ESSEX PROPERTY TRUST (ESS) Earnings Report: Q1 2016 ... filePrice as of Event Date: 222.93 ... ESSEX...

CompanyName:EssexPropertyT rustIncCompanyTicker:ESSSector:FinancialIndustry:RealEstate

EventDescription:Q12016EarningsCallMarketCapasofEventDate:14.67BPriceasofEventDate:222.93

©2014TheStreet,Inc.Al l R ightsReserved Page1of23

ESSEXPROPERTYTRUST(ESS)EarningsReport:Q12016ConferenceCallTranscriptThefollowingESSEXPROPERTYTRUSTconferencecalltookplaceonMay2,2016,09:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

MichaelSchall;EssexPropertyTrust;President&CEOJohnBurkart;EssexPropertyTrust;SeniorEVPofAssetManagementAngelaKleiman;EssexPropertyTrust;CFOJohnEudy;EssexPropertyTrust;Co-ChiefInvestmentOfficer&EVP,Development

OtherPart icipants

AustinWurschmidt;KeyBancCapitalMarkets;AnalystNickYulico;UBS;AnalystNickJoseph;Citigroup;AnalystRobStevenson;JanneyCapitalMarkets;AnalystJohnKim;BMOCapitalMarkets;AnalystIvyZelman;Zelman&Associates;AnalystTomLesnick;CapitalOne;AnalystAlexanderGoldfarb;SandlerO 'Neill&Partners;AnalystWesGolladay;RBCCapitalMarkets;AnalystDrewBabin;RobertW.Baird&Co.;AnalystTayoOkusanya;JefferiesLLC;AnalystRichAnderson;MizuhoSecurities;AnalystKrisTrafton;CreditSuisse;AnalystConorWagner;GreenStreetAdvisors;AnalystKarinFord;MUFG;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheEssexPropertyTrustfirstquarter2016earningsconferencecall.Asareminder,today'sconferencecallisbeingrecorded.

Statementsmadeonthisconferencecallregardingexpectedoperatingresultsandotherfutureeventsareforward-lookingstatementsthatinvolverisksanduncertainty.

Forward-lookingstatementsaremadebasedoncurrentexpectations,assumptionsandbeliefs,aswellasinformationavailabletotheCompanyatthistime.Anumberoffactorscouldcauseactualresultstodiffermateriallyfromthoseanticipated.

FurtherinformationabouttheseriskscanbefoundintheCompany'sfilingswiththeSEC.

Whenwegettothequestion-and-answerportion,managementasksthatyouberespectfulofeveryone'stimeandlimityourselftoonequestionandonefollow-upquestion.Itisnowmypleasuretointroduceyourhost,Mr.MichaelSchall,PresidentandChiefExecutiveOfficerforEssexPropertyTrust.




Thankyou,Mr.Schall,youmaybegin.

MichaelSchall(President&CEO):

Thankyouforjoiningustodayandwelcometoourfirstquarterearningsconferencecall.JohnBurkartandAngelaKleimanwillfollowmewithcommentsandJohnEudyishereforQ&A.I'llcoverthefollowingtopicsonthecall.First,commentsonourQ1resultsandmarketconditions;second,investmentactivities;andfinally,anupdateonrentcontrolproposals.

Yesterdaywewerepleasedtoreportcontinuedstrongoperatingresultsforthefirstquarterof2016.Forthepastseveralyears,oneofourprimaryoperatinggoalshasbeentogrowcoreFFOpershare.IcongratulatetheEssexteamforaccomplishingthatgoal,withover100%increaseincoreFFOpersharesinceQ12011.

Generallyspeaking,theWestCoasteconomycontinuestoperformwellandweareontracktoachieveour2016marketrentforecastshownonpageS16ofthesupplement.Recentjobreportshavegenerallyequaledorexceededourexpectation.

InSouthernCalifornia,wehavemodestlyincreasedourmarketrentgrowthexpectationsfrom5.2%to5.5%,againmostlyrelatedtobetterthanexpectedjobs,representingmoreevidencethatourthesisforslowandsteadygrowthcontinues.

ForNorthernCalifornia,weareloweringoureconomicrentgrowthforecastfrom7.5%to6.5%.Asnotedonourlastcall,supplydeliveriesduringthetypicallyweakfourthquartercausedlowerrentgrowthinNorthernCalifornia,mostlyfocusedonthreesubmarkets,southofMarketinSanFrancisco,thepeninsulasouthofSanFrancisco,andNorthSanJose,whichcombinedaccountforapproximately7%ofoursame-storeNOI.

AsreflectedinourQ1results,weexperiencedachoppybutnicereboundfromQ4.MarchandAprilhavebroughtrenewedpricingpressurefocusedonthesethreesubmarketsintheformofgreaterconcessions,oftenequaltosixtoeightweeksofrent,asnewlydeliveredapartmentspushrapidabsorptioninacompetitivemarket.

Thegreaterconcessionsprovideenoughincentivetodrawpeopleoutofnearbyproperties,pressuringpriceforstabilizedcommunities.Apartmentsupplydeliveriesandhiringareinherentlylumpyand,muchlikeQ42015andthepastcoupleofmonths,conditionscanchangequickly.JohnBurkartwillelaboratefurtherinhiscomments.

TurningtoSeattle.WehavesignificantlyincreasedtheeconomicrentforecastforSeattlefrom4.9%to6.1%,asitsgreatjobgrowthandstrongeconomyhasprovidedthedemandtoabsorbSeattle'ssignificantnewapartmentpipelineathigherthanexpectedrents.

