Equity Residential Properties Trust (EQR) — Q4 2017 Transcript

Thank you. Good morning and thank you for joining us to discuss Equity Residential's full year 2017 results and outlook for 2018. 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 everybody. Thank you for joining us for today's call. We are pleased to have delivered operating and financial results for 2017 that were at the high end of our original expectations for the year. Now obviously a lot of things had to go right for us to do so, because it required every market to achieve our absolute best case level of performance for the year and stayed one that's pretty much exactly what happened. Naturally as we began the year we were quite cautious, about the elevated levels of new supply across our markets, which had begun to impact landlords pricing power in 2016, ending several years of above trend performance that had been driven by extremely favorable supply and demand conditions, as we emerged from the last downturn. However, while revenue growth certainly slowed as compared to prior years, several factors allowed us to mitigate the impact of this new supply and outperform our original expectations. First as everyone is keenly aware, there is clearly very deep and very resilient demand for apartment living in our urban and highly walkable suburban markets, which continue to be powered by an expanding economy, which has driven employment - unemployment to record lows and has ignited wage growth that had been dormant for much of the recovery. As David Santee will explain in more detail in just a moment, the second factor for our success in 2017 was the relentless focus on our prospects, our residents, and our properties, by our property management and operational teams and everyone else across our enterprise that supports those teams. Our 2017 performance was the result of everyone working as one team, providing remarkable service to our residents and sweating every detail. This was a job very well done across the enterprise and I'm extremely proud and honored to give a hearty shout out to them all. However, we don’t get to celebrate our successes for too long, because as these teams know all too well, 2018 will bring more of the same. New supply will continue to be delivered across our markets, which will continue to pressure new lease rates, occupancy, and retention. Fortunately, all signals continue to point to further economic expansion; corporate earnings continue to grow and the corporate tax cuts are encouraging companies to deploy capital and increase wages, which are very good signs for the apartment business. There is no question that demand for our high-quality rental properties will continue to be extremely strong. Our residents will see their wages increase and will have more after-tax money in their pockets as a result of the new tax act, while still being disinterested or unable to afford single-family homes the cost of which continue to rise in our already high single-family housing markets. It won’t be easy, but you can count on EQR teams across the country to continue to perform at the highest levels and deliver optimum results in the New Year. David Santee will now go into more detail of our 2017 results, and how we expect our markets to perform in 2018.

