Essex Property Trust Inc (ESS) — Q3 2015 Earnings Call Transcript

Thank you, April. Thank you for joining us today. And welcome to our third-quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments. John Eudy and Erik Alexander are here in attendance for Q&A. This past quarter, John Burkart assumed leadership of our Asset Management and Operations functions, and thus he will provide commentary on those activities today and in the future. As you know, Angela became CFO on October 1st upon Mike Dance’s retirement. Please join me in welcoming both of them to their new roles on the quarterly call. I will cover the following topics on the call: first, Q3 results and activities; second, an update on rent control discussions; third, a review of the investment market; and fourth, comments on our 2016 preliminary market forecast. On to the first topic, yesterday we were pleased to report another impressive quarter driven by a strong West Coast economy. As expected, demand from robust job growth led to continued high occupancy for apartments and significant increases in for-sale home prices. Thus, our reported results for same-property revenue, NOI, and core FFO per share growth exceeded our expectations and led the multifamily industry. I would like to recognize the Essex team for their tremendous effort and for exceeding expectations once again. With a few exceptions, rents at the B-quality properties and locations are growing faster than A-quality properties, exemplified in the Oakland Metro with 12.7% same-property revenue growth, the highest in our portfolio. Despite the fact that the Oakland Metro generated only 2.2% year-over-year job growth for the nine months ended September, which significantly lagged San Francisco and San Jose at 4.6% and 5.5%, respectively. These trends occurred because affordability and commute time are two critical considerations for most apartment seekers. With traffic congestion growing, access to major employment centers has become incredibly challenging, and more people are doubling up, living with relatives or moving to less expensive areas. Thus, we believe that B locations closest to the job and public transit will continue to perform best in 2016. In recent investor meetings, we have heard concerns about tech hiring and changing housing preferences favoring homeownership. Regarding tech hiring, we closely monitor tech job growth, especially in the current environment given broader economic issues, such as the strength of the U.S. dollar, weak commodity prices, weak global growth, and the divergence in performance across key sectors of the economy. The Essex portfolio typically experiences softness in traffic and pricing a month or two before a slowdown in hiring is reflected in the data. This is complicated to some extent by the normal seasonal slowdown typical in the apartment business at this time of year. At this point, we have not experienced a slowdown beyond the normal seasonal pattern, and reported job growth has been excellent. Perhaps the best way to demonstrate the current conditions is through the 2% improvement in loss to lease at the end of Q3, from 5% at the end of September 2014 to 7% at September 30, 2015. Regarding the homeownership rate, we continue to focus on the relationship between the number of new homes, both rental and for-sale, being delivered, compared to household formations estimated from employment growth. We have heard some economists use national data when discussing this relationship, which we believe is often misleading, as apartments focus on our local business. Therefore, our valuation of supply and demand is regionally focused. For a variety of reasons, including the California Global Warming Solutions Act of 2006 and related laws, we continue to expect very muted production of for-sale housing in the coastal metros of California, as cities implement an urban village housing concept accessed by a robust public transit system. This new concept is likely to take years to implement and will favor apartments and condos. Therefore, we believe it is unlikely there will be a significant increase in for-sale housing production necessary to materially increase the homeownership rate in Coastal California. Moving on to the second topic, rent control. I commented last quarter that proposed local rent control ordinances are being discussed in several West Coast cities, particularly in California. Cities are generally protective of their rental stock and voters who live in apartments are growing increasingly concerned that high-income tech workers will displace other residents who have not received large increases in compensation. I’ve commented in previous calls about Richmond, California, which is the first city to preliminarily approve a draft of a rent control ordinance. Opposition led by the California Apartment Association has been able to force the Richmond rent control proposals to the voters in 2016. For context, California State Law supersedes city ordinances, which is fortunate for landlords, as state law mandates vacancy decontrol and prohibits rent control on apartments completed after 1995. We have also seen some cities and community organizations focus on the long-term impact of inadequate housing supply, particularly at lower income levels, acknowledging that rent control has unintended negative consequences and ignores the real issue, which is a shortage of housing production. Our view is there is no near-term solution to the housing shortages, especially in Northern California, because cities are generally not supportive of progress. Strategies regarding entitlements for new housing remain challenging and costly to obtain, and construction costs have spiked around 10% in each of the past two years. Therefore, we don't expect the rent control discussion to end anytime soon. We encourage landlords to self-regulate by considering these factors as part of their lease renewal strategies. On to the third topic, investments. As commented previously, we will become more selective regarding our external growth activities, although we continue to be very active in our search for both acquisition and development deals. As noted previously, construction cost increases are pressuring development deals, with some likely to stall. The flipside of a more selective acquisition market is that it presents a better market for property sales. You should expect modestly increased disposition levels in 2016. Cap rates remain lower throughout our markets. Using the cap rate methodology of the most active buyers, our best estimate is that the highest quality properties in prime locations produce a cap rate of around 4%, while B-quality properties in less desirable locations yield around 4.5%. Lesser quality properties trade at higher cap rates, and periodically aggressively underwritten trophy properties will trade in the high 3 cap rate range. Some buyers make more aggressive assumptions, which can add 25 to 50 basis points of cap rate compared to yields underwritten by more active buyers. Moving on to the fourth topic, our market outlook for 2016. Page S-16 of the supplement provides an overview of the key housing supply and demand and economic assumptions supporting our market rent growth expectations for 2016. As before, we assume each of the West Coast metros, except Ventura, will outperform national average job growth, which is assumed to be 2%. While we are not projecting the continuation of the exceptional job growth that we enjoyed in 2015, we have no specific reason to think hiring will moderate, other than the concerns about the global economy noted previously. It's important to note that we do not need extraordinary job growth to generate a favorable supply and demand relationship and great results. Should job growth continue at the pace experienced in 2015, we are likely to exceed the forecasted results for market rents shown in our market outlook. Finally, the 2016 same-property revenue growth expectation for the Essex portfolio is likely to exceed the forecasted 6% economic rent growth on S-16 due to our healthy loss to lease and other factors, all of which will be discussed as part of our 2016 guidance on the next call. This concludes my comments. Thank you for joining the call today. I will turn the call over to John Burkart.