Ontothesecondtopic,investments.Duringthequarterweoriginatedapreferredequityinvestmentonanapartmentdevelopmentconsistingof494apartmenthomeslocatedinGlendale,California.Theinvestmentprovidesa12%preferredreturnonoutstandingprincipal,withatotalcommitmentof$47million.

Weareworkingonotherpreferredequitytransactions,asdevelopersarefindingthemselvesinneedofadditionalequitygivingconstructioncostincreases,moreconservativeconstructionlendingstandards,andmorechallengingandexpensiveentitlementprocesses.Marketclearingcapratesfordevelopmentdealstypicallygeneratearounda4.5%to4.75%untrendedcaprate,whichisbelowouryieldthreshold.Wecontinuetolookfordevelopmentopportunitiesthatmeetourunderwritingcriteriaandwearenotlikelytolowerourtargetsinthenearterm.




There'sbeenwidespreaddiscussionofincreasingcapratesintheWestCoastmarket.Twoofourrecentacquisitions,MioandEnso,bothinSanJose,werecitedbybrokersasexamplesofcapratesthatarehigherthancomparablepropertiestradingafewmonthsearlier.Wetakethisasacomplimentthatweacquiredpropertyatabetterthanmarketcaprate;however,inourevaluationofmanydealsthatwehaverecentlyunderwritten,thevalueofMioandEnsodidnotchangemateriallyinthepastseveralquarters.

Inourexperience,caprateschangeslowly,primarilybecausebuyersandsellersdon'tchangetheirpricingexpectationsquicklyoreasily.Rather,buyersandsellersneedtobeconvincedthatmarketconditionshavepermanentlychanged.Financialdistressoftenshortensthisprocessforchangingcaprates,butcurrentlythereisalmostnodistressinwell-locatedapartments.Tothecontrary,theamountofpositiveleverageavailabletobuyersatexistingcapratesrepresentsacompellingopportunityinthisyieldstarvedenvironment.

Duringthequarterandasoutlinedinthepressrelease,weacquiredtwopropertiestofacilitate1031exchangesandsoldtwopropertiesaspartofaportfoliocullingprocess.Similartolastquarter,Aqualitypropertyandlocationstradedarounda4.25%caprateusingtheEssexmethodology;butfromtimetotime,moreaggressivebuyerswillpaysub4%caprates.Bqualitypropertiesandlocationstypicallyhavecaprates25-50basispointshigherthanAqualityproperty.

Nowontomythirdtopic,whichisrentcontrol.TherehavebeenseveralnewdevelopmentswithrespecttorentcontrolinvariousCaliforniacities,mostlyinnorthernCalifornia.Mostnotable,theCityCouncilinSanJosehasamendedtheexistingrentstabilizationordinancetolowerthemaximumrentincreaseonrenewalsto5%,from8%previously.

TheamendedSanJoseordinancealsocontainsaprovisiontobankoraccumulateupto8%ofpotentialrentincreasestobeusedduringperiodsthatmarketrentincreasesarebelowthe5%maximum.Finally,theSanJoseordinanceisapplicableonlytopropertiesbuiltbefore1979.

Oakland,whichalsohasanexistingrentstabilizationordinance,recentlypassedanemergency90-daymoratoriumonrentincreases,applicableonlytopropertiesbuiltbefore1983.InadditiontothespecificactionsinSanJoseandOakland,webelievethattenantsrightsgroupswillattempttowinvoterapprovalreferendumsthatwillopposerentcontrolinseveralcities.

Itisimportanttonotethatalllocalordinances,includingtheactivityjustdescribed,mustcomplywithstatelawwhichmandates,amongotherthings,thatvacantapartmentsareprohibitedfromrentcontrolandrentcontrolcanonlybeappliedtopropertybuiltbefore1996.WebelievethatthesevariousordinanceswillhavelimitedimpactonEssex,primarilybecausethevastmajorityofourpropertiesarenewerthantherentcontrolcutoffdatesinthevariousstabilizationordinances.

Inaddition,becauserentcontrollimitsrenewalrentincreases,residentsstaylonger,whichreducesturnoveratrentcontrolledproperty.Reducedturnovermeansthatfewerapartmentsareavailabletorentforpeoplemovingintothearea,whichlikelypushesrentsupwardontheavailableapartmentinventory.Thus,renewalswilloftenoccuratbelowmarketrates,butthisimpactispartiallymitigatedbyhigherrentsonnewleases,reflectingtheunintendedsecondaryeffectofrentcontrol.

I'mincrediblygratefulforJohnEudyandmanyEssexteammembersforattendingandadvocatingonbehalfoftheCompanyandtheindustryatseveralCityCouncilmeetings.Themeetingscontainalotofemotionandoftenendwellpastmidnight.

Thatconcludesmycomments.Thankyouforjoiningthecalltoday.IwillnowturnthecallovertoJohnBurkart.




JohnBurkart (SeniorEVPofAssetManagement):

Thankyou,Mike.

Wehadagoodquarter,deliveringtotalsame-storerevenuegrowthof7.3%andNOIgrowthof8.8%.Ourrenovationteamgotofftoagreatstartin2016.Weincreasedthenumberofunitsrenovatedinthesame-storeportfolio229%,from247unitsinthefirstquarterof2015to813unitsinthefirstquarterof2016.Theincreasedunitturnsnegativelyimpactedourvacancyratebyabout5basispointsforthequarterandthesame-storeportfoliocomparedtotheprioryear.

NowIwillsharesomehighlightsforeachregion.StrongdemandintheSeattlemarket,fueledbyemploymentgrowthof3.3%inMarch,whichisaboveourexpectations,enabledthemarkettoabsorbthenewsupplyandcontinuetogrowrevenues.OurSeattleportfoliogrewrevenue7%inthefirstquarterof2016comparedtothefirstquarterof2015.

