Equity Residential Properties Trust (EQR) — Q3 2017 Transcript

Thanks, James. Good morning and thank you for joining us to discuss Equity Residential's third quarter 2017 results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn the call over to David Neithercut.

Thank you, Marty. Good morning everyone. Thank you for joining us for today's call. We were pleased that across our markets we continue to experience very deep and resilient demand for apartment living. As David Santee will explain in more detail in just a moment, despite elevated levels of new supply our portfolio performed very well during the lease confusion. Driven by great property management and operational support teams, our full year results will meet or exceed our original expectations for revenue growth in every market. Across our portfolio, we see the benefits to our business from an expanding economy producing jobs, loans, unemployment, and rising incomes which continue to drive strong and steady demand for rental housing in our core markets. As a result, we now expect to achieve year-over-year growth of same store revenue and net operating income towards the upper end of our original expectations, and our year-over-year growth in normalized funds from operations will be at the upper end of the range we provided last February as well. So I’ll let David Santee go into more detail about how our markets performed during the extremely important third quarter, and then Mark Parrell will give some color on operating expenses and our guidance for this year.

Okay. Thank you, David. I am extremely pleased with the performance of our property teams during our busiest quarter of the annual business cycle as they continued to deliver remarkable service and renewal results despite elevated deliveries across all of our markets. In addition to the 4.7% renewal rate increases achieved for the quarter, our annualized year-to-date retention improved by 230 basis points, which was up by 80 basis points from Q2. We renewed 54% of our expiring leases for the quarter, occupancy improved by 40 basis points sequentially and was 20 basis points better quarter-over-quarter. As I said on the previous call, physical occupancy continued to hold, and if it has, we would deliver full year results at the high end of our original guidance. With 2017 deliveries peaking in the second half of the year across most of our markets, our results demonstrate that demand for quality urban apartments continues to be very good. And as I stated last quarter, we see no indications that demand will soften beyond the normal seasonal trends for the balance of the year. Renewal rates thus far for October are at 4.6%, with occupancy 20 basis points higher than the same week last year at 96.3% and available inventory flat. We are in a good position to end the year and deliver full-year revenue growth of 2.3%. Moving out of the markets, again no different than last quarter, Washington DC is our only market that will fail to meet or exceed our original expectations. As peak deliveries from Q2 led into Q3, rates have stabilized while the community further deteriorates in the Central district submarket. Federal job vacancies and weak government procurement further pressured this submarket as new development came online and a lot of front submarkets. However, the fall-off in demand that we experienced late in Q2 did recover, allowing us to achieve a fully basis point increase in sequential occupancy to 96.2%. Renewal growth moderated to 3.8% for the quarter as DC is our only market to experience an increase in year-to-date turnover. New lease pricing saw a decline of 2.6%, driven mostly by the Central DC and the FAS submarkets. While all indicators signal an improving local economy, the pace of improvement is only sufficient to absorb new units at market rental rates that were below expectations. Better clarity on federal initiatives and improving job growth will be the necessary catalyst to absorb future deliveries with positive late growth. New York City was stable in the quarter and continues to outperform our relatively pessimistic expectations. Today, we enjoy a very strong occupancy of 96.9%. Renewal increases were at 3% for the quarter and, combined with higher retention, mitigated the -4.1% renewed lease over leased results that combined to achieve a positive 10 basis points revenue growth year-to-date. Compared to Q2, these results are very good as New York had more leads available in Q3 than any other quarter in 2017. Moving two sessions of one month or more are still mostly limited to new lease ups, with concessions on stabilized assets across our portfolio that are, again, very targeted to certain properties. Unit prices ticked down slightly from $485 per move-in to $436 per move-in, or from an average of 3.8 days to 3.5 days per move-in for the quarter. Our net effective rents, which factor in concessions, are currently flat compared to the same time last year, which is an improvement from last quarter when they were down 2.3% compared to the same time the previous year. Additionally, we have not felt the need to use non-revenue incentives such as gift cards. As a result, New York City's listing and advertising costs are down almost 39% for the quarter. These have been positive signs thus far, but we acknowledge that the market still faces a significant amount of supply and slowing job growth. For Boston, the summer student churn proved to be a little more challenging than previous years, but recovered quickly to deliver a 30 basis point quarter-over-quarter improvement in occupancy. Renewal growth of 5.2% was very strong in addition to a 130 basis point improvement in retention. New lease pricing was positive by 30 basis points for the quarter. New deliveries and downtown in Cambridge continue to weigh on new lease rents; however, recent announcements of large office space leases by Facebook and Bristol-Myers Squibb in these submarkets are encouraging for demand and above-average leadership growth in the future.

