Equity Residential Properties Trust (EQR) — Q4 2016 Transcript

Thank you, Ashley. Good morning and thank you for joining us to discuss Equity Residential’s fourth quarter 2016 results and outlook for 2017. 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 will turn the call over to David Neithercut.

Thank you, Marty and good morning everybody. Thank you for joining us for today’s call. 2016 represented the culmination of a very important multiyear process for Equity Residential as we completed the transformation of the company’s portfolio, with the sale of nearly 30,000 apartment units and the return of $4 billion to our shareholders in special dividends in what’s been noted by many as one of the most investor-friendly transactions seen in years. Unfortunately, 2016 also brought about an abrupt downturn in apartment fundamentals as new supply entered the market at a time of slowing job growth, particularly in the growth of higher paying jobs. As a result, after five years of extraordinarily strong fundamentals, our same-store revenue growth in 2016 came in at 3.7%, down from the 5.1% growth delivered in 2015 and more in line with long-term historical trends. Now as noted in last night’s press release, we expect revenue growth to continue to weaken in 2017 with nearly all of our markets expected to deliver same-store revenue growth for this year below 2016 actual performance with Washington, DC being the lone exception. Weakness in fundamentals is not a result of much of any change in the underlying demand for rental housing across our portfolio. On the contrary, occupancy remains strong today and is expected to moderate only slightly through the year. Turnover across all markets, when excluding same-property movement actually improved last year, dropping to 48%, a 100 basis point improvement over 2015 and consistent with our expectations for 2017. Move-outs to buy single-family homes remain a non-factor in our high cost of housing markets. Furthermore, while our markets have experienced a slowdown in the growth of high-income jobs, the absolute number of new high-income jobs remains relatively strong. And perhaps more importantly, for the first time since the recovery began, there are abundant signs of wage growth occurring in all industries across the country, which obviously is a very good sign for the apartment business. So as we look ahead to what we see as peak deliveries in many of our markets this year, our teams across the country will work very hard, delighting our existing residents and extending their stay with us, while welcoming prospects and turning them into new residents. We remain extraordinarily excited about the long-term outlook for our business, portfolio, and the company. So with that said, I will let David Santee go into more detail about our outlook for 2017.

Okay. Thank you, David. Good morning, everyone. Before I jump into the numbers, I’d like to first acknowledge the commitment and efforts of all of our employees over the past year. While results were certainly bumpy, it only strengthened our resolve to do better. I know our teams are keenly aware of the challenges before us. And I am 100% confident that they will go above and beyond to deliver in 2017. While markets have now returned to pre-2014, 2015 seasonality, there continues to be strong demand for high-quality apartments in great locations and occupancy remains above historic norms. Today, I will focus my comments on the assumptions that make up our full year forecast on a market-by-market basis. I will provide you with lease-over-lease growth rates, expected renewal rates achieved, any material changes in occupancy and the percent of contribution to same-store revenue growth that together get you to the midpoint of our full year guidance. I will also discuss what we see in the markets today and provide color on the new deliveries and how much or how little we expect them to impact us based on our geographic footprint. I can address any 2016 questions in the Q&A session afterwards. So I will start with the markets that we expect to have the most positive impact on our 2017 revenue growth and finish with New York, which will have a negative impact on our performance this year. Los Angeles will contribute around 40% of our growth this year. With job growth remaining steady, we are forecasting lease-over-lease growth of 1.8%, renewal rate growth of 5.4% and a 20 basis points decline from 2016 occupancy. These assumptions would deliver 3.6% total revenue growth in 2017. As you know, Los Angeles is the collection of several large submarkets. About half of the new supply in 2017 will be focused in downtown L.A. as we witnessed the creation of a 24/7 downtown for the first time in the city’s history and will pressure our footprint there which represents 16% of L.A. same-store revenue. The remaining new units are spread across the Valley and specifically, Pasadena, which represent 24% of our revenue. There are virtually no new deliveries in West L.A., where we have 25% of our revenue, or in Santa Clarita or other suburban markets which account for 35% of revenue. On to DC, DC continues to show acceleration and will contribute 21% of our total same-store revenue growth in 2017. Lease-over-lease growth is forecasted at plus 80 basis points, renewal growth of 4.4%, with occupancy essentially unchanged. Full-year revenue growth would be 1.8%. While news of the federal hire increase causes us to take pause, history tells us that frozen federal jobs are simply replaced with outside contractors and higher wages. However, the actual order says that the hiring of contractors to circumvent the order is not allowed. Like other initiatives the administration has put forth, there remain more questions than answers on the potential impact to our markets, our industry, both at the city and national level. But we still remain confident that demographics will continue to drive strong demand for apartments. In the DC Metro, 2017 new supply will be slightly elevated from 2016 and approximately a third of those new units will be competing head-to-head with the majority of our entire DC footprint with the largest concentrations in the RBC Corridor and Arlington. The Navy Yard in Southwest DC will continue to deliver units, but neighborhood amenities and services are not following at the same pace; creating a less desirable but more affordable location. The remaining deliveries are dispersed across many popular suburban locations like Tysons Corner, Reston, around the Beltway to Rockford, Gaithersburg, and Prince George’s counties, which all should bode well for continuing improvement in the district. Seattle will contribute about 20% of full year same-store portfolio revenue growth. Lease-over-lease growth is forecasted at 3%, renewal rate at 6.2%. With no change in occupancy, our most likely revenue growth for 2017 is 4.25%. With deliveries in 2017 basically the same as 2016, we have yet to see any price pressures as strong demand for rental housing continues to be driven by employers like Amazon and Microsoft. We continue to produce strong results, while expanding their footprint into new business lines or next-generation technologies. The tech stalwarts are also expanding their employment base in the Greater Metropolitan area to better compete with talent, and Seattle continues to have the lowest absolute rents and taxes of any other market in which we operate. No difference in the past three years, most 2017 deliveries in Seattle will go head-to-head with our portfolio. Our 4.25% revenue growth reflects our expectation of moderation as a result of increase in competition. Additionally, prohibitions on upfront non-refundable move-in fees that were recently enacted by the Seattle City Council will negatively impact our 2017 revenue growth by 30 basis points. There is still uncertainty around the new ordinance regarding pet rent that could have a negative impact of an additional 20 basis points that is not captured in our forecast.

