits. Where we have not done that. That has also been a key driver of our leading the market in San Francisco for the last four, five years. But at the same time, when you reach an inflection point and the market comes down very quickly, we're going to come down just as quick and we’re going to come down much harder than our competitors. So again, I – we will go through this exercise again after everyone reports. And we will matchup our head-to-head properties with theirs. And like previous years, I expect that our execution will prove to be very good.

Okay. Thank you for that. And a question for David Neithercut, what are your thoughts—how does this experience so far this year inform your thinking on your strategy? Are the markets and submarkets that you're in truly as high barrier as you believed? And they’re clearly priced in the private market for superior NOI growth, which at least over the near-term is not what was expected. To what extent is the transaction market for these assets weakening along with the fundamentals?

Well, I think they might be priced for superior total return over an extended time period. And I just simply the NOI growth in the short term. I'd say the assets in these markets continue to trade at very low cap rates with three handles. In some instances even through a three handle there continues to be perhaps not as much demand, but certainly sufficient demand for these hard assets that in these Gateway cities that we've not seen any change in value at least for the present time. Now there may be because there might be fewer tours and potentially fewer buyers, maybe the ask spreads widening in certain instances, but the transactions that we are seeing getting done in the market in which we operate continue to support the valuations that we've been talking about. Just with respect to strategy, I think we've gone in with our eyes wide open that by operating in fewer markets we're likely to have more volatility. But again, we think these are the markets that are going to create jobs and these are the markets where people are going to want to live, work, and play and they’ll perform best over the long-term. As David noted, we've had 10% compounded annual growth rate in San Francisco over the past five years. If it was flat jobs – flat revenue growth for the next five, over 10 years it would still be 4.5 which is very, very strong revenue growth. So we remain very committed to the markets we are in. We think that again these are the places where the economy going forward will drive and that we’ll see better overall risk-adjusted total returns in these markets. We've seen construction costs continue to go up in these markets and replacement costs going up. But I guess I'd also say that in these markets, while there is elevated or more supply than we’ve seen in the past as a percentage of existing inventory, these are troubling amounts of new supply and in a historical context, unprecedented levels of new supply. So it's more than we’ve seen; it's disrupting us somewhat but evidence by just our lease ups particularly in San Francisco that you’ve gone extraordinarily well, demand is there. And we couldn't be happier with the product we’re delivering and will outperform our original expectations and we think we are in the right place for a long-term perspective.

Okay. Thank you for that. One last one if I may, in light of the underperformance of the stock and the fact that it's discounted on an absolute basis and cheaper than its peer set or cheaper than it's ever been, versus its peer set, can you update us on what you can do proactively to attempt to narrow the discount between the private and public market values? What are you evaluating or thinking about doing in terms of asset sales or joint ventures?

I guess we’re selling almost $7 billion of product this year and returning a significant amount of that back to our shareholders on a leverage-neutral basis. So I'm not sure there's anybody who's done more this year than we have in that regard. But I guess as I've said to many of our investors and have said repeatedly, I mean everything is on the table. We are painfully aware of where the stock price trades relative to those values. And we'll pursue and consider everything. I’d just reiterate what I think I've said on our last call and certainly evidenced by the gains that we’ve realized on those assets that we've sold as part of this larger process. We've got significant gains in almost everything we’ve owned. I think we’ve been very good capital allocators and we made a lot of money. And as a result of that, by the time after one looks at the gains of assets and runs those things on the balance sheet repo basis, if things went off on a lot of asset sales to have any real impact on stock buybacks. So it's just been more challenging than what I think many investors might think. But everything is always on the table and will look at everything between now and the end of the year.

Thank you.

Hey good morning, guys. Thanks for taking…

Good morning, Rich.

So I wanted to hit on David Neithercut’s comment earlier on the probable outcome versus the range of outcomes with respect to guidance. So specifically on the topic of the range of outcomes, how bad do you think San Francisco and/or New York could actually get? And then, I don't believe this was actually answered earlier, but does the guidance as it currently stands build in some cushion against current trends as you described them, or is it simply extrapolated what you are seeing in the market currently?