Wemadethestrategicdecision,duetothemarketstrengthinthefirstquarter,toemphasizeachievedrentalratesoveroccupancyandwecontinuetodosoasweenterthespringleasingseason.Thatdecisionispayingoffwell,withbetterthanexpectedperformance,anditwillpositionuswellgoingforward.

Submarketsperformedsimilartolastyear,withtheCBDgrowingrentalrevenueabout4%inthefirstquarterof2016comparedtothecomparablequarter,andtheEast,NorthSeaside,NorthandSouthsubmarketsareallgrowingbetween7.5%and9%forthefirstquarterof2016,comparedtotheircomparablequarter.

IntheBayArea,asImentionedpreviously,ourexpectationsforthefirstquarterwerethatthemarketwouldbechoppyandthatitwouldbefollowedbythenormalseasonalpattern.However,themarketiscurrentlysofterthanexpected.Oursame-storeachievedrentsinMarchof2016wereabout6%overachievedrentsinMarch2015.AndtheachievedrentsinAprilof2016areroughly4%overthecomparablemonth,duetothedifficultcomp.

TheBLSsurveyscontinuetoshowstrongemploymentgrowthintheBayArea.TheindustrysurveyreportedMarch2016employmentgrowthratesof4%,2.4%and3.8%forSanFrancisco,OaklandandSanJoseMDs,respectively,whichareaboveourexpectations.Thehouseholdsurveyreportedunemploymentdeclinedanaverageof60basispointsineachMDyear-over-year,whichisconsistentwithstrongjobgrowth.Bothreportsindicatestrongemploymentmarket,whichshouldbeabletoabsorbtotalsupply,multi-familyandsinglefamilyunits,andcontinuetogrowrents.

Itappearsthatinadditiontothelumpinessofthemulti-familysupplydeliveriesduringthelowdemandperiod,otherfactorsarecurrentlyimpactingthedemandintheBayAreamarket,suchasdoublingup;anincreaseinrenterschoosingtorentsinglefamilyhomes,whichenablesmoreroommatestosharetherent;theone-timeimpactofthecrackdownofstudentVisaprogramwhichhasreduceddemandfromoutsidethecountry;andanincreaseintheflexibleworkarrangementenablingtheemployeestotelecommutefromoutsidethenormalcommutezone.

Wehavenotedaslightchangeinthegeographiclocationoftheopenpositionslistedbythemajortechcompanies.There'saslightincreaseintotalopenpositionsbetweenWashingtonandCalifornia;however,Californiaopenpositionshavedeclinedslightly,whiletheWashingtonopenpositionshaveincreasedslightly.ThisshiftmaybetheproductofthetightlabormarketandhousingmarketthatwehaveintheBayArea.

SouthernCaliforniaregioncontinuestoperform,drivenbystrongjobgrowthexceedingourexpectations.Asexpected,themomentumwesawin2015continuedinto2016,enablingustoachievea




revenuegrowthof6.1%inthefirstquarterof2016comparedtothecomparablequarter.

IntheLAMSA,LACBD,whichisimpactedbyapocketofsupplygrewrentalrevenue4.9%forthefirstquarterof2016comparedtothefirstquarterof2015.AndtheWoodlandHillssubmarket,whichhadthegreatestpositiveimpactsfromPorterRanchrelocation,performedatthetopoftheMSA,withanincreaseinrentalrevenuesof8.6%forthefirstquarterof2016comparedtothecomparablequarters.

Weestimatethattheincreaseddemandforshort-termrentalsrelatedtothePorterRanchleasesincreasedtheyear-over-yeargrowthratefortheLAMSAportfoliobyabout30basispointsduringthefirstquarterof2016.

Currently,ourportfoliooccupancyisat95.8%andouravailability30daysoutisat5.4%.ConsideringtheunderperformanceintheNorthernCaliforniaportfolio,wearecautiouslyoptimisticaboutthespringleasingseason.

ThankyouandIwillnowturnthecallovertoAngelaKleiman.

AngelaKleiman (CFO):

Thanks,John.

I'llstartwithourfirstquarterresults,thenprovideanupdateonrecentcapitalmarketsactivities.

I'mpleasedtoreportthatourcoreFFOforthefirstquarterexceededthemidpointofourguidanceby$0.08pershare.Although$0.04wasrelatedtotimingofexpenses,theremaining$0.04wasprimarilydrivenbystrongerthananticipatedoperations,whichleadtoanotherquarterofsolidoperatingresults.

Alsointhefirstquarter,wedeclaredaquarterlycommondividendof$1.60pershare,whichisan11%year-over-yearincreaseandrepresentsour20thyearofconsecutivedividendgrowth.

Movingontorecentcapitalmarketsactivities.InApril,weissued$450millionof10-yearseniorunsecurednotesattherateof3.375%perannum.Thenetproceedsfromtheofferingwereusedtopayoffthebalanceonourlineofcredit,redeemtheseriesHpreferredstock,andfundothercorporateactivities.

Whilethereisatemporarymismatchonthetimingoftheuseforsomeportionoftheproceeds,webelieveitwasanopportunetimetoenterthedebtmarket.

Ouronlyremainingmaturitythisyearis$200milliontermloanwhichcomesdueinNovember.Withzerooutstandingonour$1billionlineofcreditandlimitedneartermdebtmaturities,ourbalancesheetiswellpositionedtobeopportunistic,asweevaluatefutureinvestmentandrefinancingalternatives.