Alright. Thank you, David. Following a year in which we sold nearly $7 billion of assets, 2017 will look slightly tame on the capital allocation front. The investment teams will be working very hard seeking to maximize the total return on invested capital in their respective markets. The 2017 guidance assumes $500 million of acquisition activity, funded by a like amount of disposition activity at a negative spread of 75 basis points. Now, I want to make it clear that after having backed up the truck last year as we sold nine core assets, there is very little that we believe needs to be sold in 2017. So we will transact if and when we find an opportunity to redeploy that capital into a higher fully return asset. The investment team will also be focused on our rehab activity in 2017, where we expect to spend $50 million this year, covering approximately 4,500 units and would expect our past returns on this capital of 12% to 14% to be achievable again this year. Last year, Equity Residential completed the highest dollar volume of new developments in our history in five assets, totaling $1.1 billion of project costs. In 2017, we will also complete nearly $900 million of additional new developments and this will contrast sharply with 2018, when we will complete just one development project, that being what would be the last remaining project underway, our $88 million 220 unit project at 100 K Street in Washington, DC. Clearly, we have throttled back our development activity in the face of rising land and construction costs and declining yields. At the present time, we have two potential development starts this year, totaling only $100 million. Beyond that, we will continue to work on several existing operating assets where we hope to upsize our density in order to build additional units. We have just two remaining land sites in inventory that were acquired and are currently held for future development with a carrying value of less than $60 million. Now this does not suggest that we won’t continue to look for opportunities to develop more projects and create new long-term streams of income for the company because our teams continue to look for those opportunities every day. But after a terrific long-term run of realizing development yields well in excess of current cap rates and creating meaningful long-term value for our shareholders in the face of elevated new supply and slowing revenue growth, we have opted to take a more cautious approach to development at this time.

Thank you, David. I want to take a few minutes this morning to talk about our expense and our normalized FFO guidance for 2017 as well as our capital expenditure plans. I will close with a few comments on our balance sheet activity and our sources and uses. So first, on the same-store expenses, we have provided a range of 3% to 4% for our 2017 same-store expense growth. I am going to go through a few of the main drivers of that at the moment. On the real estate tax side, we expect an increase of between 4% and 5%, with 1.8 percentage points of the increase coming from the 421a burn off in New York. Markets with the largest increases in property taxes are Boston, New York, and Washington, DC. For payroll expense, we expect an increase of between 4% and 5% as we face pressure to retain our property-level employees in a very competitive market. We have also added staff in some markets to provide even better service to our residents and to support tenant retention. Switching over to utilities, which is our third largest expense category, we anticipate an increase of approximately 2%. In each of the last two years, our annual utility expense has declined, so this is a bit of a normalization year. Also, we are seeing some pressure on our repair and maintenance line item. This is due to increases in the minimum wage that impact our outside cleaning and landscaping vendors. We estimate that in 2017 we will incur approximately $1.5 million in additional cost due to minimum wage pressure and that’s going to add about 20 basis points to total expense growth from these increases in minimum wage. For the leasing and advertising expense line item, after a big increase of 19% in 2016 versus 2015, we have budgeted leasing and advertising expense to be flat in 2017 versus 2016. The increase in 2016 was driven by increased promotional spending and that included gift cards and owner payment of broker fees and approximated about $1.6 million and was spent predominantly in New York, with a lesser increase across the portfolio in Internet advertising cost.

