Equity Residential Properties Trust (EQR) — Q2 2018 Transcript

Thank you, Catherine. Good morning, and thank you for joining us to discuss Equity Residential’s second quarter 2018 operating results. Our featured speakers today are David Neithercut, our President and CEO; Michael Manelis, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer; David Santee is here with us as well. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. 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.

Thanks, Marty. Good morning, everybody. Thank you for joining us for today’s call. We’re extremely pleased with the Company’s operating performance to date as we move towards the tail end of our primary leasing season. Because of continued strong demand across the board for rental housing and the relentless attention to customer service delivered each and every day by our outstanding property management teams, combined maintained very high levels of occupancy and record-setting resident retention that have enabled us to now expect to deliver growth in same-store revenue towards the high end of our original expectations. With elevated levels of new supply across our markets this year, we had prepared ourselves for modest reductions in occupancy and weaker growth, but it was going to be a very competitive marketplace for new prospective residents and our existing residents, we have a lot of options from which to choose when their lease comes up for renewal. Yet, very deep and resilient demand for apartment living in our urban and highly walkable suburban markets continues to be the story. And here, to take you into greater detail is our recently promoted Chief Operating Officer, Michael Manelis.

Thank you, David. So, similar to the trend we discussed on the last call, the overall demand for our product remains strong through the leasing, despite the elevated supply. Our team’s ability to execute along with continued job growth has put us in a position to exceed expected revenue results for this quarter and increase our full-year revenue growth expectations to 2.1%. New York and San Francisco are driving the majority of the overall guidance increase. For the second quarter, we reported 96.2% occupancy. Our new lease change was up 1.4%, and achieved renewal increases were up 4.7%. All three of these metrics were above our original expectations. I’d like to take a minute and recognize our on-site teams. Renewing our residents in the pace of elevated supply has been the team’s number one goal. Not only did they deliver a 4.7% achieved increase on renewal, but they also managed to reduce turnover again to 13.4% for the quarter, while increasing our overall resident satisfaction, the highest levels we have seen in the history of our Company. In addition to being the lowest turnover percent that we have ever reported in the second quarter, when you net out on-site transfers that is residents who are moving to a new unit within the same community, this number drops another 150 basis points to 11.9%. Their ability to deliver remarkable service to our residents is an inspiration to all of us here, and I can’t tell you how proud I am of all of them. So, now, onto the markets. Let’s start with Boston. Gains and occupancy, 20 basis-point revenue boost from parking income and a continued ability of the market to absorb the new supply has given us the confidence to increase our full-year revenue guidance midpoint for this market by 50 basis points to 2.1%. Our occupancy for the quarter was 96.3% in Boston, which was 50 basis points higher than our original expectations and 60 basis points better than Q2 of ‘17. As of this morning, our Boston base rents are up 2.7% as compared to the same week last year and renewal performance remains strong with 4.8% achieved increases in the second quarter. July is trending to a 5.1% and August is projected to be 5.2%. Moving over to New York. Consistency in operations and disciplined market pricing are the highlights for this quarter. 96.8% occupancy for the quarter was 70 basis points better than both expectations and that of the second quarter of 2017. Achieved increases on renewals were 30 basis points better than expected at 2.8%. Our use of concessions in New York remains very limited and strategic. Our second quarter concessions were 37% lower than that of the second quarter of 2017. And for the past several months, we have only had approximately 5% to 10% of our weekly applications receive some form of moving concessions. We remain focused on competitive net effective pricing and the use of concessions at our stabilized assets will remain targeted, but it is expected to increase in the softer demand period, later in the year. Full-year revenue guidance for New York is being increased by almost 100 basis points from negative 75 basis points to a positive 20 basis points. Today, our occupancy in New York is 96.7%, which is 70 basis points higher than the same week last year. Base rents are up 2.9% year-over-year, and this week is the 14th consecutive week of base rents being positive on a year-over-year basis and the 5th consecutive week being above 2%. Achieved increases on renewals remain strong with 3.2% expected in July and 3.4% for August. So, strong demand and disciplined market pricing in New York positioned us well for the peak leasing season. This provided us the opportunity to both raise rate and grow occupancy. That being said, we are not out of the woods yet as the third quarter is the peak delivery quarter for New York. Now, these deliveries are concentrated in Long Island City and Brooklyn where to date, we have not seen a significant impact to our operations. Our New York team has performed extremely well through the leasing season, and we like our position here heading into a softer period of activity.