Thank you, David and good morning. I want to take a couple of minutes to talk today about our same store expenses, our revised full year normalized FFO guidance, and our capital markets activities. Our same store expenses were up 1.7% for the third quarter, and this was driven by a relatively modest increase in payroll and utilities and an increase of 2.9% in property taxes. On the plus side, the third quarter property tax increase was considerably less than we had expected due to favorable results we obtained on several property tax appeals. Our annual property tax expense guidance included an estimate of appeal success based on the many years of experience of our in-house property tax team, and we had a few large appeals that were resolved sooner than we had anticipated in our guidance. As we discussed on the July call, leasing and advertising expense growth has, as expected, turned negative for the quarter and year-to-date, with newly non-existent spending on resident gift cards, as David Santee mentioned, driving the reduction. Switching to the year-to-date numbers, our same store expenses are up 2.9% for the first nine months of 2017, with again increases in real estate taxes and on-site payroll continuing to be the primary drivers of this growth. Same store payroll expense was up 4.7% through the first nine months of the year. As we have discussed on previous calls, we continue to be impacted in this category by a combination of wage pressure to retain our property level employees in a very competitive market and the addition of staff in some markets to provide even better service to our residents and support resident retention. These factors, along with a higher estimate for certain employee medical insurance and workers' comp claims, have caused us to maintain our estimate that on-site payroll will grow about 6% for the full year. We have revised our full year same store property tax expense increase guidance to 3.4%, down from our previous 4% to 4.5% growth expectation, all for the reasons I just mentioned. This improvement in our estimate of real estate tax expense growth in turn drove the reduction in our same store expense growth guidance to 3.2%, which is slightly below the low end of our previous guidance range. Moving onto normalized FFO, in our earnings release, we provided a full year same store revenue increase guidance expectation of 2.2%, which is at the high end of our previous range driven by the factors that David Santee just discussed. This revenue number and our new expense growth guidance of 3.2% will lead to an increase in same store NOI of 1.8%, which is slightly above the top end of our previous range. For our annual normalized FFO guidance, we are picking up two pennies per share in higher property NOI with contributions from both our better same store performance and strong performance from our leased-up properties. We expect to see a one penny offset to this improvement due to slightly higher interest expense from our debt issuance, as well as other items including a slight increase in corporate overhead. Combining all of this, the result is a modest increase to our normalized FFO guidance midpoint to $3.12 per share from $3.11 per share. Additionally, as we discussed in our earnings release, we issued $700 million of unsecured debt in August; this included $400 million of 10-year notes and $300 million of 30-year notes. Our July guidance included an assumption that we would issue about $500 million in 10-year notes this year. Recognizing the strength of the market, we decided to add a third-year issuance while slightly paring down our 10-year note issuance, and indeed overall demand was exceptional for us.