Thank you, David. Good morning, everyone. A year ago, when we laid out our guidance for 2017, I told you that our teams are keenly aware of the challenges before us, and I was 100% confident that they would go above and beyond to deliver in 2017. They did, and I'd like to recognize those efforts, which allowed us to keep revenue growth at the high end of our original guidance and expense growth that came in well below the bottom end of our guidance. In a new supply environment like this one, we know that our customers have many choices, but despite these above-average levels of new supply across all of our markets, our teams were able to deliver 4.6% renewal rate growth, while achieving the lowest resident turnover in the history of our company. They also continued to improve our customer loyalty scores, which have increased 25% over the last couple of years. And we did this while also seeing our employee engagement scores remain at peak levels and our property employee turnover decline. Our winning culture and the desire to deliver our best will be called upon once again in 2018, as we face another year of elevated supply. And so our 2018 operating strategy is very simple: Hit the replay button and keep a laser focus on our customers and employees. Renew and retain combined with market pricing discipline will be the key drivers in our ability to deliver 2018 revenue results that are very similar to 2017. Now moving on to the markets, I’ll focus my comments on the assumptions that make up our full-year forecast on a market-by-market basis. These include new lease growth rates, the expected renewal rates achieved, and the percent of contribution to same-store revenue growth that together get to the midpoint of our full-year guidance. I'll also discuss what we see in the markets today and provide color on the new deliveries and how much or little we expect them to impact us based on our geographic footprint. So I will start with the markets and we expect to have the most positive impact on our 2018 revenue growth and finish up with New York, which will have a negative impact. Before I get to the specific markets, a note on the impact of tax reform: while it’s too early to make any conclusions about the impact of the new tax plan, our maps in both California and New York, our average single resident will be saving about $2,000 annually and our average married couple about $3,500 annually. Also, the new reforms appear to make homeownership look marginally more expensive. First, Los Angeles, which produced 3.6% revenue growth in 2017, which was in line with our original expectation. We got there from better than expected renewal growth, which offset lower than expected gains on new leases. In 2018, we expect Los Angeles to produce revenue growth of about 3.25% for the year and contribute approximately 35% of our portfolio-wide revenue growth. With the national economy appearing to be firing on all cylinders, LA is expected to see improved job growth in 2018, which should help drive strong absorption of the estimated 14,000 new deliveries. Announcements by Amazon, Apple, and others have taken larger chunks of office space in Cargo City, which bode well for both downtown and West LA. With the favorable geographic mismatch in the new supply versus our footprint, we are forecasting 96% occupancy, 5.2% renewal rate growth, and new lease gain of 75 basis points. West LA, the North, and East suburbs will be the strongest as these submarkets will see virtually no new supply. Downtown, Koreatown, and up through Glendale past will see the bulk of all deliveries, however, at a much higher price point to much of our existing portfolio. In 2017, San Francisco produced 2.2% revenue growth, which was better than we expected, but not beyond what we thought could happen. The growth here was again driven by better than expected renewal growth. In 2018, San Francisco appears to be on very solid ground and takes the number two position contributing 20% to 2018 revenue growth, with total new deliveries on par with 2017, and spread similarly across the same submarkets. Very strong demand has positioned us for a good start to the year. With the new corporate tax plan taking hold, many announcements of tech expansion in the Peninsula and South Bay San Jose are very encouraging for maintaining solid absorption. With deliveries front-loaded for the year and current occupancy better by 60 basis points versus last year, we checkmark San Francisco as the market that has the most potential to surprise to the upside. Our 2018 forecast has this market producing revenue growth of approximately 1.75% with occupancy for the full year at 95.8%, renewals up 4.1% versus the 4.3% growth in 2017 and flat growth on new leases versus the negative 1.7% for 2017. On to Seattle, where the 5.6% revenue growth we produced in 2017, driven by good absorption of new supply, candidly should be cautious in forecasting. We saw both new leases and renewals in this market perform better than expected in 2017. Now in 2018, Seattle will be our third largest contributor to growth at 16%, driven mostly by our strong embedded growth in the ramp up. But as we start 2018 we are more cautious as a result of the concentrated and elevated supply in all of the urban submarkets and the persistent moderation of new lease rent since the announcement of HQ2. In Q4 2017, rumors of hiring freezes at Amazon appeared to play out with the number of job openings hitting their lowest level in years at 3,000. As recent as last week, however, open jobs have rebounded to 3,600 and demand in the recent weeks has been good or average, but is yet to be consistent week over week. Occupancy and exposure are better than last year, however, there has been notable moderation in new lease ramp. With that said, our forecast for 2018 is for this market to produce revenue growth of 3.25% versus the 5.6% growth we achieved last year. For 2018 we’re budgeting new lease growth up 70 basis points, we’re holding occupancy flat, renewals up 5.4% versus the 2017 achieved growth of 7.5%. The Washington DC was the only market in our portfolio that did not meet or beat our expectations in 2017. We produced revenue growth of 1.3% in DC in 2017 as the uncertainty in the market caused by the political