Thank you, Michael, and good morning. Michael has just discussed our markets and the upward revision to our same-store revenue guidance, and I want to take a couple of minutes here to talk about our revisions to our same-store expense guidance and to our full-year normalized FFO guidance. First, for same-store expenses, we have lowered the midpoint of our full-year same-store expense guidance to 3.75% from 4%. This is primarily driven by our expectation of modestly lower property tax expense growth and for lower on-site payroll expense growth. As a reminder, these two expense line items together constitute approximately 65% of our same-store operating expenses. Year-to-date, we have produced expense growth of 3.5%. We don’t expect a big change in the growth rate of our expenses in the second half of the year. Now, I’ll give you a bit more color. You saw us produce 4.5% growth in property taxes through the first six months of 2018. We now expect our full-year property tax expenses to grow in the range of 4% to 4.5%, and that’s down from the 4.75% to 5.75% prior range. This is due to both significantly better than expected appeal activity, as well as our expectation of a reduction in the growth rate of our taxes upon the sale of a same-store asset that David Neithercut will discuss in a moment. Also, we have lowered our expectation for on-site payroll expense growth to a range of 3% to 4%, and that’s down from 5% before. At the beginning of the year, our budget assumed continued pressure on on-site payroll, especially compensation for our maintenance personnel. While we are still feeling wage pressure, especially on the maintenance side, our on-site payroll expense growth has been positively impacted year-to-date by a reduction in our estimate of medical reserve expenses. Year-to-date growth of 2% in on-site payroll means that payroll expense growth will be higher in the back half of the year than it has been year-to-date but that is mostly due to a harder 2017 comparable period in the second half of the year than any real change in trend. Now, moving over to normalized FFO. In our earnings release, we raised the midpoint of our full-year same-store revenue guidance to 2.1% from 1.6%, driven by the strong renewals, low turnover and high occupancy in our portfolio that Michael just discussed. I just went over our expectation of a decrease in same-store expenses which collectively allow us to raise the midpoint of our same-store NOI guidance to 1.4% from 0.75%. On the normalized FFO side, we are picking up about $0.03 per share from higher same-store NOI and another penny or so from our 2018 transaction activity due to our narrowing of our reinvestment spread and the timing of our acquisition and disposition activity. These positives are partially offset by a one penny per share increase in interest expense, primarily due to the increase and timing of the same transaction activity and its impact on our intra-period borrowing. The result is a modest increase to our normalized FFO guidance from $3.22 per share to $3.25 per share.