Just a moment, a quick moment in capital allocation. As we noted in last night’s press release, our transaction activity picked up some in the third quarter with the acquisition of three assets. A stabilized 301-unit property completed in 2016 in the Wiltshire Center submarket in Los Angeles was acquired for $117 million at a cap rate of 4.5%. During the quarter, we also acquired two brand new assets that were both nearing completion of their initial lease-up: one in Boston, a 160-unit property acquired for $116 million at a stabilized cap rate of 4.5%. We also acquired a 350-unit property in Bellevue, Washington for $178 million at a stabilized cap rate of 5.3. During the quarter, we disposed of one asset, a 120-unit property in California built in 2002 for $53 million at a disposition yield of 4.3%, and we realized a 10.1% unleveraged IRR on that investment. Now, at the present time, we do not expect to acquire additional assets before the year is up; as a result, the $468 million acquired through the end of the third quarter will most likely be our number for the full year. However, that could change if the seller needs to complete a transaction by year-end, and we are incentivized to help make that happen. We also continue to actively work on the disposition of a handful of assets that could close yet this year, so we expect to get closer to our original guidance of dispositions of $500 million for the year. On the development side, in the third quarter, we were very excited to essentially complete the construction on our new 398-unit high-rise tower in Seattle, just two blocks from Pike Place Market. Rents and absorption rates are well above our original pro forma, and we expect this asset to stabilize at a yield on cost of about 5.6%. You’ll note that the budget for this development has increased by $11.5 million, which represents changes in scope that have occurred since construction began on this asset in 2014. As rents continue to increase across the Seattle market, we were compelled to enhance the quality of the unit appliance packages and the overall finishes of the property, including the amenities in the common areas. We could not be more pleased with the job our team in Seattle did delivering this asset, and the market reaction to it has been tremendous thus far. During the quarter, we also completed our 178-unit development in Washington DC's Mt. Vernon Triangle Submarket, which has also been very well received by the marketplace. Since occupancy began in June, they’re already at 69% occupied and 80% leased, with rents very much in line with our original expectations. We expect to realize a stabilized yield on cost of this new development of 5.7%, and this was a job well done by our DC team. During the third quarter, we started our first new development of the year, a small one, 137 units in the Capitol Hill market in Seattle. This project has a $62 million development cost, and we project a high 5% stabilized yield on cost in this transaction. It remains possible that we will start construction on one more development project before the year is out, also small, 84 units in Cambridge, Massachusetts. This is adjacent to an existing 186-unit asset we have in that market, with a construction budget of about $50 million and yield on cost currently projected in the mid-5s. Before we open the call to Q&A, I just wanted to emphasize one additional time that we've been recognized by GRESB for the fourth consecutive year as a leader in environmental, social, and governance performance. We take our responsibilities and commitments on these matters quite seriously, and everyone at Equity is honored to be recognized again as this year's global residential listed leader. My thanks to everyone at Equity for helping make this happen again this year. With that, James, we’ll open the call to Q&A.

Thanks. I wanted to start with the topic of supply. In your view, is this year the peak supply impact for your markets overall? And then I was hoping to break down which cities are still seeing supply ease versus getting worse. I think New York City, Seattle, and San Francisco are a couple of controversial markets that come to mind?

Okay. Nick, this is David. I’ll just kind of give you a high, low by market. Starting with Boston, 18 deliveries slightly lower, New York slightly higher, but some of that is pushed from '17 and '18, Washington D.C. pretty much identical to '17. San Francisco a little bit lower. Seattle lower, Los Angeles significantly higher from 8,000 up to 14,500, Orange County about the same at 5,000, San Diego just a little bit more at 3,500 units. Just to be clear, Nick, this is the way we look at it with our competitive set: those projects in these marketplaces that we look at that would compete with us. So, this would not be a holistic amount across an entire marketplace, but those that are within that, a defined boundary that we look at as competitive to us.

Okay. That’s helpful. So I guess, David, putting this all together, it has been several years of slowing revenue growth in multifamily. You’ve gone to this year you're seeing some stability in your markets. There are some supply pockets of pressure still next year. Hoping to just get any earlier thoughts you’ll be willing to share on next year and whether your same-store revenue growth could exceed growth next year? And what would be a driver for that with certain markets or not? Thanks.

Well, I guess I would say, with job growth and full employment, it's probably difficult to expect outsized job growth. When we go across the markets, we just look at where the supply is going to impact us. For example, Boston, 50% of the new deliveries will be in the urban core and 20% are going to be in Cambridge. But there’s announcements of Facebook taking sizable office spaces in Cambridge, as I discussed previously. So, even though there is elevated supply there, we expect it to be absorbed with minimal impact to rental rates. You know, D.C. is really experiencing significant impacts, particularly with 45% of those deliveries concentrated in the Riverfront D.C. Central and NoMa Submarket. In places like the RBC corridor where we have a lot of product, we’ll see little deliveries. Regarding New York, when you look at the deliveries or even the delayed delivery, 57% of those numbers this year and next year are in Long Island City where we have no presence. And then Midtown West, where we don't have a large presence, is adding 23%. So, 70%, 80% of the deliveries in New York are really not directly competing with our assets. I can go on through the rest of the markets, but that’s how we’re looking at next year and our ability to drive rates and retain our residents to achieve good renewal rate growth.