Thank you, Mike. I really appreciate the hard work of the operations and asset management team this last quarter executing our plan, which enabled our great results. The third quarter was robust. We continue to have a positive outlook for all our markets, with higher than expected job growth continuing to be the primary catalyst for increasing rents and higher occupancies throughout the portfolio. Strong demand pushed economic rents higher, leading to our fourth consecutive quarter of 10% increases in same-store property NOI growth. Gains from renewal activity increased 6.6% portfolio-wide in the quarter, and turnover was down across the portfolio from 63% in 2014 to 60% this quarter. As of yesterday, the same property portfolio in all regions had occupancy at or above 96%, with a 30-day availability of just over 4.7%. All of our markets are benefiting from the combination of strong job and income growth and insufficient supply to keep pace with the demand. According to Axiometrics, market rent growth was stronger in September 2015 year-over-year than last year at this time in each of our regions: Seattle, Bay Area, Southern California. While we are not providing guidance for next year, we conclude from this that our markets are strong or stronger than last year at this time, which bodes well for next year. Ramping up our redevelopment pipeline has been a major focus for 2015, including the restart of the program for the legacy BRE property. Our renovations team completed over 1,000 apartment home renovations during the third quarter, an increase of 50% compared to the third quarter of 2014. A little over 30% of the unit renovations are currently focused on the legacy BRE portfolio, which negatively impacted occupancy during the quarter. We continue to make progress on phase II and phase III of our merger integration, as outlined in the June NAREIT presentation available on our website. The resource management efforts, renovation, and refinement of the revenue management unit amenity pricing are ongoing efforts that will continue for the foreseeable future. We are making good progress on phase III, which is focused on improving our customer experience, growing our employees, and increasing our efficiency, the results of which will be realized after 2016. Now I will share some highlights for each region, beginning with Southern California. Los Angeles, Orange County, and San Diego continue to be strong performers this quarter, driven by job growth of 2.3%, 3.3%, and 3.2% respectively, all exceeding our initial expectations and U.S. averages. Personal income growth continues to grow well above the national average in all three metros. Northern California continues to perform above expectations due to exceptional job growth in San Francisco and San Jose, which was reported for September at 4.6% and 5.5% respectively. The robust personal income growth in the Bay Area, forecasted to be 4.6% in San Francisco and 6.5% in San Jose, is enabling strong market rent growth with a limited impact on affordability. Oakland continues to perform well due to its strong income and job growth as well as its proximity to both San Francisco and Silicon Valley. Uber purchased Uptown Station in downtown Oakland and is expected to accommodate 2,500 to 3,000 employees beginning in 2017. Several other tech companies are following Uber’s path, having announced their moving or expanding to Oakland to take advantage of the lower cost office space and shorter commutes for their employees, a trend that we expect to continue over the next several years. The exceptional demand in the Bay Area is evident in the strength of our lease-up. One South Market in downtown San Jose has averaged over 40 leases per month. Epic has averaged about 39 leases per month, and MB360 Phase II in San Francisco, which is close to being rebuilt following the tragic fire in March 2014, is already 26% pre-leased, with the first move-in scheduled for the fourth quarter of this year upon completion. Finally, in Seattle, employment growth in this region continues to be strong at 3.3% and personal incomes are expected to grow 5.7% for 2015, maintaining rental market affordability. CBD Seattle continues to perform with revenue growth of about 4% quarter-over-quarter, while the other markets, East Side, Snohomish, and South King, grew at approximately 8% quarter-over-quarter. 25% of the 6 million square feet of office development in the region is being delivered into downtown Bellevue, with the first tower expected to be completed in the fourth quarter. Salesforce has announced that it signed a lease for 75,000 square feet in Bellevue and plans to double its current workforce in the area. We expect housing supply to decline quietly in 2016 as rising construction costs begin to limit apartment development. We're very pleased with our results year-to-date, and I think our momentum should position us well into 2016. Thank you, and I will now turn the call over to Angela Kleiman.