Thanks, Mark. On the transaction front, the second quarter was pretty quiet with only one acquisition occurring and no dispositions. That acquisition being a 240-unit mid-rise property built in 1999 located in Hoboken, New Jersey. Now, as noted in last night’s press release, through the first half of the year, we have acquired two assets for $200 million and sold four assets for $290 million at an accretive spread of 10 basis points. Also noted in the press release is a revised assumption for the year of $700 million of acquisitions and an equal amount of dispositions, which obviously will require a fair amount of activity in the second half of the year. Included in that activity are several acquisitions under contract and in the due diligence process totaling nearly $500 million, which includes a couple of recently built properties in close-in, highly walkable neighborhoods of Denver. As we said repeatedly, our exit there was not market-related but rather portfolio-related. We’ve continued to carefully watch Denver because it possesses many of the characteristics we look for in one of our markets, that being a highly educated workforce, strong growth and high-paying jobs and relatively high cost to single-family housing as a multiple of income. And we think that with the new supply that has recently been and will soon be brought online in Denver, there will be additional attractive opportunities to acquire assets that meet our investment criteria as we rebuild a critical mass in the market. Our second half transaction activity will also include the disposition of an asset on Manhattan’s West Side that is currently under contract at a price in excess of $400 million, and at a very attractive disposition unit. This sale is expected to close late this quarter with all contingencies currently waived and subject at this time to only normal closing conditions. This disposition will be discussed in more detail following closing, but it does represent an opportunity for us to reduce our exposure to the West Side where we have a significant portfolio of assets, as well as an opportunity to address the negative impact on our New York City growth rates by reducing our exposure to properties with expiring 421-a real estate tax benefits. In fact, going back to Mark’s comments just a moment ago, on the expected improvement in our 2018 same-store operating expenses, this sale will reduce our portfolio-wide growth and same-store real estate taxes by 30 basis points. Turning to development. During the quarter, we started work on our tower in Boston to West End neighborhood that we discussed on our most recent call. This is a 469-unit project that will be delivered in 2021 at a cost of $410 million. We were also very pleased to note in last night’s release that we now expect to stabilize three development deals on the West Coast two to three quarters sooner than expected. More clear example is the continued strong demand for high-quality, multifamily properties across our markets. So, I’d like to close with just a few comments on Proposition 10 that’s being the California ballot initiative to overturn Costa-Hawkins. For those of you unaware of the situation, municipalities in California have for many years been able to implement rent control. However, it would be subject to certain limitations, as a result of the Costa-Hawkins Law. One, it can only be imposed on properties built before 1995; and two, properties are subject to rent control must be allowed to move their rents to market upon vacancy, which is known as vacancy decontrol. Proposition 10, which will be on the ballot in California this November, seeks to repeal Costa-Hawkins, which would remove these limitations on rent control for those jurisdictions opting to implement rent control, which of course not all actually do. Now, our EQR has joined the California Apartment Association, public and private landlords across the state, numerous trade organizations, affordable housing groups, state and local chambers of commerce, veterans and minority groups, nationally recognized independent research organizations, among many others to create a coalition to defeat this proposal. This will not be an easy fight because on the surface who isn’t supportive of affordable housing. However, when made aware of the negative impact the rent control has on the existing housing stock and the disincentive it creates to build more housing, which is truly the only way to address the shortage of housing, many people come to understand how bad rent control can be for the neighborhoods, neighborhoods and communities. So, we will fight Proposition 10 at a cost to EQR of $1.6 million to date. And regardless of the outcome, we will continue to fight attempts at the local level to enact rent control. Because this is bad housing policy, plain and simple. There is a reason that it has made no headway in the legislature and why the current Governor and both gubernatorial candidates have come out against it. And that is because it is widely understood that rent control creates a disincentive to invest in the existing rental housing stock and a disincentive to build more rental housing and is therefore the worst possible action that could be taken to address the shortage of affordable housing, because rather than address the problems, it exacerbates it. The answer is to build more housing. And there is not one solution that will work everywhere there is a housing shortage. But, the basket of solutions includes inclusionary zoning, looking hard at some of the regulatory requirements that can add significant costs to new development projects, increasing federal low-income housing tax credit programs, and addressing the nimbyism that exists in many of the areas where the current housing shortage is the most acute. Now, there is no question that we have a serious housing issue across our nation which needs to be addressed. And while the answer may not be easy, solutions do exist. And it has been proven time and time again that rent control is not one of them. So, Kathy, we will be happy to open the call now to Q&A.

Hi. Good morning. I was just hoping for the latest portfolio-wide color on 2019 supply and the expected delta versus ‘18. And if you could maybe just highlight which markets are seeing the biggest deceleration, if any and are you seeing an unexpected increase?

Yes, sure. This is Michael. So, I guess, I would say, at the highest level, we have rolled up about 71,000 units for 2018, going down to 57,000 units in 2019. And when you go across the markets, the market that probably has the most pronounced reduction is New York, dropping from 19,400 units down to 8,500 units. The rest of them are moving, I mean slightly, but it’s not as material of a decline as what we see in New York.

And with the latest cut of the numbers, has there been any material move from ‘18 into ‘19 outside of the LA market which you highlighted in your prepared remarks?