Okay. That’s helpful. I mean, just a follow-up here. So is it, when you look at everything you review across your markets right now and everything you talked about regarding supply, is it just too early to get a read on 2018 showing you better rent growth and revenue growth for your markets?

It's just too early; we’re not prepared to give guidance at this juncture, Nick.

Thanks. David, you talked about the acquisitions in the third quarter, but just more broadly, are you seeing more opportunities for acquisitions than you have over the past few years? And what do you think is driving that, if so?

I’ll be careful with the use of the term opportunity, Nick. Are we seeing more product? No. The volume is, I guess, okay. It’s still down from a year ago. I don't think we’ve seen the same amount of product that we had seen in the past. And I wouldn't characterize any of it as opportunity. I think there’s a lot of capital that’s perhaps backed away from core product, but there's still enough out there that what is getting done is being done at the same kind of cap rates and valuations that we’ve seen for some time. But I would not suggest that we’ve seen anything that would represent opportunities.

David, you had talked with Michael Bilerman probably going back 18 months about more merchant development or the potential for merchant development deals to start to crack, and that represented a potential opportunity to put a lot of capital to work. Is that not coming to fruition at all?

I’m not certain how my comments to Michael were interpreted. I meant to convey that rather than expecting any major disruptions, I anticipated that there would be deals available for acquisition that were newly built and could offer better risk-adjusted opportunities for capital deployment compared to developing on our own in the current market conditions. In the third quarter, we acquired two recently completed deals that were in the final stages of lease-up. We've successfully executed those acquisitions and obtained decent initial yields compared to what stabilized products might have traded for. While I wasn't expecting any major disruptions, I believed there could be a consistent flow of product. Our acquisition of two properties reflects this, and I expect we will have more opportunities to explore similar products in 2018.

Thanks. And then, just one more follow-up. In terms of the free cash flow for next year, I think you talked about the $275 million or so. Just curious what is most attractive where we stand today for the use of that in terms of additional acquisitions, development, paying down debt, raising the dividend. Just your thoughts on that where we stand today?

Well, I guess, I’d say we will consider all of those, Nick. We had a board meeting in September, and Mark Parrell laid out that exact situation and the options we might have with that free cash flow now that our development spend has decreased considerably over the past several years. So, we’ll consider when the time comes what we think is the best execution on behalf of our shareholders and won’t be afraid to buy if it makes sense, address the dividend if it makes sense, or think about development if it makes sense.

Hi. Good morning, guys.

Good morning, Rich.

I wanted to quickly follow up on Nick Yulico’s question about New York. Just regarding your outlook for submarket supply next year, does your experience in 2016, where I think you sort of discovered that renters were submarket agnostic in many ways in New York, temper your view on what New York could be next year in terms of rent growth despite the fact that you're fairly well protected from a submarket perspective currently?

Well, I think the most obvious discussion for our portfolio would be Long Island City, and we just haven't seen – our concern was with value hunters initially being willing to move out of the city into Long Island City for better value. We just really haven't seen that materialize. Moreover, when you look at the big portion of what's being delivered in Brooklyn, it is further east. Brooklyn has held up reasonably well for us. So we don't see a big chunk of these new deliveries next year really impacting us if the market continues to be disciplined the way it has this year.

Hey, Rich, it’s Mark Parrell. Just to summarize some numbers for the quarter-over-quarter, average rental rates, physical occupancy, and turnover are all metrics we compute solely with regard to the residential portfolio which makes up 96 plus percent of our income. We do have retail in the base of our buildings as tenant amenities, dry cleaners, and similar services. So, the revenue number for the quarter for Seattle, which was 4.9%, includes retail garage and anything else. We had some retail vacancy in the third quarter in Seattle and also some issues with timing that will correct itself in the fourth quarter. So if you look at that number, 4.9%, it would have been a 6% number just on residential. But again, this is not anything particularly material, and the situation is one that will reverse itself in the fourth quarter.

Good morning.

Good morning, Conor.

David Santee on the Bay Area, can you give us some color on the difference between the performance in Oakland, San Francisco, and then San Jose?