Thank you, John. Today I’ll discuss our third quarter results, the revised outlook for the year, and provide an update on our balance sheet. For the third quarter, we exceeded our core FFO guidance by $0.06 per share. $0.03 of the outperformance resulted from higher revenue, primarily driven by the strong job growth in our markets, which accelerated the rate of lease-up absorption at higher than projected rents. $0.02 of the outperformance resulted from lower expenses within our consolidated properties, although part of the favorable expense variance is timing-related. Therefore, we expect our year-over-year same-property operating expense growth to be between 3% to 4% with the combined portfolio in the fourth quarter. Following two previous revenue guidance increases totaling 115 basis points at the midpoint, we are reaffirming our same-store revenue growth forecast and are pleased to report that we are currently tracking slightly above the midpoint of that range. Now turning to the balance sheet. Our balance sheet remains strong. Our net debt-to-EBITDA has now declined to 6.1 times, which is one quarter ahead of our target due to stronger than anticipated growth in EBITDA. Based on our market rent growth outlook, we expect this metric to decline to the high five’s in 2016. In addition, we are currently evaluating our options to refinance $114 million of Fannie Mae credit-enhanced bonds in the fourth quarter. In doing so, we anticipate potential savings of $1.4 million annually over the 7-year term. We would incur approximately $6 million in write-offs, of which $4.25 million is non-cash. These costs will be excluded from core FFO but included in total FFO and are shown as non-core adjustments on S14 in the supplemental. As for our plans for the $350 million debt maturity in 2016, we have good flexibility with access to multiple options. For example, our $1 billion revolver has virtually no outstanding balance, and if we keep this debt floating, our variable-rate debt exposure will only increase to approximately 10% on a low average balance sheet. Although this is not a preference, if we were making this decision today, we favor refinancing most of the maturity with a five to seven-year term loan and/or a 10-year unsecured public bond execution, depending on the interest rate curve and the related risk. Lastly, we have classified one property as held for sale, our corporate headquarters in Palo Alto, which we expect to sell in the fourth quarter. We will be moving to a newly leased space in San Mateo. We’re presenting the final steps in the office relocation plans, which will consolidate the BRE corporate office in San Francisco with the Essex corporate office in Palo Alto. I will now turn the call back to the operator for questions.