No, no material change moving between here outside of what we saw on our LA.

And thank you for the color on the renewals by market. Would you mind providing the new lease spreads by market, as well as the portfolio-wide spot occupancy?

I want to address the new lease. I believe I've mentioned this before, but it's important to emphasize that assessing these results based on a single quarter isn't the best approach for understanding this metric at a market level. We recently updated our full-year expectations during the guidance revision process. Our updated assumptions are as follows: we increased expectations for new lease changes in New York by 100 basis points, in San Francisco by 50 basis points, while we reduced expectations in Seattle and Orange County by 100 basis points. For our other markets, the expectations were either consistent or experienced minor fluctuations.

Okay. But, can you provide the second quarter figures for the new leases?

Yes, sure. So, Boston was positive 30 basis points; New York was negative 1.2% or 120 basis points; Washington DC was negative 0.9%; San Francisco was up 5.1%; Seattle was up 0.7%; LA was up 2.6%; Orange County up 0.4%; San Diego up 3.7%, putting the entire portfolio up 1.4% as we disclosed in the release.

On reentering to Denver, how many assets or what percentage of NOI do you need to own to reach an acceptable scale?

That’s a good question, Nick. As we look at, we think that we can get an appropriate sort of critical mass with, call it 14, 15, 16 assets. That’s probably around a 1.5 billion or about 5% of our sort of NAV allocation, if you will. And these two assets we’re underwriting, get us 20% of the way there.

Okay. So, do you expect to reach that level over the next two to three years or is it more of a next cycle target?

I find it difficult to provide a definitive answer. Much of it will depend on our ability to identify opportunities to redirect investments from other markets, similar to what we are currently doing in New York, and reallocating that capital in Denver. If quicker opportunities arise, we will pursue them. However, it’s challenging to set a specific timeline. We will closely monitor the situation and aim to achieve our goals as soon as it is suitable, based on our capital allocation strategy.

And then, you’ve done a great job with renewals and drive internal but lower. Is there an opportunity to drive it further, or do you think you are close to frictional turnover level?

I guess, I would just say tell you, I think our expectation is that we’re going to continue to see the results that we’ve seen play out for the first half for the balance of the year. I mean, the teams are focused on this. How much more improvement are we going to see than these 100 basis points declines that were posted in each quarter, I don’t know. I mean, I think we’re probably getting down towards where we will post kind of the lowest turnover, but we will see kind of where we go from there.

David, I just wanted to make sure I heard you correctly. I think, in your opening comments, you said you were maybe trending towards the high end of the expectations. I just wanted to make sure, given that you’ve done 2.2 revenue growth in the first half, the 1.9 at the low end would kind of imply a 1.6 second half. So, I’m assuming you’re not assuming there’s a big deceleration. I mean, is it fair to assume you’re kind of in that 2.1 to 2.3 range right now?

So, Steve, this is Michael. I guess, I would say, yes. So, we have a lot of confidence in the 2.1% midpoint that we just put out there. I do want to say that it doesn’t take much to move our revenue by 10 basis points in the portfolio, winds up coming down to $2.4 million. And the 40 basis points range that we just communicated in the release is really just the result of a sensitivity analysis that we complete for each market that kind of looks at best likely and worst. And I said, right now, we’ve got a lot of confidence in the 2.1. We have a pretty difficult comp period coming up in front of us from an occupancy standpoint and several of our markets have peak deliveries occurring in the third quarter. So, as far as the bottom end of that range, the 1.9, there are a couple of different ways to get there, but it basically is going to come down to our ability to hold occupancy at 96.1% for the second half of the year. And a 30 basis-point decline in occupancy in the second half, which we do not see happening at this point, but that would result in revenue towards the bottom end of our range. But on the opposite end of the spectrum, continued improvement in retention and demand, which we are seeing, will accelerate rate growth and push occupancy higher, and that in turn would result in the higher end of our revenue range.