Forthefullyear,wearereaffirmingourguidanceonsamepropertyrevenue,expenseandNOIgrowth,andthemidpointofourcoreFFOpershareof$10.92.Lastly,Iwouldliketohighlightanewpage,S12.1inoursupplemental,whichprovidesadditionaldisclosuresonourrevenuegeneratingandnon-revenuegeneratingCapExspending.

Wehopetheseenhanceddisclosureswillbebeneficialtotheinvestmentcommunity.

IwillnowturnthecallbacktotheOperatorforquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)




JordanSadlerfromKeyBancCapitalMarkets.

AustinWurschmidt (Analyst-KeyBancCapitalMarkets):

Hello,guys.It'sAustinWurschmidtherewithJordan.Onthepreferredequitydeals,Iwasjustwonderingifyoucouldgiveusasenseofthenumberofdealsyou'relookingatandthepotentialmagnitudeoftransactions.


Sure.ThisisMikeSchall.Wearelookingatseveraldeals,sosomewherebetweenaroundfivedealsgoingforward.Previouslywehaveestablishedanoverallcaponwhatwewouldconsiderat5%ofenterprisevalue.Ithinkattheendoflastquarterweweresomewherearound$140millionfundedonthepreferredequityinvestments,andsowehavequiteawaystogo.Idon'tthinkwe'llgetanywhereclosetothecap.


That'shelpful.Thanksforthedetail.Andthenontheaffordablehousing,doyouthinkatanypointthatitspurslooseninginpermittingorzoningformulti-familyhousingintheBayArea?


Again,it'sMichaelSchall.AndJohnEudy'shereandhemayhaveacommentonthis,aswell.Itseemslikealltheforcesareworkingagainstthat.Numberone,theentitlementprocessisjustverychallenging.Ifanything,therearesomecitieslikeSanFranciscothatwouldliketobumpupthenumberofunitsthatarededicatedtobelowmarketrateunits.Andconstructioncostsaregoingupatdoubledigitrates.Soitwouldbedifficulttosee,especiallywithrentsmoderating,alotofmomentumtowardmoreapartmentdevelopmentgoingforward,atthispointintime.


Thanksfortakingthequestions.


Thankyou.

Operator :

AndournextquestioncomesfromthelineofNickYulicofromUBS.

NickYulico (Analyst-UBS):

Thanks.IjustwantedtogobacktothecommentJohnmadeabout--IwasabitconfusedaboutApril--Ithinkyousaidsomethingabout4%year-over-yearrents.WasthatfortheentireSanFranciscoBayarea?

JohnEudy(Co-ChiefInvestmentOfficer&EVP,Development):

Yes,thisisJohnspeaking.ThatwasforNorthernCalifornia.AndsoeffectivelywhathappenedisrentsbetweenMarchandAprilwerebasicallyflatonayear-over-yearcomparison,becauselastyearnormallyseasonallyrentsmoveupinApril,thatmeansthatourcomparisonwentfrom6%to4%.AndsothatflatnessiswhatIwascommentingon,whichisuniqueinthecontextoftheseason.Soit'sashortwindow,butthat'swhatwe'reatrightnow.





Andthat'syourblendednewandrenewalrentgrowth?


No,that'snewonly.Ourrenewalsareinthe6.5%zoneinNorthernCaliforniaatthistime.


Okay.Okay.Ijustwantedtobeclearonthat.AndthencanyoujustremindusintheentireNorthernCaliforniaregionwhereyourrentsinplacetodayareversusmarket?


Youmeanofflease?


Yes,right.


Ihavethatnumber.ThisisMikeSchall.NorthernCalifornialostalease.Sothedifferencebetweenscheduledandmarketrentsis4.8%.Ayearago,itwas8.1%.


Okay.Great.Thanks,Mike.


Thankyou.

Operator :

OurnextquestioncomesfromthelineofNickJosephfromCitigroup.

NickJoseph (Analyst-Citigroup):

Thanks.Justonequestiononguidance.Ithinkforthelasttwoyearsafterthefirstquarter,youhadbeatenthefirstquarterandthenyouraisedforthefullyear2016,recognizingpartofthebeatinthisfirstquarterwastiming.Whatwereyourthoughtsonnotrevisitingoverall2016guidanceatthispoint?


Hello.It'sMikeSchall.IthinkJohnBurkart'scommentscoverthat,tosomeextent.Itwasthatslowdownfrommonthtomonth,actuallythroughthefirstquarterandintoApril,thatwasconcerningus.Andthere'sacoupleofotherpieces,too.OneisthatourevaluationofapartmentsupplyindicatesfurtherlumpinessinQ2andQ3.SoroughlyintheSanFranciscoMSA,3,600unitsgetdeliveredinQ2and2,700inQ3.Soroughly70%oftheexpectedannualdeliverieswillhappeninQ2orQ3.Sowe'reconcernedaboutthatandthesignificance,sinceweturnorreneworturnaround50%oftheleasesinthesenextseveralmonths,thathasaprettysignificantimpactontheoverallresults.

SoIguessperhapswe'rebeingoverlycautious,butthosewerethefactorsthatleadustodothat.Andactually,letmeaddonemorefactor.Andthatisoverallsupplyanddemand,asyoulookatthenumbers,appearstobedisconnectinginsomeway.Asanexample,ortogothroughthenumbers,theBayAreaisexpectedtoproduceabout93,000jobsin2016.Thatwouldordinarily,ata2-to-1,lookingatallhousing,




notjustapartments,wouldgiveyou46,000unitsofdemandagainstabout20,000apartmentsandhomesbeingdeliveredintothemarketplace,soabouta2-for-1relationship.Sothereshouldbesufficientdemandtoabsorbthesupplyasitcomesonboard,yetwhatwe'reseeinginthemarketplaceisthatthere'smoreconcessionsandthatthesupplyisnotbeingabsorbedaseasilyasweotherwisewouldexpect.Sothatsupply/demanddisconnectisofconcerntous,couldbeindicativeofperhapsemploymentisslowing,butithasn'treallyhitthenumbersyet.