Our range for normalized FFO for 2017 is $3.05 to $3.15 per share, comparing our 2016 normalized FFO to $3.09 per share to the $3.10 per share midpoint of our guidance for 2017. I want to hit on a few of the main drivers. First, our portfolio of 15 properties, totaling about 5,300 units that are in various stages of lease-up should create a total of $85 million to $95 million of NOI. As compared to 2016, this is an incremental contribution to our results of $41 million or about $0.11 per share. We are excited about the current cash flow and about the long-term value creation that these assets will bring Equity Residential. We will caution that cash flows during lease-ups can be volatile due to the lease of timing and changes in rental rate and concession estimates. We expect an additional contribution in normalized FFO of about $4 million or about $0.01 per share from other non-same-store properties, so adding that all up, you get a total positive contribution in the non-same-store category of about $45 million or about $0.12 per share.

We are going to spend about $300 million in 2017 completing our development projects, leaving us with cost of only about $40 million in 2018 to complete our current development starts. Acquisition and disposition activity is anticipated to be about equal in amount. Our guidance assumes that dispositions are slightly front-loaded for the year versus acquisitions occurring ratably over the course of the year. Now I am going to turn the call back over to the operator for the Q&A session.

I was just hoping you could speak to the 2017 guidance on the core business of same-store revenue and NOI and just give us a sense of the main variance items between the low and the high end, whether it’s macro assumptions or supply/concessions or whatever color you can provide?

And by that, do you mean how do we set the guidance range for normalized FFO?

Well, it’s primarily revenue-driven. I would say that in places like obviously, Los Angeles, where we have the largest contribution to growth with the same-store portfolio, we are just assuming more volatility. New York, same story, New York is probably one of the most undisciplined markets when it comes to pricing and concessions and what have you. So we have assumed a certain level of concessions and rolled down in pricing. But there is more volatility that could happen there than we expect.

David, you mentioned New York City had the most variability in terms of potential outcomes and I think you mentioned at the midpoint, you are assuming down 1.5%, but can you talk about the low end and where that – where the downside could be for that market?

I think it all comes down to level of concessions. We have certainly prepared for a certain level of concessions. But you are already hearing some crazy stuff like three months and four months free on 12-month leases. I mean certainly, if that becomes widespread across the entire MSA, then you can get to negative three pretty quick. So that’s kind of our worst case scenario on New York City.

And how do you think about the use of concessions within your portfolio for New York versus using gift cards and does the same-store revenue guidance at 1.5% assume any use of gift cards or maybe that’s being run through the expense line item there?

Yes. So let me just explain our overarching strategy for the company and then specifically, New York. We have always thought to be a net effective rent shop. The only market that we have budgeted significant concessions and it’s $4 million is New York City. We have budgeted the same level of gift cards that we spent last year, but everyone is very clear that that is a tool that we will only use if absolutely necessary. So our first line of defense is rate, second, concessions, and last, gift cards.

And just one other question, for same-store revenue growth, there has been a deceleration on a year-over-year basis every quarter since third quarter of ‘15, but when you look out to 2017 guidance, do you expect that to stabilize at some point, in the back half of 2017 and could there be a reacceleration?

Our guidance assumption now assumes a gradual decline in same-store revenue quarterly numbers throughout the year. Nick, certainly it would be great if there was some sort of reacceleration, but that’s not what’s presumed in our numbers.

Thanks. I appreciate all the market level detail on the guidance. I guess going back to New York and San Francisco, the assumptions you gave on new lease growth for each market, how does that compare to where new lease growth is – was in the fourth quarter and so far in January?

Let me say this. This is why – I can give you an example of the fourth quarter numbers, but we know from tracking this for the last ten years that if the market is even stable, the likelihood of having negative lease-over-lease growth in Q4 is a likely outcome because you have a disproportionate of people breaking their leases in Q4 versus regular lease expirations. So just to give you an extreme example, so New York in Q4 was a minus 5.3, okay. But almost every market is negative. So basically, you are re-letting units at that were at premiums and now you are re-letting them at lower rents. However, you have very few transactions. So you can’t extrapolate the direction of the market from those numbers. So in Q1, it becomes less negative. In Q2 and Q3, it’s very positive. And that’s just how the cycle works pretty much every year.

Okay. I guess what I am trying to get at is whether or not the guidance for New York and San Francisco is at the midpoint is assuming that both markets get tougher versus what you have actually been seeing on the ground of late, so whether you are actually building – how much conservatism you are building in for these markets this year would be helpful to understand?