environment slowed activity early in the year. In 2018, DC is expected to contribute 11% of our revenue growth as the continued improvement in economic conditions is only sufficient to absorb the level of new deliveries at flat to slightly negative rental rates. With the federal government, which makes up a third of the metro economy not growing, the private sector will need to be the fuel that creates outsize demand, a necessary variable to achieve rent growth that is closer to long-term averages. With almost 12,000 new units expected, the concentrations in the district submarkets of Nomad, Central DC, and the Riverfront will continue to pressure new lease rents in much of our footprint. The RBC Corridor and Alexandria will see little new supply this year and that should add some stability to full-year revenue growth. Our expectation for 2018 is revenue growth of 1%. We expect occupancy to be flat at 96.1, renewals the same as 2017 up 4.1% and slight improvement to new lease gain at negative 1.9% versus the negative 3% we realized in 2017. In 2017, Boston produced revenue growth of 1.6% in line with our expectations. We did better than we expected on renewals and occupancy, which offset some softness in rates. In 2018, we expect Boston to contribute 10% of our revenue growth and like last year Boston will deliver 4,500 new units spread across the same metro submarkets with a slight increase in Cambridge. The City will see deliveries front-loaded, while Cambridge is back-loaded and expected to have a greater impact in 2018. Good news continues to be abundant in Boston as many of the large technology and biotech firms continue to take down large swaps of office space, as well as companies like Phillips who are relocating their headquarters. All told, 2,000 high-paying jobs will be moving to Cambridge alone, which should continue to support good absorption rates with minimal pricing power on new leases. We expect this market to produce revenue growth of 1.6% this year similar to what it delivered in 2017. Forecast for 2018 hold occupancy flat at 95.8%, renewals slightly less than 2017 up 4.3% with marginal improvement in new lease gains of minus 1% versus minus 1.7% in 2017. Orange County and San Diego are two smallest NOI markets. Both had very good years in 2017 delivering revenue growth of 4.7% and 4.6% respectively. Again, better than expected renewal growth and occupancy led the way in these markets. In 2018 they should produce our best revenue growth, but due to their size will contribute the least to our overall growth at 9% each. Orange County will see a slight reduction in new deliveries that will come online evenly across next four quarters, while San Diego will see an increase of 3,700 deliveries that are front-loaded. New deliveries in absolute term should be easily absorbed without pricing disruption, steady job growth coupled with increased single-family home prices continues to fuel demand in excess of supply that allows these two markets to achieve above-average trend revenue growth. We expect both markets to deliver 4% revenue growth in 2018. Occupancy forecast for both markets are 96.2% with renewals up 5.9% and 5.4% for Orange County and San Diego respectively. New lease growth is expected to be 2.1% and 2.2% respectively. And then closing with the Big Apple, in 2017 this market exceeded our expectations by producing revenue growth of 10 basis points. Driven by a less use of concessions than expected as well as better than expected renewal growth and occupancy. We continue to be very pleased with the pricing discipline that the market showed in 2017 and that we continue to see today. In 2018, this market will deliver elevated supply approximately 19,000 units in our competitive footprint. 62% of this new supply is in Long Island City and Brooklyn. As we've discussed previously the unknown in New York City is at the level of new supply in Long Island City will begin to attract meaningful demand for Manhattan. Long Island City is expected to see around 4,000 new units come online in the first half of the year with total expected 2018 deliveries of a little more than 6,200 new apartments. Brooklyn, a more desirable borough, will have almost 4,800 new units with over 1,800 in downtown and 1,400 in Williamsburg. East Brooklyn will see 1,300 new units that are counted separately from Brooklyn. Brooklyn has developed into a destination location and its downtown has been completely transformed. But it only grew for Manhattan lenders seeking value, while Long Island City is far behind in neighborhood amenities and nightlife. The risk of increasing concessions and the potential to bleed into Manhattan pricing is only one great stop away. A short train ride for a 15% to 20% discount on rent is a risk that we cannot yet quantify. Manhattan alone has almost 4,000 new units coming online in Midtown West and Gramercy and the Hudson Waterfront Jersey City submarket another 2,000. With peak supply in 2018 and job growth for the year forecast to be below 2017 levels, we continue to be cautious about New York. We expect to produce same-store revenue of minus 75 basis points in this market in 2018, which will result in New York making a negative contribution of 10% to our portfolio-wide revenue growth. The occupancy forecast is 96.1%, renewals at up 2.5% and new leases at minus 3.7%, which is a 50 basis point improvement from 2017. We were conservative in our estimate regarding the amount of concessions we thought we would have to use in 2017 and ended up using less than we budgeted. We begin 2018 with a similar level of conservatism on concessions. In closing, all of our markets will see elevated levels of new supply, but demand remains very good. Job growth continues to be solid and we are optimistic that the new tax plan will be a very good stimulus to improving the overall economy and the incomes of our customers. Our employees are some of the best and brightest out there, and they know how to do things right. But more importantly when to do the right things for our customers and our business that in the end will produce optimal results for our shareholders. And again a big shout out to all of our employees out there, I know that you can hit that reply button and do it again in 2018.