Sure. We don't have anything in Oakland. The downtown market continues to be under pressure and is the bottom performing submarket. The best performance is in the Peninsula, and then East Bay, South Bay, and Berkeley are all in between and showing similar metrics.

Okay. And then in South Bay, that's your in San Jose there in Silicon Valley?

Yes.

Okay. And then on that transaction activity, David Neithercut, can you just remind me, the numbers you are putting in cap rates, is that one year forward nominal or on the lease-up what rent is that on? Is that on the assumption of stabilization?

The transactions that are stabilized would be our forward 12 across the acquisitions. On the lease-up, it would be the second 12-month period of ownership.

And on that second 12 months, are you assuming some rent growth in that interim period? Or is that based on today's rents?

Depending on the marketplace, that could include a combination of burn-off of perhaps what the developer might have offered in concessions, as well as some sort of rent growth. Yes, there would be some view as to what would be taking place on the rent side in that second 12-month period.

Hi. Good morning. I was just hoping you could talk to the concession environment for lease-up across your major markets and whether you've seen any step up in the amount of free rent or other forms of concessions into the fourth quarter today?

Juan, it's David Santee. As far as concessions on lease-up, it’s been very stable and within expectations in places like Seattle, even our Brannan deal in Downtown San Francisco. We had very strong demand, so we didn't come out of the chute with the standard one-month concession. And everywhere else, it's pretty consistent. I mean, there's no markets that are giving more than one month on lease-up, at least in our portfolio, and we haven't seen any change through the peak season.

So it's fair to say you aren't seeing the same panic that we saw in 2016, at least to date despite the peak supply at this point in 2017?

Not even close, no, very stable.

Okay. And then just on the new lease growth. Could you give us a sense of the trend throughout the third quarter, and kind of where you are fourth quarter to date for the portfolio as a whole?

Well, all I could give you today would be kind of a snapshot of our market rents relative to our exposure, and today across the portfolio, market rents versus the same week last year are up about 2.5%, which bodes very well considering we’re entering the slower time of the year.

And the churn on the new lease signed during the third quarter decelerate throughout the third quarter given seasonality?

Well, I guess that would be a market by market discussion, but I gave you all of the Q3 lease-over-lease numbers in my prepared remarks.

Hi. Thank you, guys. First one, just for the portfolio as a whole do you have the new on the renewal rate increases in the third quarter? Sorry if I missed it.

The renewal for the portfolio was 4.7% and the lease-over-lease was -90 basis points.

Okay, great. Thank you. And just back to the supply conversation. When you noted the different increases across markets or decreases, as you said, it was on how you define the boundaries of what's competitive with you. Can you elaborate on how you define those boundaries? Is it a distance from the property? Is it qualitative at the market level? Any thoughts there would be helpful?

Well, I think if you look at some of the data stops, they’re using statistical MSA, which if you use New York as an example goes all the way down to almost Philadelphia, far west into New Jersey, further up into outer New York almost Connecticut. In our portfolio in New York, it is really Manhattan, a little bit on the Jersey waterfront, and then a little bit in Brooklyn. So we just kind of draw a circle around all of that and focus on the deliveries within that boundary. This year or last year we decided to include Long Island City which is really at a different price point with a different demographic knowing that this new submarket could draw residents from the city. We’ve been very conservative, giving ourselves, being intellectually honest in drawing these boundaries while also considering assets down to five units, so we’re including everything knowing that anything that's on the market for lease could impact demand in our footprint.

So the radius of that circle is defined at each level with the local teams, or is there a uniform definition?

Yes.

Okay. So on New York specifically, you mentioned earlier that supply in 2018 would be slightly higher versus 2017. But then later you said that about 80% of what's being delivered is not directly competing with your assets? So is the increase encompassing some of those areas like Long Island City that you mentioned are not directly competing or is that slight increase versus 2017 just in your competitive set?

The increase in New York for 2018 some of that is pushed back from this year to next. When you look at where all of these deliveries are, the largest concentration—57% of the number for 2018 is 19,000 units—predominantly in Long Island City and Far East and North Brooklyn. We have probably four smaller assets in Brooklyn, but we have nothing in Long Island City, although we've incorporated that into our custom competitive set knowing that because of the value opportunity in Long Island City, some folks could opt to save on rent.