Well, I guess we look at the quarterly numbers historically. We have to assume some level of rent growth, what are leases doing. In San Francisco for 2017, we assume that new lease rents will be flat over last year, right. So rents will be basically the same as they were last year, but people who have lived with us for 2 years, 18 months, are paying above market rents, so those will roll down. So we have incorporated all of that into our guidance on a quarter-by-quarter basis.

Let me just put two things together Nick for you. We have no starts assumed in guidance, so no spend on new starts. We have $300 million that we will spend completing things that have already started that you already see on our development page. David Neithercut referred to two deals we may start. If we do start them, they will have a material impact on guidance. I mean there will be draws on the revolver and slightly higher capitalized interest and it just won’t make a great deal of difference to the FFO numbers for the year.

Right, okay. I just but – just for the two developments that could start, what is the dollar amount of total cost for those projects?

$100 million on those two deals, Nick.

Okay. Total cost $100 million for two projects?

That’s correct.

Okay. So I guess my – that’s helpful. My follow-up question here then is I mean if you think about it, I mean, you are essentially practically shutting down the development pipeline which means you are – you could have a lot more use of potential for your free cash flow as you get out to next year. I mean, what are the thoughts about where that goes? I mean, are you going to increase your payout ratio on the dividend? Are you going to do more share repurchases? You are not going to have much in the way of future capital needs.

I think we will see at the time, but those two things are certainly would be part of the things that we would strongly consider.

Good morning.

Good morning, Conor.

You mentioned that disposition activity could be front-end loaded. What are you seeing on demand and pricing for the assets that you are looking to sell? And without giving away too much, could you tell us how those assets – how they fit in your overall portfolio? You mentioned David that you had sold largely all of your non-core assets. So, I assume these are assets that are in your remaining markets and closer to the average of your existing portfolio?

Yes. And as I also noted, Conor, many of which would not be sold if there is not a redeployment sort of opportunity also on the horizon. So I would kind of think about them as more sort of pair of trades, if you will. We have $100 million or so of product that we had hoped to sell last year as part of the larger sort of non-core disposition program that did leak into this year. Beyond that, as I said during our prepared remarks, we have very little identified that we feel like we need to sell, but we do have product identified that we would sell if we could find the right reinvestment opportunity. Just with respect generally to valuations, I can tell you that of all that we sold a year ago or during 2017, we have sold that for about a 3% premium to what we had told our board that we probably could realize on that product. And I think that’s a real testament to Alan George and his team for their ability to attract the market. Those guys are telling us today that values generally are kind of holding in there. That deals with some sort of story or some kind of structure here might be off a little bit on a year-over-year basis, but a great deal of our assets would be right in there, same valuation over a year ago and in some markets, maybe even up slightly from there.

And then on that acquisition disposition strategy, do you have any desire to use that to shift your allocation between markets at all? Again, it’s obviously a pair of trade strategy, but is there any portfolio refinement strategy baked into that?

I don’t think so, Conor. I mean, certainly, we may sell an asset to one market, buy another in another but that’s not going to change in any material way NOI concentration. So that won’t be conducted with a specific desire to reduce one market and increase another market, but more just in response to whatever opportunities we may see.

Okay. And then David in last night’s release, you noted at the beginning, just in the opening, just the strong demand that you guys are seeing in the potential for great returns in future years. What’s your outlook for employment growth and supply growth in ’18 and ’19 and what’s underpinning that constant outlook that you have for your portfolio?

Well, look, it’s hard to ask me exactly where we think ’18 supply is going to be, but we do think with land prices up and construction cost up and a lot of more traditional sort of construction lending sources maybe winding down a little bit, but there are lots of reasons to think that ’18 deliveries will be below ’17. And just with respect to demand, we just think that demographic picture remains very favorable. The job picture remains very favorable. Rising wages, we as you know operate in markets which is processing. The family housing is very expensive. So we just believe that we have got a lot of residents that will stay with us and the demographic picture will bring more to the market. So, we remain – we think we have got peak deliveries in 2017. And as we have already discussed in great detail, we are going to have to work our way through that. But on the backside of that, we remain very optimistic on a multifamily business in general and certainly, very optimistic for the multifamily business in our core markets.

Good morning, guys. Can you talk about what the current expectation in terms of stabilized yield is for the $960 million in the development pipeline?

Sure. I mean of the completions that we delivered last year, so that’s about the $1.1 billion. We think these things will stabilize in the high 5s, low 6s and the product that we believe – and we will certainly complete yet this year will stabilize also in the high 5s, low 6s.

Okay. So the five projects that you guys have completed in California, the three in San Francisco, the one in San Jose, and the one in L.A. that are already on your schedules completed, that already is sort of high 5s, low 6s?

Well, I am not saying it’s already, because they are still in various stages of lease-up but we believe that when they do stabilize, they will stabilize in that ballpark.

Okay. And where is that relative to what you expected at underwriting?