Are you there, April?

Thanks. One of you can frame the 7% loss in the lease in a historical context. You mentioned last year it was 5%, but is this the largest loss to lease that you have seen at the end of September?

Hi Nick, it’s Mike Schall. I don't have historical statistics for each year going back a long time. However, I can tell you that July usually marks the peak for loss to lease throughout the year, while December typically sees the lowest rates. In July 2014 and July 2015, for instance, the loss to lease was 8%. The lowest point was in December, where December 2014 had about 4%, and December 2013 was around 4% as well. This gives you some context. These figures occurred during very robust periods. I've noticed loss to lease reach zero at the end of December, and I would estimate that a more typical high for loss to lease in an average year would be around 5% to 6%. Again, these years have been quite extraordinary from my perspective. I believe that 8% in July is nearing the highest we've historically seen in my nearly 30-year career.

Thanks. And just staying with that, the 6% economic rent growth outlook for next year is actually higher than the 5.6% you had predicted at the same time last year. So what gives you the confidence to make that prediction today?

Well, a couple things. If you go back to our original guidance that you noted for 2015, it was based on 2.5% percent job growth. If we are tracking, if you use September’s year-to-date numbers, they are at 3.3%. So we've dramatically outperformed that number and we are carrying momentum into this next year. Our view is that with a limited amount of supply and a supply-demand relationship moving in our favor, we will build pricing power. So there is a little bit of incremental pricing power just from the supply-demand situation and consequent impacts on market occupancy levels then the places where people want to live most.

Thanks.

Hi guys. It’s Austin Wurschmidt here with Jordan. You commented that conditions are strong as they were last year. Is it conceivable to think you would be able to push rents at a pace that was higher than what you achieved this year?

Again, this is Mike Schall. I would just go back to the job question and if we exceed the 2.5% job growth that is the basis for our 6% market rent growth, then yes, we would expect rent growth to be higher again. We are concerned about affordability and about all the issues with the global economy that were noted before. Although one compelling factor is the personal income growth that we are seeing, especially in the tech markets, which is in the 5% to 6% range. So if you're getting 5% to 6% personal income growth and rents are sort of growing at 8% or 9%, it doesn't have that bigger impact on affordability. And again, not everyone is going to get the big increase in income. The personal income growth is driven largely by new tech workers coming in, making a lot of money and displacing someone that is not seeing a big increase in their compensation, who has been forced to move further away from their deployment center. So this transition is ongoing through the rental pool. But if we bring in high-income tech workers in greater numbers than we have projected for 2016, then yes, we would expect rent growth to be higher.

Thanks for the detail there. And then you mentioned in your prepared remarks also about a decline in housing supply in 2016. And I was wondering if you could expand on that a bit and give a little bit of detail by market.

I don't think that we actually have much of a decline in supply. So, I'm not sure exactly what you're referring to. I think it’s very nominal. Who has those numbers? Let’s see ‘15 versus ‘16. I think the supply decrease is somewhere around like 0.1%, so overall. So, we are not expecting supply to decrease. Again, we don’t have complete certainty. We have some factors that could lead us to believe that supply could decrease, i.e. construction costs going up at 10% in each of the last two years. And John Eudy is here and he is looking for development deals every day, and he's having trouble with the underwriting because costs have moved so quickly and pro forma; it sometimes doesn't reflect the most current cost structure. So when John and I talk about new deals, we are finding it more difficult to underwrite. And if we are having trouble underwriting them, I can assure you others are as well.

Yes. Any interactions that we are seeing, cities are getting tougher and tougher. Nothing is going in the favor of oversupplying the market.

Thanks. And then just on your comments about the aggressive bidding going on for new deals. You mentioned being a net seller next year by a little bit about. Are there any markets that you are looking to lighten up in, and how should we think about the assets that you're taking to sellers? Are these more BRE assets or legacy assets?