And then, I guess, I want to just how you guys address maybe construction costs. I know, you don’t have that many new projects starting other than the new one in Boston. But maybe David or somebody else could just sort of address what you’re seeing in import costs and things like steel and wood, and how that’s impacting maybe underwriting today for new deals?

It's challenging, especially as construction costs are rising faster than rental rates. In 2017, we experienced a 4% to 8% increase in hard costs across our markets, and we anticipate similar growth this year, even though we aren't actively bidding on projects. Our teams are monitoring these costs and seeing the same trends this year, not accounting for any impact from tariffs yet. My construction team has mentioned that steel prices have increased by at least 25% due to tariffs. Mark has also had discussions with others who can provide additional insights on this issue.

Yes. I attended some industry events where a large general contractor spoke to a group of developers, and their attention was fully focused on this issue. They mentioned that before the steel tariffs, and even just the threat of them along with existing lumber tariffs from Canada, was already driving our costs up by 4% to 8%. Additionally, this was affecting many construction contracts, leading to significant uncertainty as both the general contractor and subcontractors were reluctant to take risks on these items, putting considerable pressure on the developers and their contingency budgets.

So, can you expect that this will lead to a significant decrease in new supply over the next 6 to 12 months?

We have mentioned for quite some time that there are products in the pipeline that will remain unaffected by this situation. Our agreement in Boston is not impacted by any of this, although that contractor has somewhat locked down. We frequently hear from our investment team about projects being put on hold and equity capital being hesitant to move forward with deals seeking new funding sources, particularly as a result of this situation. Therefore, I believe this will significantly influence the number of new starts in the future.

There has been some news articles out there about pop-up hotel at your 100K Apartments in DC. I was wondering if you could provide the economics, average rents, margin, CapEx reserve on that building now that will be a more of a short-term lodging type focus versus if there was a 100% traditional apartments.

I don’t have that compared to what it would be, John. But we have cut a deal with this entity called WhyHotel where they are chasing down 95 units for nine months in our property that will soon be delivered. We get a base rent from them as well as a participation over some thresholds. These are apartment experienced guys. So, they’ve been very easy to work with, very compatible to work with. We think it’s a great opportunity to deliver some income in vacant units that would otherwise remain vacant over that nine-month period.

And John, they provide all of the goods. They are furnishing the units. There is no additional capital needed from us. They are also providing the staffing to address any concerns of their hotel residents. Therefore, there isn’t any cost impact on us.

Okay. Could you share a stabilized yield projection?

I beg your pardon?

Could you share a stabilized NOI yield projection on the development?

On that particular property, 100K? We think that deal will stabilize in the mid-5s.

That’s the 12 months forward return on a fully stabilized apartment product. The existence of the WhyHotel will just provide some income in advance of that calculation.

Okay. Turning back to Denver, when you are underwriting that market, again, obviously, I know, it wasn’t end market exit, but when you are underwriting Denver and long-term NOI growth in Denver versus your existing portfolio, how is that market ranked against your existing markets?

Well, we think that Denver will be not particularly strong performer in the current and in next year because of the new supply that’s being delivered. We do believe supply will reduce considerably in 2019 and that it should probably perform most likely in the upper half of the market in which we currently operate.

You mentioned the low turnover and it seems that much of that is a result of your accomplishments. I'm curious if there are any external factors beyond your control that might be contributing to this favorable turnover. For instance, could the SALT deduction be influencing people to move away from ownership, or are there other elements at play that could either benefit or hinder you in this area?

I think, there is a lot of reasons why this reduction is occurring. I think, the efforts of our onsite folks is just kind of the icing on cake that’s bringing us down. But, you’ve got momentum in people deferring life decisions, marrying later, having children later, not rushing out to buy homes. I mean, buying home is the move up has declined in every single one of our markets this last quarter outside of Orange County. So, I think, there is clearly other factors that are contributing to this decline, but I think our relentless focus on renewing our residents is clearly helping this as well.

Maybe a part B to that next question and the demographics are interesting. The oldest millennials are 38 this year. Have you seen anything on the margin there with movement, maybe an increased move toward homeownership?