Generally better. I will tell you that in those – in most of the products we have delivered, we are able to price these land and price construction costs at a different point in the cycle. So, our costs were very attractive. And we have seen, as you know, very strong revenue growth and rental rate growth during that time period. So, while even our deals in San Francisco might be exceeding our original expectations, they might be a little off of what we had thought they might be at the beginning of ’16, but still that will deliver at or modestly above our original expectations.

In 2017, we expect to spend $2,600 per same-store unit in capitalized expenditures as compared to $2,235 per same-store unit that we spent in 2016. Included in this is approximately $17 million of additional spend. The customer-facing renovation projects, examples include common areas, leasing offices, and exercise rooms. As you know, much of the new product that is being delivered into our market is targeted at the higher-end renter. We are making sure that our incredibly well-located assets are able to continue to compete with this new product. This increased spend will be reflected in the line Building Improvements on Page 23 of our supplement. We expect this spend to normalize back down over time. The fourth quarter was certainly a busy one for our finance and legal teams. We replaced our $2.5 billion revolving line of credit which was scheduled to mature in about a year with a new cheaper $2 billion unsecured revolving line of credit that matures on January 2022. We made our line of credit smaller to reflect the reduction in the size of the company and the prepayment of significant amounts of debt during the first quarter of 2016. We had strong interest from our bank group in renewing the facility and we are able to obtain market leading terms. We also issued $500 million of 10-year unsecured notes at a coupon of 2.85% and an all-in effective rate of 3.1%. This is the lowest 10-year issuance we have ever done. We also paid $1.1 billion or $3 per share in a cash special dividend in the fourth quarter. At the end of 2017, we expect the line of credit or the commercial paper program to have about $550 million balance. I am going to give you a quick summary of some of the cash inflows and outflows. Our guidance includes a $400 million debt issuance in the second half of the year. We expect to payoff $630 million in debt as it matures during 2017 and recall about $340 million of debt that matures in later years, so a total of $970 million of debt repayments during 2017. We will spend about $300 million in 2017 completing our development projects, leaving us with cost of only about $40 million in 2018 to complete our current development starts. Acquisition and disposition activity is anticipated to be about equal in amount. Our guidance assumes that dispositions are slightly front-loaded for the year versus acquisitions occurring ratably over the course of the year.

Thank you. And we will take our first question from Juan Sanabria from Bank of America.

Hi, good morning. I was just hoping you could speak to the 2017 guidance on the core business of same-store revenue and NOI and just give us a sense of the main variance items between the low and the high end, whether it’s macro assumptions or supply/concessions or whatever color you can provide?

And by that, do you mean how do we set the guidance range for normalized FFO?

Well, it’s primarily revenue-driven. I would say that in places like obviously, Los Angeles, where we have the largest contribution to growth with the same-store portfolio, we are just assuming more volatility or providing a range for more volatility. New York, same story, New York is probably one of the most undisciplined markets when it comes to pricing and concessions and what have you. So we have assumed a certain level of concessions and rolled down in pricing. But there is more volatility that could happen there than we expect.

Okay, thanks. And then on the supply side, any skew across the top markets between the first half and the second half of ’17, how are you guys thinking about kind of the trends in results from over the course of the year in ‘17?

Yes. I guess I would say that as we built up the budgets from the ground up, we understood when the bulk of the units were coming, whether its front-loaded, spread across, equally across the fourth quarter or if it was more back end loaded. So the pace of those deliveries, are embedded in our revenue assumptions.

Okay, thank you.

Thanks. David, you mentioned New York City had the most variability in terms of potential outcomes and I think you mentioned at the midpoint, you are assuming down 1.5%, but can you talk about kind of the low end and where that – where the downside could be for that market?

Well, I think it all comes down to level of concessions. We have certainly prepared for a certain level of concessions. But you are already hearing some extreme stuff like three months and four months free on 12-month leases. I mean certainly, if that becomes widespread across the entire MSA, then you can get to negative three pretty quick. So that’s kind of our worst case scenario on New York City.

And how do you think about the use of concessions within your portfolio for New York versus using gift cards and does the same-store revenue guidance at 1.5% assume any use of gift cards or maybe that’s being run through the expense line item there?

Yes. So let me just explain our overarching strategy for the company and then specifically, New York. We have always thought to be a net effective rent shop. The only market that we have budgeted significant concessions and it’s $4 million is New York City. We have budgeted the same level of gift cards that we spent last year, but everyone is very clear that that is a tool that we will only use if absolutely necessary. So our first line of defense is rate, second, concessions, and last, gift cards.

Thanks. And just one other question, for same-store revenue growth, there has been a deceleration on a year-over-year basis every quarter since third quarter of ‘15, but when you look out to 2017 guidance, do you expect that to stabilize at some point, in the back half of 2017 and could there be a reacceleration?