InthelastmanyyearsthatI'vebeenhere,itseemsthatsometimesweseechangesinthemarketplacebeforetheyactuallygetreportedinthenumbers.Sothosewouldbealittlebitofbackgroundonwhywedecidednottochangeguidance.


Thanks.Appreciatethecolor.Andthenthespreadintermsofsame-storerevenuegrowthbetweenNorthernCaliforniaandSouthernCaliforniacontinuestocontract,forthereasonsyou'vediscussed.DoyouexpectatanypointthisyearforSouthernCaliforniatoactuallyoutperformNorthernCalifornia?


Yes,thisisJohn.It'shardtotell,right?WerightnowareexpectingthatNorCalwillfollowseasonalpatterns,asMikelaidout.There'salotofstrength,ifyoulookatthejobsversusthesupply.Buthonestly,it'snotnecessarilyworkingoutthatway.Soyes,ifthere'sayearthatithappens,thisyearisSouthernCalisstrongerthanexpectedandisdoingverywell,itmighthappensomewheredownthelinethisyearorinto2017.


Thanks.


Thankyou.

Operator :

AndournextquestioncomesfromthelineofRobStevensonfromJanney.

RobStevenson (Analyst-JanneyCapitalMarkets):

Goodafternoon,guys.CanyoutalkalittlebitaboutLACountyresults?Wasitstrongacross-the-boardorweretherepocketsofrelativestrength,relativeweaknessinthequarter?Obviously,it's7%plusofrelativeweaknessisprobablyastrongstatement.ButwherewithintheportfoliowasthebestperformanceinLACountyandwastherenoticeablebetweensomeofthesubmarkets?


Yes.Overall,thesubmarketswerefairlyconsistent.However,ifwe'rereallybreakingitdownclearly,theWoodlandHillsareagotsomebenefitfromPorterRanch,andsothatmovesitup.Itdoesn'treallymovetheneedlesomuchasitrelatestoEssex,butthatenabledthatsubmarkettomoveupalittlebit.YoumightseeitinsomeoftheAxionumbers.Andthenofcourse,thedowntownareaisalittlebitonthelowside,again,wehavesupplygoingininthatmarket,butstilldoingstrong.Overall,SoCalasabigpictureisdoingwell,asisLACounty.

Really,it'sinteresting,therewasnotalotofchanges.AndifyoulookattheBayArea,it'salittledifferent.TheBayArea,youclearlyhaveSanFranciscoisunderperformingandthenyouhaveothermarkets,other




submarketsintheBayAreaaredoingstronger.SoCalwasmuchmoreconsistent.


Okay.Andthenintermsoftheshadowdevelopmentpipeline,howmanyunitsareyouworkingthroughentitlementprocessthroughthatcouldstartinthenextyear,yearandahalforsooutthereversusbasicallyexhaustingyourlandsupplyatthispoint?


ThisisMike.Andagain,JohnEudymaywanttoaddtothis.Ourviewisthatwearemoreaggressiveondevelopmentatthebottomofthecycleandwescaleoffaswegotothetopofthecycle,andsowedonothaveasignificantlandinventoryorlandbankatthispointintime.Intermsofdealmaking,IknowJohnislookingatdealsthatarefullyentitled,readytogo,wherewe'renottakinganycostrisk.Becauseagain,constructioncostsaremovingsorapidlythatwe'reconcernedaboutcommittingandbeingnakedwithrespecttowhenwecommittoadealandwhenitstarts.Sowehaveturnedtobecomemoreconservative.Andagain,thatreallyprovidestheopportunitywithinorforthepreferredequitytransactionswherewecancomeinbetweenthesomewherearoundthe60%loantocosttoabout85%loantocostandearna12%returnthere.Wefundamentallylikethatbusinessandwethinkit'sagreattimetodothatrelativetotheopportunitiesinthemarketplace.


Areyoulookingatthatbusinessasapathtoownershiporjustbasicallya12%investment,atthispoint?


Well,wewouldlovetonegotiateanoptiontobuyattheendofthat,butwehavenotreallybeenabletodothat.Wecoulddoitifwewerewillingtogiveupasignificantamountofcurrentreturn.Wehaven'tmadethatchoiceatthispointintime.Soatthispointintime,we'rehappytoearnthatfixedreturnandgetrepaid;andiftherearesomebumpsdowntheroadsomewhere,perhapswe'reinapositiontobuyoutourpartner.


Okay.Thanks,guys.


Thankyou.

Operator :

OurnextquestioncomesfromthelineofJohnKimfromBMOCapitalMarkets.

JohnKim(Analyst-BMOCapitalMarkets):

Myquestionshavebeenasked,thankyou.


Thanks.

Operator :

AndournextquestioncomesfromthelineofIvyZelmanfromZelmanandAssociates.




IvyZelman (Analyst-Zelman&Associates):

Thankyou.Goodafternoon,guys.


Hello,Ivy.


Couldyoutalkalittlebitaboutthefinancingenvironmentwithrespecttoavailabilityoffinancingforconstructionlendingandlanddevelopmentandifanything,ifweshouldbemodelingmoreconservativelyifthecostisincreasing,givingsomelessdesirefromthebanks,orareyouguysnotseeingthat?