I mean, as noted, we’ve seen percentage of our move-outs to buy single-family homes reduce. And we operate in the markets that have got very expensive costs of single-family homeownerships such that we would expect our residents to remain renters for significantly longer, and that’s exactly what’s happening.

Thanks. We've experienced a 2.2% year-over-year increase in same-store revenue for the last four quarters, with the previous quarter at 2.1% and a guidance midpoint of 2.1% for this year. This indicates that we are maintaining a steady range. Referring to 2019, given this stability and the potential easing of supply, do you believe that revenue growth in 2019 will be higher or lower than in 2018, or are we currently at a balanced market?

We can’t go into 2019 revenue growth at this time. We’ve sort of given you all the facts we see them. And at least for this juncture, you’ll have to come up with your own conclusion to that.

So, the way you are approaching Denver, which is to buy now, even though the market isn’t great is interesting. And I’m wondering if that can be extrapolated to the New York City metro area, despite the fact that you got a $400 million asset for sale. Do you think there’s any opportunity to buy at this point where it isn’t great, but maybe will get great eventually again?

Well, I think that you are generally on to the thought process there, Rich, and that is, this is a trade. Right? We are trading capital from one market into another market. And as we look at what’s happening in New York and the low growth we’ve had there and the expectation for lower growth in some of these assets as a result of the 421-a tax burn-off, it may make sense to rotate some capital into some other markets. Now, I do want to note that the asset we acquired this past quarter, it happened to be in the New York metropolitan area. So, it’s not as though that we are selling or exiting New York. We were just rotating some capital out of some New York assets into another New York based asset as well as into Denver at this time.

And then, if I could just ask the other recent question a little bit differently. I’m not going to look for 2019 guidance, I know you are not going to give me that. But maybe you can give 2021 guidance. And the way I’m thinking about it is, do you feel like this is a tight turning kind of situation with regard to your new guidance? I can appreciate, it’s going better for you in this current year. But having experienced cycles in multifamily for many, many years, not to dig you, I’m curious where do you think we stand right now in terms of how it’s playing out versus history? In other words, revenue of 2.2 last year, maybe you are getting close to that this year. Are we at the bottom or at least nearing the bottom from your perspective, particularly when you consider the decline in deliveries that you’re seeing in your markets?

Well, there are all sorts of things that will influence performance in 2020 and 2021. But, I think that you did touch on some important issues there. Michael just talked about what improved pricing power expected in New York soon as a result of this reduction in the new supply. There is a significant fall off of new supply coming in, in 2019. And as discussed earlier, to one of the questions, we are expecting supply to remain sort of in check, if you will, among other reasons, for the increase of construction costs and now the tariffs, and to Mark’s comments, the uncertainty of costs as a result of the tariffs. So, we look at supply being reasonably in check beginning in 2019. In general, there are some markets where like DC we are expecting it about the same on a year-over-year basis but just across the portfolio. So, absent any other sort of external sort of geopolitical sort of shocks or economic sort of shocks, we certainly expect with the current demand we are seeing and the retention that we are seeing and the expectation that our residents will be unable to afford single-family housing or will opt to remain in rental housing for whatever reason, we think that the supply-demand fundamentals and the dynamics will improve from here.

A question, kind of taking supply out of the picture, lots of questions on supply. I guess, which markets would you see that on a seasonally adjusted basis you are seeing the strongest pick-ups in demand, both from an employment growth standpoint and a wage growth standpoint, which market do you feel are the most exciting and I guess which markets are kind of the most sluggish at this stage of the year?

San Francisco currently stands out as the leading market showing strong momentum. It's hard to analyze without considering the supply and the market's capacity to absorb it. For some time now, we've observed indicators of strength in that market. For context, our own Peninsula project reflects this lease-up success. On the other hand, Seattle and Orange County are falling short of expectations. I believe their sluggishness is temporary due to supply issues, even though they still have diverse job growth. We're currently not at equilibrium in those areas, which means we need to work through the supply concerns so we can consistently increase rates and maintain the necessary velocity.