I want to clarify that I don’t think we will be net sellers next year, but I’m not completely sure about that. I believe I mentioned we will likely sell more next year than we did this year. We consider two main factors: the relationship between REIT stock valuations and private real estate markets. If there's a significant difference between them and we expect the REITs to trade at a higher valuation than private markets, we will look to buy real estate. On the other hand, if our REIT stocks are performing well while private real estate values are not, we would aim to sell. Right now, we believe the valuations are relatively aligned. Regarding our real estate assets, we have very few that fall into the categories we are most eager to sell, which are substandard operating properties and marginal properties that somehow trade like better properties. However, we don't believe these assets will benefit when the economy shifts. Therefore, those are the targets for sale, while around half of our portfolio is considered irreplaceable and we are unlikely to sell them at any price. We use a ranking system to prioritize properties based on their desirability for sale, taking into account the capital dynamics, and that guides our disposition strategy.

Great. Thank you for the clarification and the details.

Thanks very much. I was wondering if you would have more emphasis on the pre-1995 entities that would be subject to rent controls if they were to be passed, based on my knowledge?

Hi, Dan. It's Mike Schall again. It comes up as a consideration. But I don't think it's one of the key considerations primarily because of California State Law. Again in California, state law mandates vacancy decontrol so even though you may have rent control upon move out, you are able to market to those people at that point in time. We operate in several rent control cities including San Francisco and Los Angeles. So, I don't think that would necessarily change things. Our experience in San Francisco, for example, in our rent-controlled buildings is that fewer people move out, so your turnover rates are lower, which means you can’t capture the loss to lease as quickly. That said, there are people that would have otherwise moved out of that building, if not for the subsidy, and would have either bought a home or moved somewhere else, and those people now occupy a unit, which effectively makes the availability of units that are vacating smaller and gives us more pricing power on the other side. So again, rent-controlled cities are not necessarily horrible for us as long as state law remains in place.

Got it. Okay. Thanks. And then I guess, I was wondering about the magnitude of the rent increases and the turnover, which clearly was down year-over-year. But just wondering in some areas such as Santa Clara and San Jose, where you’ve seen the high levels of rent growth, are you also seeing more move-outs on account of those rent increases? Or is it actually lower because of the strong income growth in those markets, so that it’s initially a function of the rent growth, but it’s more of the income growth that’s driving into that if those rent increases aren’t an issue.

This is Erik. I would say no, that we haven’t seen a significant increase due to financial reasons. If you look back over the last couple of years, that number has bounced around between 15% and 18% of people citing financial reasons, and that’s where it is today as well. The one caveat is that there has been some uptick in people citing relocation out of their area as the reason, and we believe that some of that is probably related to financial reasons, but again that hasn’t moved enough for me to believe that it’s significant.

Thanks so much.

Thank you.

Good afternoon, or I guess good morning out there. And Angela, welcome to the hot seat. Just quickly a few questions here. The first one, Mike, is you said that you’re considering increasing dispositions for next year. If we look at the past, you guys have harvested some of your funds over time, unloading meaningful parts of the portfolio. There is also a focus, I think, of Essex is to always grow FFO. So would you guys ever contemplate a transaction where you thought that the pricing was so dramatic that you think that to sell a property would result in earnings coming down, because you saw a significant part, even though it may generate huge gains for shareholders? Or is the view to always prune in smaller amounts and leave the larger portfolio stuff to joint ventures?

Yes, Alex, good question. No, I think if there is a compelling opportunity to sell assets and distribute through a special dividend, I think we would absolutely do that. Again, right now, we are at that parity based on the capital side where the stock has bounced everywhere. So maybe getting out of parity. But we’re at that point where there is no compelling arbitrage between the REIT stock price and the private real estate values. And so our motivation in that environment is not as great as it would be if share prices and private real estate values diverged as they have over the last several years. So there is some concern about whether shareholders will remember that we paid a special dividend and whether that will factor into our track record, but that’s a relatively minor concern. That said, if that’s the reality with respect to selling assets with large gains and distributing money, we will do it.

Okay. And then switching to Oakland, last cycle you guys did some investments over there. There was a high-rise tower that you guys got involved in. And then if memory serves, I thought you guys sort of exited the market or weren’t as pleased with the results that you’ve got. But at the beginning of the call you guys spoke highly of the market as far as just the accessibility to San Francisco and the low-cost option. So is this a market that we should see you guys increasing investment in, or is it still, even though it may be attractive right now, you might hesitate to put longer-term REITs there?