Our guidance assumption now assumes a gradual decline in same-store revenue quarterly numbers throughout the year. Nick, certainly it would be great if there was some sort of reacceleration, but that’s not what’s presumed in our numbers.

Thanks. I appreciate all the market level detail on the guidance. I guess going back to New York and San Francisco, the assumptions you gave on new lease growth for each market, how does that compare to where new lease growth is – was in the fourth quarter and so far in January?

Let me say this. This is why – I can give you an example of the fourth quarter numbers, but we know from tracking this for the last ten years that if the market is even stable, the likelihood of having negative lease over lease growth in Q4 is a likely outcome because you have a disproportionate of people breaking their leases in Q4 versus regular lease expirations. So just to give you an extreme example, so New York in Q4 was a minus 5.3, okay. But almost every market is negative. So basically, you are re-letting units at premiums and now you are re-letting them at lower rents. However, you have very few transactions. So you can’t extrapolate the direction of the market from those numbers. So in Q1, it becomes less negative. And then in Q2 and Q3, it’s very positive. And that’s just how the cycle works pretty much every year.

Okay. I guess what I am trying to get at is whether or not the guidance for New York and San Francisco is at the midpoint is assuming that both markets get tougher versus what you have actually been seeing on the ground of late, so whether you are actually building – how much conservatism you are building in for these markets this year would be helpful to understand?

Well, I guess we look at the quarterly numbers historically. We have to assume some level of rent growth, what are leases doing. In San Francisco for 2017, we assume that new lease rents will be flat over last year, right. So rents will be basically the same as they were last year, but people who have lived with us for 2 years, 18 months, are paying above market rents, so those will roll down. So we have incorporated all of that into our guidance on a quarter-by-quarter basis.

Good morning, guys. Can you talk about what the current expectation in terms of stabilized yield is for the $960 million in the development pipeline?

Sure. I mean of the completions that we delivered last year, so that’s about the $1.1 billion. We think these things will stabilize high 5s, low 6s and the product that we believe – and we will certainly complete yet this year will stabilize also in the high 5s, low 6s.

Hi. Good morning, guys.

Good morning, Rich.

So I got a couple of questions here. I am going to go back to David Santee’s comments earlier in the prepared remarks about first, New York City being the only market where, I think “substantial concessions were built into the forecast for the year.” Are there other markets where concessions are built in but they are less substantial? And if so, can you kind of give a little color around what those markets are at this point?

I guess, I would say that there is nothing – there are no markets that can come close to what we have budgeted in New York. Seattle, we put in probably $80,000 to really just because of the concentration within a couple of block area on some deliveries, we did a little bit maybe, call it, $90,000 in DC just because of some concentrations in a specific neighborhood. Other than that, there are no significant concessions budgeted. I guess what we have seen Rich is the ability to maintain net effective lease pricing across most markets even when they sort of soften. And maybe DC is the perfect example. There are a lot of new supplies you know in DC in kind of '13 and '14 and we remain there was discipline sort of in the marketplace and we could continue to operate successfully at a net effective rate. New York is something where the marketplace as David said, originally is less disciplined and is one in which concessions can become problematic and we would have to respond.

Okay, great, that’s helpful guys. Second question here, so going to Mark’s comments about the balance sheet and how well positioned EQR is in the current environment with respect to liquidity and all the other sort of financing needs you have taken care of recently and he talked about anticipating volatility in the upcoming environment, so does that imply you see better opportunities for capital allocation maybe as a 2018, 2019 type of timeframe, I would also maybe compare and contrast that against the statements earlier about 2018, 2019 being better fundamentally, so where is the source of that volatility and what should we expect in terms of what EQR does about it?

Well, I guess the volatility with respect to the fundamentals, not necessarily with respect to assets sort of valuations. But again, we have four in the last 12 months, 18 months, I think taken a fairly, but not too years, taken a fairly cautious approach to investment. Certainly, I think as indicated by the large transaction we did last year with Starwood and the other subsequent dispositions and the big special dividend that we did. So look, we see a lot of new products coming out of these markets. We think there may be opportunities, should it make sense from a capital allocation standpoint to buy new product, it might make more sense to buy some of that product, rather than develop and take development risk, construction risk, lease-up risk, etcetera. So we are just taking a cautious approach, given all the new supply with respect to capital deployment. And as noted earlier, by having reduced the development up to this point and not having any meaningful spend in '18, we do create net cash flow which we could use for some other purposes. And we would not be afraid to use that for those other purposes.

Hi guys. Hello.

Yes. We hear you.