Thank you, David. Good morning, everyone. And I want to take a few minutes this morning to talk today about our same-store expense, normalized FFO, and capital expenditure guidance for 2018. Before I launch into some detail on our 2018 same-store expense guidance range of 3.5% to 4.5%, I want to give some context. Our lower than expected full year 2017 same-store expense increase of 2.7% versus the 3.2% that we expected has set up a relatively difficult comparable period for 2018. We have also benefited from a modest 2.7% average annual growth rate of same-store expenses over the past five years. Switching now to 2018, our same-store expense growth this year will be driven as it usually is by growth in our big three expense lines, real estate taxes, on-site payroll, and utilities, which together constitute almost 80% of our total same-store expenses. On the real estate tax side, we expect an increase of between 4.75% and 5.75% with about 170 basis points of the increase coming from the 421-a burn off in New York. We face a tough comp in 2018, as we had better than expected success in some appeals in 2017, that brought the full year growth rate down to 3.2%, now about 100 basis points lower than we originally thought back in February of 2017. Jurisdictions with the largest expected real estate tax expense increase are in New Jersey and New York. For payroll expense, we expect an increase of around 5%, as we face continued pressure to retain our property-level employees, especially in regards to maintenance salaries, which we see up over 6%, all in a very competitive labor market. Switching to utilities, we anticipate an increase of between 3% and 4% in 2018, after some very good years in this category, you might recall we were up 2% in 2017, and we had decreases in both 2016 and 2015. We are now facing a tough comp and increases in trash and natural gas costs. So now move over to normalized FFO guidance. Our range for normalized FFO for 2018 is $3.17 to $3.27 per share. Comparing our 2017 normalized FFO guidance of $3.13 per share to the $3.22 midpoint of our 2018 guidance, the major drivers are first, our portfolio of nine properties, totaling about 3,200 units in various stages of lease-up, should create about $71 million in normalized FFO. As compared to 2017, this is an incremental contribution to our results of about $35 million or $0.09 per share. Second, we expect to have a positive impact of about $0.04 per share from same-store NOI growth in 2018, and offsetting this will be a reduction of about $4 million or $0.01 per share from our 2017 and 2018 transaction activity. Our guidance assumes that dispositions are relatively front-end loaded, while acquisitions are relatively backend loaded. Also on the negative side, we estimate an impact of about $4.4 million, and that approximates $0.01 per share from higher total interest expense, while we will benefit from our prepayment activity in issuance of new data at lower coupons, we will feel a large negative impact from significantly lower capitalized interest this year, because most of our development projects have now been placed into service, as well as higher expected rates on our variable rate debt. We’ll also have a negative impact of about $0.02 per share from other items, including higher general and administrative costs and property management costs. Because G&A and property management mostly consist of compensation costs for off-site and corporate personnel, these line items are subject to the same cost pressures that I just mentioned as negatively impacting our on-site payroll number. And then finally to our capital expenditure guidance, in 2018 we plan to spend approximately $210 million, which is about $2,900 per same-store unit in capitalized expenditures, which is about 8.8% of same-store revenue. And about one-third of this is for improvements that we believe are revenue enhancing. Included as revenue enhancing in the $210 million is our unit renovation program, where we expect to spend $60 million to renovate approximately 4,500 units at a cost of about $13,300 per unit and which we expect will produce returns in the low double-digits. Also providing a return is our spend of approximately $15 million to $20 million on sustainability-related projects like energy conservation through lighting and water retrofits, that both provide the company a strong 20% return as well as further our commitment to sustainability in all that we do. We will also continue our elevated spending level on customer-facing projects, like lobbies, gyms, and other amenities, to keep our extremely well-located product competitive with new assets being delivered in our markets. Over the last few years we've been spending between 7% and 8.5% of our same-store revenue on capital expenditures. Even with the slightly elevated level of capital expenditures in 2018, the company should continue to rank as one of the very best in its peer group in terms of capital spending as a percentage of same-store revenues. We still expect that overtime, our capital expenditure spending will modestly decline as we complete some large ongoing projects and renovate a large proportion of our units and as competitive pressures abate. I will now turn the call back over to David Neithercut.