Well, this is David Santee. Someone asked me could New York be negative? It’s certainly possible. I mean we are focused more on this year. We certainly have as I noted in my comments, we are already seeing a lot of the marketing employees in New York, one private company is offering a $1,000 gift card on any rental. So we are just kind of playing off there at knowing that we were kind of forced to use cash set upfront concessions in Q1 in New York. Knowing that the level of supply that's still in Lisa, knowing what's coming next year – we have built-in what we think are necessary levels of concessions or commissions or what have you to get us through the end of the year.

Okay. And the same would apply in San Francisco?

Yes, we really haven't seen a lot of the marketing items or move-in concessions, for that matter are in the legacy portfolio. I mean the only concessions that we have seen thus far, are on the new lease ups. And I think people are rushing to get these buildings filled. Whether it's because they have occupancy requirements by their lender or a variety of other reasons. But we really haven't seen anything out of the ordinary other than rapidly declining new lease rents and less demand on the older type property. Yes. It's really negligible. So bought homes moving out to buy homes this year is actually year-to-date down 20 basis points, of that 12.1% of move out.

Good morning, guys.

Hi, Rob.

So you previously talked about the deliveries in Manhattan being Westside just heavy this year along with some of the other submarkets, but then when we got to 17, it was mostly Long Island City and Brooklyn. It sounded like today, you've thrown the Westside in there again. Is that a change you’re seeing now when you are looking at those likely 17 deliveries? Are you seeing more in Manhattan, especially on the Westside than you would have seen three or six months ago?

I think what – well, first of all, we are now kind of combining the upper Westside with Midtown West when we talk about new supply. So Midtown West and upper Westside are going to be delivering probably 2,400 units next year, which relative to the overall supply is what, 15%. I think the concern is that we do have some very large deliveries that occurred early in the year in the upper Westside, a 1,100 unit property that is still only 50% leased. That’s going to start running into renewals before they are least up. While at the same time adding a little more supply will kind of compound the rate challenges that we see in Midtown West and the upper Westside. But the upper Westside, specifically as a neighborhood is only expected to deliver 2,000—I'm sorry, 214 units into 17.

So I’m sorry, you're talking about the difference in our guidance change or the difference between…

So you got 82 to 86 range for NAREIT FFO and is 75 to 79 for Normalized FFO. What is the difference between 82 to 75 and 86 to 79?

So we have some land sale gains, but we really have there as Fort Lewis. And then the third quarter that $0.07 is going to be some land sale gains.

Okay. So there's $0.07 of land sale gains in the third quarter?

That’s certainly something we considered on the table as well.

Thank you.

Good morning and thank you for taking my questions.

Good morning.

With regard looking—good morning with the turnover if I’m correct is an annualized turnover of 59.2 which was up about 280 basis points I guess versus our expectations for 150. So it was a little more than we had expected and recognizing turnover has been pretty low throughout the last few years. With respect to understanding the expenses, as turnover accelerates, how much are you factoring in our guidance for turnover to be sustained at current levels and how much variability does that have on NOI with respect to turnover accelerating more? And maybe you know maybe in the case it has been in the less several quarters or even the last few years?

Well I guess I would say, a large portion of the increase in the physical turnover is a direct result of more people relocating in the same property for a variety of reasons. They either need more space, less space, lost a roommate – so in those cases, I mean, the frictional costs are roughly $234 to clean, paint, and shampoo an apartment. And you’re not giving up any vacancy costs for that portion of your physical move out so to speak. So you know, like anything—the largest cost of turnover is vacancy. And when you net out the turnover, you know, it’s not really that material. We have seen an elevated.

No, I’m sorry. That’s really helpful. I was trying to say on a go forward basis, so you’re assuming sort of the same level of turnover, kind of holding where we are to extrapolate no real change in guidance on turnover or in your embedded assumptions for your guidance.

No. No change.