I am sorry I am trying to get off speaker. I am sorry. Thank you for taking my question. And really excellent color on the markets and appreciate you not going to the '16 results, because I think everybody want to talk about '17 and how you are getting to your forecast. One question I had for you guys is with respect to turnover, I realized I think you said you expect flat turnover and you kind of went through with respect to occupancy by market, so some occupancy flat, some down 20 bps, 40 bps, here and there. One of the questions I had is with respect to appreciating the fragmentation of your business is pretty significant and there is a lot of arguably players that are not as well capitalized or may not be as the tenure of being in this business that are in fact telling us they are cutting prices in New York, for example, not concessions, cutting prices and so one of the things I think about is on a renewal basis, if you are a tenant and with the Internet and all the transparency on pricing, what’s the risk that you will see turnover increasing as people recognize there are better opportunities and then if so, what does that do to NOI with the higher expenses on the turn, so that’s my first question, just want to know what you have built in and why you are assuming flat on an overall basis?

So I guess I would say that first of all, regardless of rate for renewal increases or lack thereof, we are going to try and retain any resident where it makes economic sense. Frankly, the hard costs associated with turnover are very minimal. New York has a lot of hardwood floors, so really you are paying call it a couple of hundred bucks to paint the apartment and maybe $100 to clean it. So the real cost is in the vacancy. So our goal is to kind of minimize that vacancy. And I would say that when you look at our forecasted numbers and I gave you the breakdown, we forecasted basically 80 basis points lower in occupancy assuming that there could be people that choose to move in other locations because of the lack of neighborhood loyalty.

And therefore, assumingly the volatility may be that you will need to meet whatever the pricing may be at that time and retaining that customer as the strategy?

Yes. I mean the volatility would not be in rate. I mean rate would not immediately impact us. It would be in additional upfront concessions or significantly lower occupancy.

Thank you and good morning out there. Two questions for you. Maybe they are both for David Santee. Going back to LA, you said that that’s about 40% of your growth for 2017. And then in your commentary, it sounded I was trying to do the math quickly, like maybe half or so, a little over half of your portfolio are in submarkets away from supply, is that correct? And if not, if you could just break it down sort of how much of your LA exposure is in submarkets facing supply like downtown versus submarkets away from supply?

So downtown, which would include, call it Koreatown, Mid-Wilshire, Hollywood, that’s where half of the supply is. We only have 16% of our total LA MSA across those submarkets. 25% of our revenues sits, let’s just call it in the Marina or West LA. Over the past year or so, there has been significant new deliveries in the San Fernando Valley, which has pressured West LA and the Marina. Those submarkets are just beginning to recover. And we would expect little pressure from new supply in '17. Other than that, the last major chunk is really Pasadena, where we only have a few properties. But we have properties far east of downtown LA. We have considerable portion of our revenue up in Santa Clarita, up in the San Fernando Valley. So I think we are good in LA as far as feeling the brunt of the concentration of deliveries and loss of pricing power in the urban core.

Okay. And then switching coast to DC, you mentioned the hiring freeze and how that also covers contractors, but there is also a couple of things like defense clearly seems to be getting favored nation status. So if we do see more defense spending, do you think that’s enough to offset the hiring freeze? And then two, how much of your portfolio is Northern Virginia focused out of your DC portfolio?

Well, I guess, what I would say is when you look at the makeup of all of the defense employees in D.C., a lot of them are contractors already. A lot of defense employees are contract employees. So, we kind of look at that as just an offset to not hiring at the EPA or what have you. But we certainly feel that an increased focus on defense spending which is just the biggest piece of the pie in DC will be an overall net benefit.

Hey, everyone. I just want to go back to the commentary about the trajectory of same-store performance over the course of the year continuing to decelerate. It sounded like if I heard you correctly. And if we think about sort of I know that’s a bottom-up analysis of the markets and whatnot, but if we think about just supply and I think most – there is a lot of different estimates out there, but most see the first half being worse than the second half. And then also think about the demand side in terms of job growth which has slowed down a bit here, but potentially could reaccelerate towards the back half of the year. I guess, if I think about your trajectory, does that suggest that you don’t expect any change in the job environment or job growth environment, I should say, towards the end of the year and that you are sort of building in more steady supply deliveries?

I guess, I would say that we don’t – we are not forecasting any material change to job growth either to the upside or the downside. A lot of the administration’s initiatives are probably more construction type jobs what have you. I mean, everything else remains to be seen. And that’s kind of how we are looking at jobs. I mean, the unemployment rate is low. The unemployment rate and college-educated is 2.5%, so...

Unemployment rate and college-educated is 2.5%, so...

Right. So the unemployment rate and college-educated is 2.5%, so I’m not sure how much more you could improve in the next 12 months, I think it’s just another yet to be seen kind of thing.

Good morning. Quick question on price, you had mentioned before some leases where rents are probably rolling down to market or you have some legacy leases there above market. Could you quantify that in terms of loss to lease for the whole portfolio and more specifically, New York and San Francisco, if you can?