Thank you, Mark. I want to spend just a moment addressing the transaction in development activity. So across our markets there continues to be a very strong demand for multifamily assets regularly demonstrated by deal prints supporting all-time high valuations despite slowing revenue growth and rising interest rates. The sentiment across the space is that many investments remain under-allocated to multifamily real estate and that a lot of capital is looking to be put to work in our space. In fact, the annual NMHC meeting in Orlando several weeks ago attracted 6,000 registrants and by some estimates there were more than 8,000 attendees in total. Further evidence of the stability of multifamily asset valuations can be found in our own disposition activity. In 2017, we sold five assets for $355 million, and the prices realized were 102% of our internal valuations at the time and 105% of our 26 valuations of these same assets. Now as recently as October last year, we thought we might get closer to our original guidance of $500 million of dispositions in 2017, but had more than $100 million of closings move into January of this year. And these assets will trade at 105% of our most recent valuation expectations. Now with highly competitive demand for multifamily assets throughout 2017, we closed on no new acquisitions in the fourth quarter. And we closed on $468 million for the full year at a weighted average cap rate of 4.8%. Consistent with last year, we begin 2018 with an expectation for transaction activity of $500 million of acquisitions funded with $500 million of proceeds from dispositions. And like a year ago, we will only conduct this activity if it can be accomplished with limited initial dilution and result in higher long-term total returns. Now turning to development, it is becoming more and more difficult as land prices remain strong and the growth in construction costs continues to outpace rent growth significantly, reducing development yields in all markets. Nevertheless, development capital appears to still be available and around of abundant supply for the right sponsors with the right deals. For the rest of them, it appears that putting together a capital stack is becoming harder and harder. Our construction financing does remain available, but at lower advance rates and wider spreads, while requiring more capital support. To us, this all adds up to fewer starts and hence fewer deliveries in the very near future. Now development remains a core competency at Equity Residential and we have development expertise in each of our markets that continue to underwrite new development opportunities for consideration. But the fact of the matter is that we have not acquired a land parcel for development since 2015 when we assembled the site for 238 units in downtown San Francisco. Since then we've seen construction costs continue to escalate and revenue growth slow, resulting in development yields to have forced us to the sidelines in taking down new land parcels. In the meantime, we’ve continued to work diligently to create value in our existing land inventory. During the year we completed $584 million of development projects at a weighted average yield of 6%, which represents a 175 to 200 basis points premium to cap rates in today's marketplace. In 2017, we also started two development projects totaling $114 million where we are targeting 5% to 5.5% returns on cost, representing 75 to 150 basis points cap rate premiums. Now at the present time, we have four development sites remaining in inventory, representing about $1 billion of total development cost; and we currently expect to start the largest of these sometime this summer, because after nearly 10 years of extraordinarily hard work, the team has all the necessary approvals to soon begin construction of a new tower on the site of our 50-year-old parking garage located directly across the street from Boston's north station and the TD Boston Garden. At 44 floors, this 469-unit property will be Boston's tallest apartment tower, with fantastic views and located in an exciting and growing Boston neighborhood. As I said, we expect to begin demolition of a garage sometime this summer and deliver the tower in late 2021 at a cost of $410 million; our current underwriting points to a stabilized yield in the low sixes. Now before we open the call to questions, I want to quickly comment on the change in the company’s dividend policy that we announced last night. Coming out of the great recession with uncertain cash flow and an elevated level of development opportunities, we adopted a conservative and totally transparent dividend policy pegged off of the midpoint of our initial annualized normalized FFO guidance. With our development spend reduced significantly, we’ll have a meaningful increase in uncommitted cash flow going forward and believe that increasing the distribution to our shareholders under this new policy is a very good use of cash at this time. So with all that said, operator, we'll be happy now to open the call for Q&A.