Yeah, I think there is maybe a little definitional issue here. The City of Oakland is different from the Oakland Metro. The Oakland Metro includes Fremont and Pleasanton and Walnut Creek, etcetera. We’re seeing that the Oakland Metro, which generates the 12.7% same-store revenue growth, is the broader metro, and there are places within that metro that are very high quality and accessible to San Francisco and some of the major job hubs. The one thing the Bay Area really got right was the Bay Area Rapid Transit District, which allows trains to go from a variety of locations into San Francisco. Many people, including myself, are living in Fremont, which is in the Oakland MSA, and getting to San Francisco is a lot easier than driving. It’s the one thing they got very right here. So there are locations within the Oakland Metro area that we think are high quality and durable in the San Francisco context. We also believe, as John mentioned, that as office costs increase, some employers will explore different options benefiting some of the other metros, including Downtown Oakland. But we would be highly selective in Oakland and maybe more willing to invest in some other locations within the Oakland Metro.

So as Downtown Oakland is not something you may revisit or right now it’s not on the radar?

To clarify, we have a high-rise building that we built down the street from the one you’re referring to. And I don’t think we’re looking at anything else in Downtown Oakland. It has to be very specific because there are some areas in Downtown Oakland that we really do not like. And so we would avoid them, but we would be highly selective in Oakland and less so on some of the other locations within the broader Oakland Metro.

Okay. Thanks, Mike.

Thanks.

Hey, guys. Just quickly on the same-store guidance range, obviously on the 443,000 units, the ranges were unchanged, but for the 28,000 units OpEx was revised lower, implying that on the BRE portfolio, there was a revision higher, and hence the range was unchanged. I was just wondering what was driving that.

No, it’s not because of that. We revised the Essex same-store because we have realized the savings from the first quarter. We have not revised it for the combined portfolio, because we are still awaiting primary taxes, the biggest component of expenses. We’ve only received 75% of the taxes from the DRE acquisition. Although that has come in slightly favorable, there is still a quarter left, so we are just waiting on that before we make any decisions.

Makes sense. That’s helpful. And then on the insurance reimbursement accounting, there was about $3.1 million on the income statement and then call it 1.8 was backed out for FFO and then another cost, 600 was backed out for core. Can you clarify what that was?

Yes, happy to. We did move the geography a little bit this quarter, but the net, net is all non-core. We added a line in one of the supplements showing insurance reimbursement, and because of that, we did a prior period adjustment. So, it looks like some got added in four, but it wasn’t in Q1. We can talk after the call, and I can walk you through the math.

Sure. Happy to follow up on that. And then quickly, what was the recurring CapEx number for the quarter?

The recurring CapEx is about $18 million for this quarter, and you will see that in our Q3 that’s coming on next week.

All right. Great. Thank you very much.

Hey, guys. Going back to your market forecast from the last page of your supplement. You talked about how job growth versus supply growth still really is what’s driving your strong rent growth forecast for 2016. If you had to think about the risk, though, and where you might be wrong, where would you be the least certain about your projections? Are there any of those markets that you think have more risk than others, whether it would be the upside or the downside?

Hi. This is Mike. That's a good question. We think about risk in two different ways. One is the risk of a major economic blip, causing all job growth across the nation to go to zero. In that case, the market with the highest overhang of new construction, as a percentage of stock, would be hit the hardest. So, Seattle, from that perspective, at 1.3%, has the most overhang with respect to deliveries, particularly in an environment where demand or job growth goes to zero across the nation. In terms of the supply side of the equation, we expect to do enough diligence to have a high degree of confidence that the supply numbers in this document are accurate. One piece to remember, you can throw up or build single-family homes relatively quickly if you can entitle them, whereas apartments and condos take longer lead times and construction times can take a few years. So we feel confident about those estimates. We think our expected case scenario is balanced, and our focus is on maintaining consideration of our job growth forecast. None of us have a crystal ball, but we try to incorporate a little bit of conservatism. Last year, we were somewhat conservative in our approach, but this year we are not estimating that as strongly. We expect the West Coast coastal metros to outperform the national average by 20% to 25%, and this seems to be a rational relationship over a longer period.