Well, I guess, I would say we don’t really focus on loss to lease in a yield management environment. I mean, that number can change dramatically from Q1 to Q2 or Q3, but it’s more about the momentum in the market. So certainly, anyone that moved in prior to, let’s just say, June of last year in San Francisco is probably 5% to 7% above market today. So that’s where you get the roll down until you reach kind of equilibrium on that.

Hey, guys. Thanks for taking my questions. I will keep it short since we are pretty late in the call here. Bigger picture and I know it’s early into the new administration everything. But given immigration policy and everything, have you guys looked at migration trends and how that sensitivity applies to your various markets? Is there some sort of demand elasticity that is sharper in some of your markets more than others? Just wondering if you could comment on maybe San Francisco, LA and New York specifically?

So, we have begun to dig into our database. We don’t identify the people on visas specifically. But there are other ways that we can query folks with no Social Security numbers or kind of an obvious first run. I would tell you that we are not ready to commit to any numbers. But I think what we have seen so far plays out matches up with our thinking in that Boston and San Francisco are very similar for different reasons, right? So San Francisco is more H1B visa. Boston is more international students. New York is probably in between those two places. So once we validate what we are seeing, we would be in a better position to kind of talk about that next quarter.

Hey guys, I know we are past hour, a lot of time, so I do want to maybe keep my question short. Going back to your comment that you don’t really have anything to sell, I am sure I am putting words in your mouth, but if the right opportunities came about, you would sell and maybe rotate into something else, could you maybe give us some color just what you would find attractive in the current market, is it would you find New York City attractive, if cap rates widened enough, are you looking for markets with less supply, I am just curious what you would consider to be an attractive acquisition in the current market, if it was favorable enough?

Well, again, it’s attractive relative to that which we want to sell. So I can’t tell you exactly what it might be, but we may find in a market that a reason why we might want to sell in one submarket and redeploy into another submarket or to sell in A and buy B or sell a B. I mean this was a market by market, submarket by submarket exercise, that is a function of what we can sell and where we can redeploy that capital and does that make sense relative to one another.

Understood. But in an ideal theoretical world, I mean obviously, you have some assets that you would potentially sell, what sort of markets do you – are there any markets that you would specifically be targeting and view more favorably or is it really as dynamic as maybe it seems?

I would not describe that as a market as much as perhaps as specific assets in a market. So there may be assets that we believe might be an opportune time to rollout of today. And I think that’s not market driven, but more asset driven. So older assets, assets which require capital perhaps so we don’t want to put into it reasons why we want again, as I said earlier move from reduced that exposure in a certain submarket redeploy in another submarket. Just to make it clear, anything that we had really recognized or identified last year as an asset that we knew that was not a long-term hold for us was rolled up into large transaction we executed as part of the $6.8 billion of dispositions last year. So anything that we identified, anything we did not want to own, we tried to and we were successful in putting that in disposing of it a year ago. So anything now, again as assets, we would be willing to sell this, this is not necessarily something that has to be a long-term capability.

Thanks. Good morning. You discussed spending additional CapEx as a response to new supply and I am wondering if this is market specific or throughout your whole portfolio and also is the $2,600 annual CapEx per unit, is that the new norm for the foreseeable future or just for 2017?

Yes. It’s Mark Parrell and $2,600, that amount is just really spread throughout the portfolio. There are some larger projects here and there, but it isn’t – could very over-weighted in one market or another. I did mention in my remarks, we think that $2,600 as an exceptional number and we would expect it to normalize back down to $2,300 or so. So $2,300 a unit is about 7% of our revenue and that’s kind of a number we think is about right and shows very well, relative to a lot of our competitors. This year, it will go up to about 8% of revenue and that’s again, I think our response to competitive pressures and because we got a few low-hanging fruits in some of the sustainability step that we would like to get done.

Good morning, guys. Looking at your base case for demand in New York, are you assuming more of the same financial service jobs contracting flattish information jobs?

Yes.

Okay. And then you have kind of mentioned rising wages to limit employee turnover. Are you seeing an uptick in turnover? And is there any property level impact when this happens?

We do our best to retain our employees and there is many levers, benefits, enhanced department discounts what have you. There are a lot of team managers out there that don’t necessarily have skin in the game when it comes to offering wages. And we have seen some how we call them outrageous offers to some people. But for the most part, I think, a lot of our people that work at Equity Residential are very loyal.

Okay. And then last one, have you mentioned where new and renewal leases are going out at, for January and for the next few months on renewals?

No, I have not, but I can. For January, we achieved 4.2% on renewals. February, which is almost closed out, 85% are closed out, we achieved 4.2%. And then March, 60%, we still have 50% to be worked, and we are at a 3.9%.

Thanks a lot.

And that concludes today’s presentation. We thank you all for your participation. And you may now disconnect.