Thanks. David, I just want to go back to the comments you had in the press release where you talked about the outlook in your coastal markets with high homeownership will soon improve significantly as new supply reduces. And I'm just looking to hear your view as to when you think this might happen, if you’re seeing any light at the end of the tunnel on supply in the second half of this year or is it more of a 2019 impact?

Well, we really look at 2019 deliveries, Nick, as the beginning of the reduction. In 2018, we’ll still have 2017 deliveries that spill over into this year, and I will say in 2019 we will still have 2018 deliveries spilling over. But the number of deliveries that we count as competitive to our assets we see diminishing considerably in some markets, less so in others, but we do see a kind of light at the end of the tunnel with elevated levels of new supply beginning in 2019. I'm not suggesting this going to zero, but clearly while we look at what we think will be and should be continued very strong demand, we do see the supply we do see in 2019 and we believe that by that time we’ll begin to see pricing power return to the landlords.

That’s helpful. And then on New York City in the past, you’ve talked about Long Island City and Brooklyn as having the bulk of the supply delivering this year. It feels like you’re now saying that that competitive impact could be a little bit worse or at least your guidance is factoring some of that in. So perhaps you can just tell us more about how you thought about Long Island City and Brooklyn pricing of the competitive new supply impacting your portfolio in terms of your guidance for New York this year? Thanks.

This is David. At this point, we have a lot of anecdotal stories; we have some examples of residents that move out of our communities in Brooklyn, not to Long Island City, but after several months choose to move back. But as I said, I think, the long-term outcome of 6,200 units coming online is very hard to quantify. So we prepared for it last year certainly the number of units that are going to be delivered this year especially in the first half of the year are very elevated and we planned accordingly. And we hope the discipline stays in the market and owners remain consistent with their guidance on profit.

I guess I’d add to that, Nick, that these developers that are delivering this product have not seen a lot of rent growth from their regional performance and for them to meet their investment expectations, they’re going to be forced to toe the line on pricing. Now that doesn’t mean that some of them will get aggressive and we may not feel that, but I think that unlike what we experienced in San Francisco in 2016 there’s not a lot of cushion for the pricing expectations of these few folks that are delivering these products in Long Island City, and that may be very well why we saw discipline throughout the market in 2017.

And just to follow-up, that’s helpful. It sounds like you incorporated a significant amount of caution in New York regarding how this pricing impact might develop.

Well, I guess we’re as conservative going into this year as we were last year and obviously we outperformed our expectations, not we’re saying the fact that New York was the worst performing market, so this performance was all relative. We still expect New York to be our worst-performing market, but if pricing discipline holds throughout the marketplace maybe for the reasons that we have noted maybe New York could do better. But I will tell you, if there is a crack in the dike then we could have an outcome on the downside.

Hi, thanks for the time. Just following up on Nick’s question on New York, just hoping to better understand the same-store revenue build where you guys are building in maybe potentially more concessions that you didn't necessarily see in 2017. If I didn't miss here, I thought you said your expectation is for new leases down 3.7%, but you had a 50 basis point increase in 2017. So I was hoping you could just kind of walk us through that a little bit just to understand the assumptions on why you're starting out more conservative as you ended up in New York for 2017?

Well, I think it's more driven by what potentially could happen in the summer months, a lot of these deliveries will come online starting at the end of Q1 into Q2; that's when a lot of your lease expirations occur. The other thing is that New York has the lowest turnover of any market. So consequently renewal increases have a bigger impact and have more staying power in New York. So when a new lease turns over the drop in the difference between the current rent and the new lease rent is much greater. So, you’ll just have more roll down in the rent rolled so to speak than we saw last year. And then we forecasted, we are prepared with the concessions we think are necessary should the market see pricing contagion with regard to concessions.

And so I just wanted to follow-up on that 2019 supply comment. Any sense portfolio-wide at this point what the expected decline in units across your competitive set would be looking at 2018 deliveries versus your initial expectations for 2019 at this point?

I guess I would say 2019 numbers are definitely more biased towards the estimate than fact. But today, based on our boots on the ground and data that we reconcile through Axiometrics, we’re showing almost a 30% decline in new deliveries in 2019 versus 2018.