Good morning. Dave, just going back to the comments on the lack of opportunity from the Merchant, you had picked up deals from the Merchant guy. Is that, you think that's more just where your portfolio is in terms of timing of deliveries with those deals that you thought would crack this year getting delayed until next year, or is it something else going on? Because obviously some of your peers have said differently. So, I'm trying to figure out if it's deals getting pushed that's causing the lack of opportunity versus literally in your markets, it's just you're not seeing it because of capital flows, etc.

I guess it’s perhaps all of the above, Alex. And again, I'm not sure that I ever implied there was going to be some tsunami wave of these deals coming, but you also see many of these markets see them all going up, and our expectations is over some accretive period, maybe not. Maybe more of them have been delayed because construction has been delayed, some may want to get stabilized, maybe some have got some institutional capital willing to sit for several years. It’s all of the above. But we expect to see some of those brought to market; as I know, we bought two. There’s some being brought to market. I’m sure we’ve underwritten more than just the two that we’ve acquired, and I’m sure we will look at more.

Okay. And then, David Santee, when we look at Seattle, obviously Amazon's been the gorilla in expansion, but at the property level, are your teams seeing predominantly Amazon employees or companies that are spawned because of Amazon? Or do you believe there is sufficient other tech growers and other companies that are going to Seattle that, even if Amazon dials back, there's still sufficient demand? I'm just trying to get a sense from you guys from what you're hearing from your local teams how much of an impact they think it’s going to have.

Well, I mean, obviously the closer you are to a property near Amazon, the more it's going to be influenced by Amazon. But we have a wide range of people living and working for different employers. We measure that every so often, and it’s not necessarily concerning at any one community. I guess that's all I could give you for now.

Okay. And then just final question. I just saw the news item on the litigation in California. Is there anything that you can provide some more color or perspective?

Well, in 2014, a lawsuit was brought against us because of our rate late payment process and procedures. I will just sort of tell you that things like this are standard operating procedure for a company like us and particularly in complexes in California.

Thanks, good morning.

Good morning.

In Seattle, David Santee referenced Amazon HQ2 and its impact on new leases. But I was wondering with that announcement in combination with the approval of a new municipal income tax whether that's impacted your underwriting for Seattle investments going forward.

We haven’t been underwriting anything new at this point in time, but we certainly have seen numerous city council initiatives that involve fees and taxes. We always update those items when we are underwriting either an acquisition or a new development.

Yes. David's comments about HQ2 weren't specifically citing that but just mentioning we saw a little wobble, if you will, of some of our pricing around that time. As you've also noted, the market has recovered and is now operating at the same levels we experienced for most of this summer. As we think about looking at Seattle, which represents maybe only 8% or 9% of our NOI, we take all of these things into consideration, including the impact of big companies like Amazon and Microsoft, and issues with fees and regulations will all be part of what we'll consider as we underwrite the future cash flow streams of the assets we want to either build or acquire.

Okay. Next question may be Amazon-related. But on the discussion of wage pressure, can you just clarify is this the direct result of new supply and also there was some commentary on additional staff needed to provide better service, and I was wondering if that was in relation to packages delivered?

Hey, John, it's Mark. Some of this is just wage growth as we've said because there are wage pressures in the field. There are adjustments we are making that are very hard for us to predict regarding workman's compensation and medical insurance reserves; we are self-insured. So, as a result of that when those items run through the numbers, they can impact margin a bit. So, when you look at that predicted 6% number for the year, a fair amount of that—around 4%—is probably driven by these reserves and adjustments we've made.

Thanks, Mark. And any commentary on additional staff needed?

Well, I think we targeted several of our larger buildings, or buildings across the street from one another that we may have used one manager to run two or three buildings, and we felt that in this very competitive environment we want to ensure that our residents are being serviced and that we have appropriate resources to administer our renewal programs to ensure the sales are in tip-top shape. When we discussed that at the beginning of the year, most of that was put in place; we haven't made many further adjustments since then. We don’t see we have not really added staffing solely because of packages. We are more focused on 24/7 package rooms that we have been extremely focused on delivering to our employees this year. So, I mean, when you look at the wage growth and wage pressure, with the retail slowdown—however you want to categorize what's going on with retail—office employees are not really that under pressure. It's more on the service side, the guys that know how to fix refrigerators and HVACs. We feel good about the changes that we made year-to-date for the most part, which are pretty stable right now.