I guess, said differently, are there any markets where you are seeing employment growth or wage growth reaccelerate or accelerate in a way that’s been surprising? It sounds like that has occurred in the Bay Area but in other markets.

No, I don’t think so. I mean, I think they are kind of all within check of what the original expectations were from job growth and where the job growth is coming from.

And then, on kind of segmenting the New York performance from a Manhattan but the New Jersey, Hudson waterfront properties. Can you talk a little bit about that area? I know there has been a little bit of supply there, and just talk about whether you are seeing concessions and any glimpse of pricing power in the near term there?

So, no concession. I mean, if there is concessions because they are nominal, they are targeted, they are strategic from a marketing standpoint. I mean just to put into perspective the kind of Hudson waterfront area, it’s doing the best out of all of the submarkets that we have in New York on a year-to-date basis, posting kind of 1.3% revenue growth. So, I guess, at this point, I would say the trajectory looks good. I mean, I think, come Q4, like I said, in the slower periods, we will see what we need to do from a concessionary environment. But, the absorption of the supply there and our ability to kind of raise rates and maintain occupancy has been strong.

And one more for me. I was hoping if you could talk about the stabilized yield expectations on West End tower in Boston.

Well, we think that our yield on that Boston deal at current rents will be in the low to mid-5s and will likely stabilize somewhere with the six-handle. We think that’s a terrific yield in a marketplace where that asset would probably trade today, maybe with a high-3 cap rate. So, we think we’re getting appropriately compensated for the 10 years worth of blood, sweat and tears that’s gone into to try and get that deal. Plus, it’s Mark, we think Boston is a great long-term market. There is a lot of exciting things going on in Boston and in Cambridge. And this will be a perfect asset for us to own and operate for a long time.

Focusing on page 20 and building off the last question. It looks like you’re all-in development is about 874,000 a unit for West End tower, but you have only spent about 63,000 a unit so far. Does that imply that the land cost was less than 63,000 a unit? And if so, what your hard cost and soft cost per unit get up to a total development of 874,000 per unit?

I don’t have that level of detail available. We have owned the property for the tower being built for around 20 years, with a land basis of approximately $20 million. This accounts for a significant part of our expenses. Currently, we are facing some demolition costs related to the existing garage, which is the only other expense recorded so far, along with the land basis and demolition expenses, in addition to our capitalized costs for architectural and engineering services. Therefore, there hasn’t been a substantial amount of hard costs incurred yet, and I do not have the specifics of that transaction readily available.

Okay. Looking at your completed but not stabilized 724 million, it looks like your second quarter ‘18 number is about an annualized 3.5 yield on cost. What do you think these three completed, not stabilized assets will stabilize at 855 Brannan and the two Seattle deals? You are about 3.5 now at 90% occupied on average.

855 Brannan, we expect to stabilize at a high 4, the Helios deal at about 5, and the Cascade deal at about 6.3; those are the three deals. And the Cascade deal went about 6.3.

That’s a long way…

But when you use the numbers in the release, that’s wherever these properties were at that particular moment. So, this is going back in time and looking at these numbers. So, having $6 million as this thing is ramping up, that’s not the right way to do, that’s not the correct math. That’s not going to get to a number that’s going to make any sense.

But the 3.5 second quarter number can ramp up into the mid-5s on stabilized?

Well, I guess by definition. Right? But whatever yields we are receiving today will grow to the yields that I just told you on those transactions, as we lease and occupy those properties and get them stabilized.

And then, the last question I have is about your Manhattan West asset as an example. What is the yield impact on the 421-a tax burn-off? For instance, if your trailing cap rate is X and the buyers' stabilized cap rate after the 421 burn-off is Y, how much yield erosion occurs as those tax abatements expire?

The impact on the top line will also be a factor. However, bottom line growth will face negative effects as those tax abatements phase out. The specific properties involved and the timeframe of two to six years will matter. The valuation of these buildings will remain unchanged during this transition, as the cap rate is likely to decrease due to the adverse effects on income. Ultimately, these properties will trade on a fully taxable basis, likely in the low threes.