No,that'sexactlywhatwe'reseeing.Anumberofourpreferredequitytransactionsoverthelastseveralmonthshavereallycometogetherbecauseaconstructionlenderiscuttingbacktheirconstructionloancommitmentandbecomingmoreconservative.Inonecase,theconstructionlenderwasatthe65%to68%loantocost.Theycutitbacktoabout60%.Andactuallyinthatdeal,wewentfromessentiallytherewasn'taplaceforusinthetransaction,theycouldfinanceitthemselves,tocreatingthetranchethatweultimatelyinvestinbetweenthe60and85thpercentileloantocost.Sowe'veseenaprettysignificantchange,notjustinoneortwolenders,butreallyacross-the-board,asconstructionlendershavebecomemoreconservative.


Gotit.That'sreallyhelpful.Andthensecondly,IthinkMikeSchallwascitingsomenumbersonexpecteddeliveries,andIreallycomplimentyouguysonbeingconservativewithrespecttotheoutlook.Ithinkthat'sprudent.WhenyoutalkaboutthosedeliveriesinQ2andQ3,Mike,wereyoutalkingaboutdeliveriesintheBayAreaforallofmulti-familyorwasitjusttherentalportion?


Yes,Ivy,there'sacoupleofnuancesthere.Wedonotincludestudenthousing.Andweessentiallyignoreunder100units,andthat'spartofit.ButIwasreferringtoSanFranciscodirectlywhenIgaveoutthosenumbers.SoSanFrancisco,wehaveagain3,600unitsinQ2and2,700unitsinQ3.SanJosealsohasprettysignificantdeliveriesinQ2andQ3,asdoesLosAngeles.Soagain,relativetothetotal,weseeQ2andQ3ascreatingpotentiallymorelumpiness,similartowhatwesawinthefourthquarterandagain,inMarch/April.


Andjustinkeepingwiththeprudent,moreconservativeguide,whenyouthinkaboutdeliveriesthatarecomingfromcondosandrecognizingthatmanyofthosecondosarebeingboughtbyinvestorsthatmightwanttocashflowandrentoutthoseunits,istherepotentialriskthatthatcouldputmorepressurerelativetomarket?BecauseIknowwe'rehearingaboutthat.EquityResidentialmentionedtheyhadsomeonecomeinbelowmarketagainsttheirrentsbylike$800(Indiscernible)tocashflow.Sohowdoyouguysthinkaboutthatasarisktoyourguidance?


Yes,intermsofhowweapproachit,wetrytolumpallhousingtogether,becauseweknowthatpeoplewillmoveoutofapartmentsandbuycondosorhomes,andsomewillactuallygotheotherdirection,as




well.Soourbasicanalysisistolookatallthejobs,trytodeterminewhatthetotalhouseholdsareandreallynotdistinguishbetweenwhat'sarentalhomeandwhatisaforsalehome.

Havingsaidthat,theotherthingthatwepayattentiontoisaffordabilityofrentalsversushomeownership.Andineveryoneofourmarkets--andIvy,youknowthisbetterthananyone--thecostofthesehomesisprettysignificant.IthinkthemedianpricehomeinSanFranciscoisover$1million.Andsothattransitionfromarentertoahomeownerisreallyimportanttous.Andit'sobviouslyverydifficultinthismarketplace.Butinordertoavoidthisissueofokay,howmanyofthesedemandunitsaregoingtogotoforsaleversusforrent,wejustlookatthewholething.


No,no,no,andIappreciatethat.I'msorry,Imayhavemiscommunicatedthequestionright.Whatwe'rehearingisthatthecondosthatarecomingtobeingdelivered,thosethathavealreadybeenpurchasedasaforsaleunit,theymaybeaninvestor,whetherthey'refromoutsidetheUS,foreignbuyer,thatwantstonowrentitout.Isthatariskthatyou'veincorporatedintoyouroutlook,thattheywillbecompetitivenowintherental,andIguessyou'resayingthatyoujustlookatitoverallinshelterandeverydeliverytoyouisacompetitiverisk.


Exactly.It'sahousehold.Andsoyes,wedon'tcare--well,wecare,butitshouldnotaffectus.


Okay.No,that'sgreat.No,I'vegotit.Great.That'sreallyhelpfulandveryconservative.Thankyou.


Okay.Thanks.


Goodluck.


Thankyou.

Operator :

OurnextquestioncomesfromthelineofTomLesnickfromCapitalOne.

T omLesnick(Analyst-CapitalOne):

Hello.Thanksfortakingmyquestions.Justacoupleonesondevelopment.Isawyournewstartthisquarterwentintotheconsolidatedbucketat100%ownership.CanyoutalkalittlebitabouthowyoumaketheriskallocationdecisionbetweenplacingdevelopmentintoaJVorkeepingitonbalancesheet?


ThisisJohnEudy.Thatwasadealthatwebasicallyboughtoutofbankruptcyaboutfouryearsago.Asyouknow,itwasanoperatingproperty,tookitthroughentitlements,andhaveasubstantiallowlandbaseofalittleover$30,000adoor.We'reabletogettheentitlementswithoutanyincreasedexactionsorinclusionaryrequirements,sotheyieldisveryattractiveandnotreplaceableintoday'smarket,whichtheshortstoryiswe'reprobablygoingtoleavethatonthebalancesheet.





Gotit.Iappreciatethatcolor.Andthenoneotherquickone.Obviously,withtheAgoraclosetoinitialoccupancyandthatbeingacondofinishedproject,areyouguyscontemplatinganyothercondofinishdevelopmentsatthispointintime?