There are some markets that may experience steady deliveries in 2019 compared to 2018, while other markets could see a more significant decline. However, as David mentioned, it's challenging to accurately predict 2019 in markets where product delivery takes less than 24 months. In New York, we expect a considerable decrease, and for anything to be delivered in 2019, it likely needs to be in progress already. Our team is closely monitoring all these developments for us.

Hi, thank you guys. Actually just clarifying that last statement, David, so when we think about the comment earlier about 2018 supply being pretty similar to 2017, I think at this time last year you would have had more of an optimistic view that 2017 would have been the peak. So as you weigh what’s different today versus a year ago as it relates to 2018, how much of the higher level of competition in 2018 is a reflection of 2017 stuff being delayed versus more being in the pipeline than was visible at this time last year?

Yes, again, it’s forward not the latter. I mean it’s just and again I want to just emphasize this notion of delay. When properties are completed, which is how everybody tracks this all, the third party densities track this by completion, which is when they get their final CO, that does not mean that they were delayed in opening their own doors. We had a couple of properties ourselves, and one in San Francisco last year and one in Seattle last year, that was delayed or the completion pushed back, but the opening of the door, the day on which these properties became available for rent was not delayed; it was simply the completion that was pushed back for various reasons. And one of them we didn’t get some street gate work done because of some issues with the city, but the property opened its doors; it was available for lease right on time. So I want to just get away from the people thinking about the stuff was delayed, which means it wasn’t competitive in 2017; it was competitive even though it was pushed back. As we add up the completions of 2017 plus the completions of 2018, the total there really has been no change in our review and the way that we look at competitive product.

Okay. And then similarly, as you talked about the very preliminary look into 2019 and the step down is that from the competitive side or from the actual completion side?

The stats we would give you would be on the completion side. We do give you data that may not be the same footprint as the third-party services, but it is defined the same way as the third-party services.

Okay, perfect.

Sure. Renewals for Q4 were 4.6% and then lease over lease was minus 4.2%.

Now, as David has mentioned several times on these calls, those new lease rates reductions always are sort of wider than on average because you're often re-leasing units in the down of winter versus the up in summer. Therefore, when people for whatever reason have to come in and term their lease, they leased it at the peak of the season where we got the highest pricing; they’re giving it back to us in the lowest time of the season. So it's not uncommon for that delta to be the widest when it’s happening in the wintertime or in the fourth or first quarters, and it also does not account for any prepayment penalties or cancellation fees that we might have received.

And the new lease on January?

We don't track the new lease numbers on a month-by-month basis.

Good morning.

Well, let me say this most of our portfolio is in the Peninsula and South Bay, we have a few assets in the East Bay Berkeley that should do better this year. So really all I mean most of our assets in downtown San Francisco are still in the new store. So when you think about same store, it’s really the Peninsula South Bay, which we feel should do very well as I stated in my comments.

And then within your Bay area forecast, what are you thinking about the impact of H1B and do you have any sense for how many of your residents are H1B holders?

We measured that before, I mean, we really haven't seen any material impact from that, I mean, a lot of the H1Bs were kind of the $60,000, $70,000 a year jobs, I think the employees - employers typically get sole security numbers and what have for the employees after they move in. So our proxy is really to kind of measure the number of residents that don't have a sole security number. And that number’s been consistent, but we really haven't seen any negative fallout from all the H1B headlines.

Not sure, we attract it at all at these levels and as you know by your own math, that you have shared with us that the after-tax gains and being balance sheet neutral there's just not a lot of capital left after dispositions to make a meaningful impact. And the impact that it has just generally on the enterprise going forward, we don’t think it makes sense at these levels. That being said, we have bought stock back in the past and we won't hesitate to do so in the future. But levels at which we've traded off of that AZ today and this is about the level that we experienced six or so months ago. The management team here saying the Board just don't believe that the discount is enough to have it make sense particularly given the taxable gains that's embedded in the assets that we own today.