And then just secondly I think everyone has drilled a lot into San Francisco and New York City and you guys have done a great job in helping us understand the variability and respective volatility you have seen in the highest peak leasing fees. And I’m kind of just thinking about looking at the ratio of 2014 and 2015 urban multifamily permits as a percent of stock and Boston is screening the high second-highest after New York. And you obviously have exposure there as well as Seattle and LA. Just thinking about how do you today extrapolate in, especially in Seattle you said is accelerating and recognizing that you are seeing improvement and really haven’t seen the same type of volatility in DC even if also screening not as badly as New York, let’s say Boston. When you’re giving us guidance, are you extrapolating the current trend like you had been in the guidance earlier in the year. And unfortunately, so that volatility. Or are you being more conservative now because the supply hasn’t become automatic or created volatility in the downside. You know have learned from that and you are saying we are going more cautious even if those markets are extrapolating, we could extrapolate positively?

Yes. So, there’s a lot of questions there.

Sorry.

Let me just use Boston as an example. So we know that, you know 2016 as an example we’re delivering 2,300 units in Boston. The good news is, is that a lot of those units are now in the suburbs. And I think on our last call we said that we have, you know this 12 to 18 month window where, you know 2017 deliveries kind of moved back into the urban core, the Seaport, what have you – so that’s why we’re seeing better revenue growth in Boston. You know, even though we delivered 5,000 units in 2015 in the urban core, we were still able to hold occupancy at 96%, new lease rents were flat, and we were still able to get renewal increases. And you know, that’s kind of what we’ve experienced over the years is that, you know, even though these markets that we’re in today, you can still deliver product, hold the occupancy, but feel the rate pressure. And then when the new deliveries move away from you, you start to get pricing power back. And I think, you know, that’s—we’ve kind of said previously, that you know, all these markets are generally on track. They are either you know, a tick below or a tick above. But there’s nothing material in these other markets that would cause us to be you know overly optimistic or overly pessimistic. They are what they are. They are right on track and we’ve kind of left them there for the rest of the year.

That’s very helpful. If I could sneak in one more and again thank you so much for taking my question. The last one relates to just where cap rates are, and I think David Neithercut you talked about the tightness of the transaction market despite the fundamentals that might be in the margin starting to moderate. If you think about where I guess directionally if you think cap rates are going to go, assuming rates are holding constant, do you expect the fundamentals to start writing out, seeing more opportunities especially at the capital market, may not be; or the banks are pulling back and being more stringent. What’s your thought and outlook on cap rate?

Well it is not just cap rates, it is results and valuations too, right—ultimate valuations. I mean one of the things we done as we’ve seen this new supply coming is to reduce our own construction upstarts. Well we’re delivering a lot of product now but we’ve got very little of anything kind of behind that. And it is very possible that we might see, and I’ll use the term loosely, opportunities to acquire assets in these markets. We think valuations are pretty solid. Depending on what happens to interest rates and global interest rates and demand for yield. We know where cap rates might go on extremely good quality, well-located assets in the kind gateway cities that we’re in. One reason we reduced our development business is because where we saw yields going and we saw new supply and we thought it may be a better deal for us to buy completed assets rather than build our own just given the amount of supply that was coming. But it remains to be seen where cap rates are headed and where values are headed.

Great, good luck, guys. Thank you.

Thanks very much Ivy.

Hey everyone. Just going back to San Francisco and New York for a second. We’ve talked a lot about them obviously. But as far as the decline in the outlook for those two markets, we talked about rate after August not being as big a factor. Occupancy and concession is bigger. But I guess San Francisco not seeing concession today. Are you building in any increase or is that just the assumption that concession levels will stay similar and that in New York same thing you are seeing concessions there. But are you projecting any change in the level of concessions over the back half?

We’re not forecasting any concessions in the back half. I guess what I would say is that we, we’ve accounted in San Francisco, we’ve accounted for that with a 100 basis point spread in occupancy. So if occupancy comes down far enough, then we would—or if we see occupancy going in the wrong direction, we would use concessions to boost occupancy up. And that higher occupancy kind of would offset any concessions that we would need to offer. But we’ve really just factored the net effective new lease pricing for the balance of the year in San Francisco.

Okay. And then net effect will be similar to what you are seeing in July and August I guess?

If not a little lower.