Okay. And absent any nationwide economic slowdown, are there any of the three major geographies for you that are more or less risky in terms of job growth, just from market-specific issues?

Certainly, I mean, Southern California has a more diverse economy, so you would say, the chances are that if we are going to have widespread dislocation in Southern California, it has to come from a variety of factors. Obviously, we have more tech focus in Northern California and Seattle, so you would say if something were to happen to that technology sector, we would have somewhat greater exposure just regarding the components that drive that economy. I would say the same is true; I mean, all of this divergence within the economy, where certain sectors are performing well and others are struggling, look at what happened with energy, for example. So anything that has a greater concentration in any part of the economy could potentially be more exposed.

Sure. That makes sense. And then last one here is, if we think about upside from, I mean, redevelopment and also optimizing lease expiration in the BRE portfolio, how much of the tailwind do you think that could be for same-store revenue growth in ’16?

This is John. The theory on the renovation side will probably add about 50 basis points to the growth rate toward the second half of ’16. It will still take a little while to ramp up and that’s the impact to the bottom line. As for the expirations in better order and better amenity pricing, that’s an ongoing process that took us several years for our revenue management team to make adjustments in the Essex assets. We see that continuing on for the next couple of years. I can’t quite quantify the impact other than to say it is an issue.

All right. That’s great. Thanks, guys.

Hi. Great quarter. Looking into next year, I mean the BRE portfolio integration, in terms of your expense line items. Any visibility at this point on which line items we may see kind of shift one direction or the other as different cost-saving initiatives take deeper effect? And also kind of what G&A run-rate expectation is with these same factors?

Yeah. This is John again. I’ll be careful not to get into forward guidance but just to give some flavor. Right now Erik and his team have worked very hard on managing expenses across the portfolio, and we ultimately have our Essex and BRE expenses per unit basis pretty close. On a going forward basis, we don’t expect large changes that relate to one portfolio or the other. We are working on the Phase III of the merger integration program, which includes procurement. We do expect to see some savings there. We don’t have our hands around all of that just yet. We also have better set resource management as we mentioned previously, and that is largely focused on the BRE portfolio. We expected that to save as much as $100 per unit in utilities as we implement that. That’s pretty tedious; it takes several years to implement each of the programs and to do it well. So that will work into the BRE portfolio over a three-year period, some of which we’ve already completed.

And any impacts noticeably on the G&A front with the office consolidation?

We are in the process of rolling up our 2015 budget. On the office front, I think G&A as a whole will probably see a modest increase but it’s not going to be materially different from what we’re seeing right now.

I think there will be a little bit of geography difference because we’ll take the proceeds from the sale of the office building and reinvest them, and that will offset some of the G&A from the office relocation. So we expect the net core FFO impact to be modest, but the geography will differ.

Hey, sorry about that. Good quarter everyone. Here we go. Real quick on the job forecast, how did you derive that? Was that from a third party or were you looking at individual office leasing data that you’re seeing and coming up with your own forecast? How granular does it get?

This is Mike. Wes, we use a variety of data vendors, economy.com, Rosen, and a variety of others. We try to build a consensus as to the U.S. job growth. From there, we look at historical relationships to predict what will happen on the West Coast in our metro areas. We’re considering specific sectors, so it’s not granular in the sense that we have estimates for HP specifically, but it starts with broader macro expectations for the U.S. and then drills down into sectors to try to predict outcomes. We take the information and create a supply-demand model for each of our metros, our 25 submarkets, and then rank them based on what we expect rents to do over the next four years which informs our capital allocation decisions.

Okay. And then you mentioned more about rent control this quarter as well. Quick question for you on that. How much of your tenant base is represented by customers that you don’t want to displace, such as the teacher or the police officer versus the tech worker, of course, who is growing their income faster than you’re increasing rents?