Wemapeverythingwecan,justsoyouknow,whichisamajorityofourdeals.Butbyyourquestion,itsoundslike,doweplanongoingtoacondoprogramoutofthechute?No.


Allright.Great.Thanks,guys.


Thankyou.

Operator :

AndournextquestioncomesfromthelineofAlexanderGoldfarbfromSandlerO 'Neill.

AlexanderGoldfarb(Analyst-SandlerO 'Neill&Partners):

Hello,andgoodmorningoutthere.Justafewquickquestionsforyouguys.TherewasalotintheupfrontabouttheincreaseinrentalhomesandpeopledoublingupintheBayArea,soatwo-partonthat.One,areyouseeinganydynamicatthesuper--wherearethesepeoplecomingfrom?Aretheysuperhighendrenterswhojustgottiredofitandsaidit'scheapertorentotherwise,ortheseareentrylevelpeoplewhojustcan'tmakeanythingelseworkandthereforethey'redefaultingtothis?Soone,areyouseeingmorepressureatthehighendrentaloratthelowendpricepoint?AndthenI'llaskthefollow-upafterthat.


Letmeansweralittlebitbroadhere,Alex.Firstoff,withthesupplycominginandthey'retryingtogettheunitsabsorbed,they'renaturallyofferingconcessionsandthosehavebeenincreased,andthereinisthestartoftheprocessasitrelatestosomeoftheconcessionaryactivity,andthenofcourse,others,withtheconsumer,theempoweredconsumerandwiththeinformationage,youhavesomeconcessionjumpers.Andsopeoplearemovingaroundandthatcausessomepressurethenonthenextlevelintheapartments.

Asitrelatestothedoublingup,it'sreallyhappeningatvariouslevelswithinapartmentzone,andyouhavepeoplethataredoublingupintotwos,peoplearedoublingupintoones,justvariousthingsgoingon,andit'sallincremental.Butthatincrementaltakesahairoffthedemandthat'soutthere,andagain,ultimatelyreducesdemand.Andsoyouseeitallover.Thefeedbackthatwegetanecdotallyisthatthesinglefamilymarketisvery,veryhighoccupancyrightnow.Andthatagainwouldhavetakenupsomeofthedemand.Anditmakessense,ifyouthinkaboutit,it'salargerunit,ineffect,andyoucanputacouple,ortwo,three,fourpeoplein,incomeearners,andhaveanicespace.SoIthinkpeoplearefindingwaystodealwiththehigherrentsandsomeofthose,again,meandoublingup.


Butisitfairtosaythatit'smore,it'snotthehighpricepointrentsaren'ttheissue,it'smorethelowerpricepointrenterismoreofthepressurepoint,notthehighendrenter?





Ithinkit'sacrossthewholezone.


Okay.Okay.AndthenMikeSchall,youhadmentionedpreviouslythatSeattleandSanFranciscoco-existonthetechsideandthatyoudon'thaveadisconnect.Doyouthinkthatthatstillholdstrue,ordoyouthinkthatmaybetheaffordabilityissuesinSanFrancisco,coupledwiththesupply,meansthatthetwomarketscoulddisconnectonthefundamentalside?


Yes,Alex.Justtobeclear,thosecommentsIthinkImadeinconnectionwithQ4,andthepointIwastryingtomakeisthatitdidnotappeartobeatechhiringissue.Itappearedtobeasupplyissue,asupplylumpinessissue.IthinkIcommentedthataround40%,40-pluspercentofthesupplyinNorthernCaliforniahitthefourthquarterduringtheseasonallyweakesttime.Butagain,tothepoint,itappearsthatSeattleandSanFrancisco,i.e.,bothbeingtechmarkets,areperformingverywellonthejobsside,andtherefore,welookatthesupplyside,atthelumpinessofsupply,asbeingacontributingfactororadriverofthisdisconnect.

Aswegoforward,it'sgoingtobeinterestingtosee,becauseagain,ifyoulookattheoverallnumbersgoingfromjobsandjobgrowthtohouseholdformationtosupply,itwouldnotindicatethatweshouldhaveweaknessintheapartmentarea,andtheconcessionsseemtobegoingfromroughlyamonthtosixtoeightweeks,thatwouldnotbeindicated,giventheoverallsupply/demandnumbers.Butyethereweare,andsowearetryingtomakesenseoutofwhythatisoccurring.Wedon'thavetheanswer,atthispoint.


Okay.Andthenjustfinally,youmadesomecommentsintheopeningMD&Aaboutcapratesmaybesofteningabit.WasthatjustnormalcapratevolatilityorwereyouindicatingthatcapratesareinfactbackingupontheWestCoast?


Yes,Alex.ThecommentImadewasthattherewerecommentsinthemarketplacefrombrokers.TherewasacoupleofarticlesthatIreadwherebrokersinthemarketplaceweresuggestingthatcaprateswereincreasing.Wehavenotseenthat.AndasthepointIwastryingtomakeisweunderwritealotofdeals,we'realwaysinthemarket,andsowehaveaverygoodsenseofwhat'shappeninginthemarketplace,andsowedisagreewiththosebrokers.Soifthatdidn'tcomeclear,Iapologize.


No,no.Look,it'sbeenalongweek,soappreciateit.Thanks,Mike.


Thankyou.

Operator :

AndournextquestioncomesfromthelineofWesGolladayfromRBCCapitalMarkets.

WesGolladay(Analyst-RBCCapitalMarkets):




Yes.Hello,everyone.Thanksfortakingthequestion.Lookingatthisdynamicofwhatappearstobestillafavorablesupplyanddemandmarket,butyetyoukindofhaveaglutofsupplyincertainsubmarkets,isthatwhatitisweighingonitandoncewegetthroughthisglutthenwecouldgettomorenormalpatternsontherentalgrowth?