Good morning.

Good morning.

Have you heard anecdotally from a couple of your peers that the Bay Area’s maybe benefiting a little more than other markets from construction delays over our competitive supply this year? I just wanted to ask A) is that accurate to what you're seeing in the Bay Area, and B) what submarkets may be benefitting the most from projects being pushed out next year?

Well again, I know there was a large buyer in the East Bay in a new development that certainly would help the East Bay. David just discussed our experience at our Brannan property in downtown. The fire has certainly taken something out of the mix and pushed it out another year or two; we have not seen anything categorized as delayed but have not yet begun to lease up. The units coming to market are still coming to market as we expected when we began the year.

Just because projects are being delayed from their completion does not mean their doors did not open for occupancy when originally expected, and certainly they begin marketing those units 60 or 90 days in advance. It's just that our own experience with two deals where we notify you for the first time have been delayed, but their doors were open as we expected, and first occupancies took place as we expected, and the delays did not impact the leasing velocity and overall performance of these assets despite them running behind schedule of one or two quarters.

That's helpful, thanks for that. And regarding merchant development this year, there's been more discipline in the market obviously regarding concessions and things like that with your competitive set. How much of that would you attribute to earlier in the year, maybe interest rate expectations being reigned in a little bit? Is anything changing or do you expect anything to change should ten-year treasury creep up over the next couple of quarters?

I guess I'm not sure I understand, maybe you can rephrase that for me, Drew?

Sure. The question is really on the correlation between the urgency of merchant builders to lease up their properties and interest for short-term interest rates, because your interest costs are going up.

Oh, I see. Okay, I got it. So, with respect to the urgency, I think what we saw a year ago primarily in San Francisco was that people could cut rents from the marketplace and still exceed the original expectations of other rental levels. That's not the case now. I think the people that rent today are in the ballpark of what people underwrote, and they have to preserve those levels. So, they have to be disciplined with respect to achieving those, and I think that may very well explain some of what we're seeing this year relative to what we observed in San Francisco last year.

Hey everyone. I know this is probably more of a regional impact, but given that there has been labor shortages already from the natural disasters we saw this fall, I was just curious if there is any noticeable change in that dynamic post some of the hurricanes?

We've had labor challenges particularly on the construction side across all of our markets, and those continue. I noted actually in San Francisco that our Brannan property has faced issues getting sufficient labor to close out the last 120 or so units on that property. I have not heard anyone attribute any marginal worsening of that problem because resources have been deployed to assist in the aftermath of the storms. We continue to just see labor shortages, and our contractors and tradesmen are all feeling the crunch in that regard. But I haven't heard anyone suggest it has worsened due to the hurricanes.

Okay, thanks for that. And then just for guidance on same-store revenue: it seems like there is an implied modest flourishing in the fourth quarter. Is that really just a reflection of the timing of some of this supply that had been expected to be pushed into the fourth quarter from the third?

Again, it's Mark Parrell. I mean, the map means that in the fourth quarter, our quarter-over-quarter number could be anywhere from 1.9% to 2.3%, and still map out to the 2.2 number that we put out to you. It's a result of small changes in occupancy, and as we said earlier on the call, we're really not buyers in the thesis that there are delays that are meaningful in deliveries impacting our numbers. There is some margin error in these numbers, but we generally expect the number in the fourth quarter to be reasonably consistent with the third quarter numbers we just reported.

Hey, I guess it's still good morning for you guys. Hey, just a quick question on the tax appeals. I want to make sure. Was that related to the LA market, and can we attribute that to the sharp decline in expenses that we saw this quarter?

There are two markets that were impacted by the appeals in our same-store set: New York and LA.

Understood, thank you. And are there any other markets where you have ongoing appeals right now?

We have ongoing appeals in every market. We underwrite and try to make an educated guess on how many of those appeals wind up being recognized as income received or the reduction of our taxes. But it's an estimate, and sometimes things happen a little faster or a little slower than we expect.

Great, thank you very much. I appreciate it. That's all.

Thank you everybody. We’ll see many of you in Dallas next month. Thanks for your time this morning.