Hey, Michael, it's Mark. Fannie & Freddie as you said has just been extremely active, we anticipate them being extremely active in 2018. They have a slight preference probably and their pricing reflects it for certain types of affordable product, but they are certainly a very significant lender on our kind of product as well. And I think are able to do things in size. I would caution however that their ability just really for political reasons to do very large loans on very visible transactions is something I can’t really discuss and I can’t underwrite or explain. I mean, their ability to just finance our product in the ordinary course I think is unfettered, we have very little secured debt now especially by the end of this year. So we’ve got plenty of room with them and I think others do to. But to do very, very large loans that I think you’re talking about is both in underwriting decision and in their case due to conservative political decision and that I can’t give you any opinion.

Good morning or afternoon guys. Just a couple of questions left, in terms of the $0.04 negative impact in the first quarter on a sequential basis from same store, can you talk about whether or not that’s more revenue or expense driven and what markets are predominantly driving that as well?

Hey, it's Mark. It’s really about some real estate tax refunds that we got that I sort of alluded to in my remarks in the fourth quarter. So that just meant that the usual decline we have between the first quarter and the fourth was $0.02 larger throughout, really was just those couple of large refunds running through this system in Q4, increasing FFO in that quarter and just making it look like that difference was larger instead of sort of that being spread out probably in 2018 and just kind of move forward a bit.

Okay, Mark, could you explain what the next few years look like concerning the New York tax abatement programs? You have many assets in the city. Will these programs continue steadily over the coming years, or will there be a point where you return to a more normalized approach regarding tax abatements in your same-store expenses and property taxes?

I think it's probably fair to assume there is a 150 basis points to 200 basis points for the medium term of growth in our number due to New York 421-a burn-off; there isn’t a particular year Rob that’s at all ends in the next year and it's all done, it does go on for some number of years. But I just want to add a remark, it sort of like pre-paying a loan, every year you get closer to the end of the loan maturity, the prepayment penalty goes down. Every year we get closer to the end of the 421-a period, the cap rate on these assets declines. So NAV is being created because they trade as these assets get stabilized at a lower cap rate, but in the meantime you do feel it through the P&L in property tax expense.

Sure, this is David Santee. We completed the rollout of additional pilots on 14 buildings in Q4. There wasn't much activity in Q4 since most of these properties were more aligned with corporate housing companies that typically use platforms like Airbnb for vacant units, which is why we chose this specific group of buildings. It's primarily about gaining insights into what these companies are doing, and there haven't been any surprises; it's functioning exactly as we anticipated, providing us with transparency in the entire process.

Thank you. David, four of your six core markets are finalists for the Amazon HQ2. I was wondering if you could share your thoughts on which market if we announce the winner would be the best for your company.

Would be the best for the company? That market in which we’ve got the highest allocation of capital deployed. I think everybody is having a great deal of fun trying to figure this out. We think the DC market identifies three sort of submarkets within DC. We think that there is a possibility there that would certainly be good for that marketplace. It’d be good for any market, but certainly would be most beneficial in those markets in which we have most NOI coming up.

Okay. And then the second question is on your same-store rental rate declining a little bit of quarter to $2,720, I was wondering if in your 2018 guidance if that contemplates an increase in rates?

So for the full year when you look at 25, when you smooth out the leases on renewals and new lease expectations, it doesn't show much growth.

That's a number from the press release.

I'm sorry, you are on $2,720 for the fourth quarter?

Yes, sorry this is page 11, of your supplemental.

Yes, I mean, it customarily goes down and it's not stunning for it to decline in the fourth quarter, a little bit. I mean, it's not as transaction intensely a quarter. David has given some of the parameters about renewals in new lease rates in the rest and I think that what you are going to see in new lease rates there and average run rate is it will go up but only very modestly.

Yes, we previously discussed how the difference in lease rates tends to be the largest at this time of year when we often re-lease units that were previously rented during the summer, which is typically the peak season. This is influenced by lease cancellations and other factors. It's important to note that these figures do not account for the breakage costs we receive from tenants who vacate. Thus, while we see a difference in lease rates, it's not the complete economic picture for the company due to the recovery of lease breakage costs.

Okay, thanks for the color.

Thank you, John. I appreciate it.

Thank you, everybody. We appreciate your time today.