So, if you keep your top line constant, what’s the yield erosion over the burn off period, or is it impossible to determine?

It’s an asset by asset determination. We have assets that are subject to 421-a that haven’t yet begun the burn-off period. We have assets that are done, and we have assets that are in the middle and some assets are in different schedules than others. So, really, it’s kind of a custom calculation, asset by asset.

Just three really quick ones, so I’ll just go quick. First on Denver, David. Are you guys sort of just thinking like Cherry Creek area or how broadly are you defining your target, Denver MSA portfolio?

Well, the two assets we have under contract now are both in the sort of uptown, downtown area, if you will, not in Cherry Creek. So, we will continue to look for downtown, highly walkable sort of locations. We would certainly consider Cherry Creek but the two assets that we’ve have in our contract today are not in Cherry Creek.

Okay. But, are you looking broader in the greater MSA, or you really want to be more Denver proper?

We are focusing on properties that are higher density and walkable. This means we will not be looking in distant suburbs but rather at locations that have access to transportation or high walkability, likely with good walk scores.

Okay. And then, on the acquisition disposition guidance, both have increased the spread between acquisitions, and disposition has decreased, has narrowed. How has that impacted your IRRs that you are looking for both on what you are selling and what you are buying?

Well, those spreads don’t impact IRRs. So, I’m not sure I understand the question. That’s just the first year yield comparison between what we’re buying and what we’re selling. So, the IRRs on what we’re selling have been very good, plus 10% generally. And what we think we are buying in today’s marketplace, we think we’re buying probably in the 7s by and large.

So, I guess if I could rephrase it. As far as the impact to EQR’s earnings, if that spread is narrowing, do you view that as decreasing the growth benefit of what you are buying versus what you are selling, or do you view that there is no difference to the growth profile of the assets that you are trading to EQR, based on that spread narrow?

I'm sorry, I didn't quite catch your question. It is certainly in our interest to have that spread be as narrow as possible or positive, meaning we're selling lower yields and buying higher yields, as long as we believe we are investing our capital strategically for the long term. We're not planning to sell New York and reinvest in lower spread assets. However, if we can invest in our core markets and the types of assets we want to hold for the long term, then it's beneficial for the Company and the business for that spread to be as narrow as possible, even though it is very unlikely it will be positive.

And then, just finally, appreciate your comments on the Costa-Hawkins. From your people on the ground and everyone that you speak with, is there a sense that the local communities understand how vacancy decontrol impacts the market or is there a view that people just aren’t really aware of that and what damage that could cause if that is removed?

I think people's opinions on this are quite varied. Some groups refuse to consider that perspective. There is a strong belief in making rents affordable for the public today, but there is little understanding of the long-term effects on the housing market. Our view is that when people are first asked about rent control and affordable housing, they typically support it. However, when they learn about the long-term effects on the existing housing stock and the negative consequences for property values, they often come to realize that it may not be the best approach. Overall, opinions on this issue are diverse.

I just want to go back to the Prop 10. Do you think that this will have any impact on development starts over the near-term? And then, conversely, a bigger picture outlook on supply. Could we get a contraction a few years out, as maybe some owners go to a condo, convert their apartments to a condo, and have Equity Residential contemplated doing such action?

We haven't really considered a specific response to this yet. One concern about rent control is that it might convert existing rental properties into for-sale units, which would be a negative outcome. Regarding new construction, it is mainly influenced by costs at this time. Regardless of what happens with rent control, there will probably be limitations on the type of products built in certain years. Therefore, the properties constructed today likely won't be adversely affected by any changes in rent control following the repeal of Costa-Hawkins. However, that is still uncertain. Thank you, Catherine. We are excited to celebrate our 25th anniversary as a public company on August 12th. Back in the summer of 1993, no one anticipated that our 22,000-unit apartment company with an $800 million enterprise value would grow to where we are today. We truly appreciate the support from the investment community over the years, the commitment of our Board of Trustees, both past and present, and the numerous dedicated professionals who have shaped this company's unique and lasting culture. Thank you all, enjoy your summer, and we look forward to seeing you in September.