Thanks for taking my questions. First on development and peers like you guys moved up to stabilization dates on a lot of your developments this year, in particular over the last quarter. Is that due to the concessions you are offering right now? It feels kind of counterintuitive to the narrative that the Bay Area development leasing is slowing?

Actually we said nothing close to lease up in development long. Our absorption and our transactions in San Francisco have exceeded our expectations, and we have significantly moved up the stabilization dates because our absorption there was almost doubled what our real expectations were. And we were looking at 20 or so a month and we have been doing almost 26 a month. No one thought that would necessarily continue which is why it took us so long to change that stabilization date. But we're moving right along there and I’ll tell you that we have been doing that with concessions of two weeks to one month. And again at rent stand above our pro forma expectations but maybe modestly below what we might have hoped we would do at the beginning of this year. So the absorption of our San Francisco transactions have been strong and the lease rates have—exceeded our regional expectations and so the deals were stabilized at yields ahead of what we had originally underwritten. And again at $88 million deposits, not going to either one way or the other Tom.

Good morning, guys. When we talk about Northern California, what do you see in the various submarkets there? I imagine, Berkeley, Michigan Bay are probably the hardest hit. Give your high level do you have ever work in the region, anything hanging in there?

Yes. So I’ll just kind of go major submarket in San Francisco. And talk about kind of where rents are today relative to same week last year. We have Berkeley, which is more student driven, it was only down 0.5%. Obviously San Francisco, proper is down 5.4%, which is actually bolstered by one property when you look at Geary Courtyard, SoMa, those are kind of ground zero where the new deliveries are. Those are down 11.5%, 8% on rents. East Bay is still flat. East Bay continues to hold up relatively well. The Peninsula, we have some new deliveries there that are more attractive to Millennials. Those rents are down about 5% and then South Bay, which has really put a lot of new deliveries behind it, is down 2%.

Thank you for that insightful information. Regarding the quick leasing activity for your San Francisco project, how does that relate to what you observed with new renters? Are you drawing from other communities based on this trend?

Yes, I think—what David had commented earlier, we’ve got the ability for people to sort of move from older products—the first wave of new supply that’s been delivered in San Francisco in years. And people have the ability to move across into newer product, that you know, if not modestly more around the same they were paying for lesser quality products. So we’re just sort of seeing our tenant base have had more options than we have been seeing them move to our properties from elsewhere in the area.

Okay, and would you characterize that as coming from maybe the other cities or the East Bay, or is it mainly within 3 to 5-mile radius where you’re getting most of the movements from?

Do know the answer to that question David? We’d certainly have that but in the system but we don’t have that at our fingertips.

Just to review your market level, revenue growth expectations. It would be helpful to hear about the other markets. I think you said you’re currently expecting 6.5% same-store revenue growth from San Francisco, 1.5% in New York. I assume that these figures underpin the midpoint of your revenue growth guidance and if that’s correct, if you could just run through the other markets.

Yes. Boston 2.8%, New York we said 1.5%, Washington D.C 1.2%, Seattle 6.1%, Orange County 5.8%, San Diego 5.7%.

Okay. And then can you tell us what you’re expecting for the portfolio on those two metrics for 3Q and 4Q?

Yes, I would have to give you ranges. But you know I see renewals moderating down to call it, four to five. And then new lease – new move-ins, I mean obviously new move-ins, because of the seasonality they just automatically compress. So as an example, Q1 of 2015, we did 40 basis points. So I would imagine in Q4 of 2015, we did minus 40 basis points. So it’s just the natural cycle, I would expect them to fall off the balance of the year. To what degree is really just a function of, again going back to that who moved, which resident moves out and at what property.

Okay so no specific range on new move-ins. But the renewals is 4% to 5% range and that compares to what looks like about 6.5% on renewals in the second half of last year? Is that correct?

Renewals, yes, 15 renewals were 6.8% and Q4 renewals were 6.4%.

Hey good morning, guys. Thanks for taking…

Good morning, Rich.

Thank you all for your time today. I hope you all have great remaining part of the summer and we look forward to seeing many of you in September.