This is purely based on personal observations, but I believe it plays a major role in our rental sector. In Northern California and Seattle, I estimate that it falls within the 30% to 40% range. This situation occurs as high-income individuals move in and rent more expensive units, which displaces those who aren't experiencing significant income growth and must relocate further away. I see this as a typical aspect of the market. I also think that California could greatly benefit, leading to a more robust economy, with increased housing production.

Okay. Thanks a lot.

Thanks. Mike, since it's in Palo Alto, which is at the center of venture capital, I'm curious about what you're hearing from people regarding the recent data showing a decline in venture capital funding, with fewer deals and start-ups. Are you viewing this as a leading indicator for the economy, and what’s your perspective on this discussion?

Yeah, it’s a good question. We are somewhat concerned about venture capital, and we monitor it closely. We’re less concerned about valuations and whether there's an exit into the public market or liquidity as it relates to those entities. We’re more concerned about how many people do they have, how many employees do they have, and how many people need housing. In that light, I can’t express how different the current environment is from the internet boom in the late '90s. If you take the top 20 unicorns, for example, I believe they employ somewhere around 26,000 people. If you take the five public companies — Oracle, Apple, Cisco, Google, Facebook — their combined workforce is about 367,000. We are primarily concerned with big tech companies and what they are doing. It’s incredible; we see Google doing various things with Alphabet and different technology-related spin-offs, which provides us some level of comfort that tech hiring should not fall off quickly. This is why we feel comfortable with our expectations for 2016 and our market outlook — there seems to be a lot of activity and a lot of money in the area pursuing that activity.

All right. Good points. I guess turning down to Hollywood, the Nickelodeon site you guys have, can you just remind us what sort of ultimate cost on that project is? And a little bit more about where you think maybe land value is, there has been a lot of site change around there recently and on the market right now for sale. And then just lastly, I want to be clear, whether or not that site is actually listed in your land held for development or if it’s still some other piece of real estate because at one point there was a lease on it?

This is John Eudy. In general, you are aware of the specific location in Hollywood. It is ground zero for Hollywood locations. It has been in a number of other transactions in the Hollywood area that have been completely different. As for it being a future investment, I believe it still has investment because we have kind of a lease with Nickelodeon.

Yes.

In terms of our basis, we believe it’s well below what we would be able to trade it for today if we choose to go in that direction, and we are under the radar regarding the height of the building we are aiming and visibility regarding pushback on the entitlement side. So, long and short, we expect sometime late next year to transfer it over from a leased investment to an active land development transaction.

Okay. I guess that’s helpful. But anything you can share on just sort of the ultimate plans for what you’re going to build there, and there are — I know we can look at land comps in the market, but just some idea of how much you could actually build on that site?

Approximately, 200 units is what we are going for, and it fits within the SAR fairly nicely. Until we get it all done, we don't like to project assumptions and announce until we are ready.

Okay. Got it. Thanks, guys.

Thank you.

How meaningful is the impact of the low property tax relative to Procter’s team in ranking your potential dispositions for next year?

Hi, Conor. It’s Mike Schall. It is a factor. Procter’s team gives us a fair amount of momentum regarding what buyers will need to pay if they purchase an asset. So I would say that number one is a factor. Number two, we are looking for a variety of transactional approaches to avoid a Procter assessment. This could involve selling less than half, say 49%, of the portfolio of assets to an institutional investor. There are some ways we believe we can manage that, but the management of Procter assessments is a factor for sure.

And then on the dispositions for next year, is there any thought to condos yet or is it still too early?

I think it is still a bit too early. Again, we can only pull that trigger one time. We targeted a 30% to 40% premium to apartment values to make it worthwhile to convert from apartments to condos. We are not seeing that 30% to 40% premium anywhere. Although in San Francisco and in a few other Bay Area cities, we are beginning to see 10% to 15% premiums of condo values over apartments. We are starting to see that divergence; it has taken longer, not because those condos have done poorly, but because apartments have performed so well. We continue to monitor the situation.

Okay. Thank you very much.

Thanks, Conor.

Okay. Thank you. Well, in closing, I want to thank you once again for joining the call. We wish you and your family a safe and enjoyable Halloween and look forward to seeing many of you at the NAREIT Conference in a few weeks. Good day.