Hello,Wes.It'sMike.AndJohnmayhavecommentsonthis,aswell.Again,we'renotquitesure.Ifyoulookattheseoverallsupply/demandratiosupanddownthecoast,itwouldindicatethatwewouldcontinuetohavepricingpower.Andagain,we'reseeingconcessionsonthenewlydeliveredproductincreasingfromamonthtosixtoeightweeks,andIthinkit'slumpiness,butwe'regoingtoletthisnextquartergobyandthenwe'llreevaluateguidanceandresultsatthispointintime.

Soessentially,asageneralrule,revisingguidanceattheendofthefirstquarterissomethingthatIthinkisgenerallynotwhatyouwanttodo,becauseit'sonlyonequarter.Sowewouldratherbealittlebitcautiousandhopefully,weblowrightthroughthisperiodandabsorbtheunitsandwe'rebackintoaverystrongpricingpowertypeofmodecometheendofsummer.Butwe'llhavetowaitandsee.


Okay.Soissoundslikethevelocityisactuallygoingprettynicelyonthosenewunits,sojustamatterofgettingthemthroughatalittlebitlowerpricepoint?


Well,yes.Butkeepinmindthatanextramonthofconcessionisan8%reductioninprice.Andwhenyoulookatitthatway,peoplethatotherwisewouldn'tmovemightsay,oh,gee,atthatprice,I'mwillingtomakeachangeandmovetoabrandnewapartmentunit.Andsothat'stheeffectofconcessions.Anditseemstomethatconcessionsareprevalentinthemarketplaceandthey'veincreased;andagain,that'swhat'scausingthesoftness.

Again,Ibelievethattheconcessionscanabate,muchliketheydidJanuaryandFebruary,quickly,butwejustdon'tknowexactlyhowthat'sgoingtohappen.It'safunctionofhowmanyunitsdoyouhave,howaggressivetheownersare.Obviously,ifyoudeliveranewbuilding,youhavezerodollarscominginonyourvacantunitsandsoyou'rehighlymotivatedtorentthem.Andmanyofthoseownersaresaying,hey,ratherthanleavingitvacant,I'lltrytohitreallyhighabsorptionnumbersandincreasemycashflow.Again,theyhaveadifferentfinancialobjectiveoradifferentfinancialviewrelativetostabilizedapartments,buttheyhaveadramaticeffectonthestabilizedapartments.Sothatprocessisgoingtoplayout,sowe'regoingtobeclearlyunderabitmorepressurethanwehaveoverthelastcoupleofyearsandwe'llhavetoseehowthatultimatelyturnsout.


Okay.Andjustaquickfollow-up.SoisittheconcessionsenoughtopeoplepullinmaybefromtheEastBayintotheSoMamarket,ordoyouthinkpeoplewillstayintheirownsubmarket?


Oh,no,Ithinkeverythingwillhappen.Peoplearelookingforopportunity.I'vebeeninthisbusinessalongtime,asyouknow,Wes,andpeoplearesmart.Theyfigureouttheopportunitiesinthemarketplaceandtheygoafterthem.

Manyoftherentersjustdon'thavethatmuchfurnitureandsomovingisnotthatbigadeal.Soifyougivethemanother8%offtheirrentintheformofaconcession,theyarealloverit.Andsoit'saveryfluid




marketplace.AndwhatIsuspectwillhappeniswewillgothroughthisperiodoftimeandwewillabsorbtheunits,we'llgetbackintoQ4inSanFrancisco,wherewethinkroughly1,300unitswillbedelivered,andwe'llhavemuchmorepricingpower.Soitwillbeatemporarydislocationinthemarket,iswhatIsuspect.


Okay.Thanksfortheclarity.


Thanks.

Operator :

AndournextquestioncomesfromthelineofDrewBabinfromRobertW.Baird.

DrewBabin (Analyst-RobertW.Baird&Co.):

Goodafternoon.


Hello,Drew.


Iwantedtoaskaboutthethreesubmarketsyoumentioned,SoMa,Peninsula,NorthSanJose,andwhatthesupplyoutlooklookslikeinthosemarketsfornextyear,onceyoudealwiththeconcessionsandeverythinggoingoutnow,whentheremightbeamoresustaineddropoffinnewsupplydeliveries.


That'sagoodquestion.Idon'thavethatinformationwithme.Ithinkitwillbeslightlylowerin2017relativeto2016,butIjustdon'thave--I'mnotfocusedonthosenumbersatthispointintime.


Okay.


Again,thedynamics,letmegobacktothedynamicsthough,withconstructioncostsincreasing,lenderissues,etcetera,itseemslikeweareatthepointwherewe'regoingtostartseeingslowerdevelopmentdeliveriesgoingforward,justasageneralrule.


Okay.Thenonequestion,goingbacktoatopicthatwasfrequentlyvisitedonlastquarter'scall,theprospectsforsharerepurchasetotheextentyou'reabletosellpropertiesatcapratesbelowtheimpliedcaprateonyourstock,hasanythingchangedinthemarketoverthepastfewmonthsthatwouldmaybecauseyoutoviewdoingsomethinglikethatdifferently?


Ourthoughtshaveevolvedinthatarea.Andforbackground,wehavea$250millionsharerepurchaseprogramoutthere.Lastquarter,weweretryingtonotusethebalancesheet.Weweretryingtoalign




salesproceedsfromproperties.Essentially,IthinkImentionedthatroughly33%oftheshareingreensalewewantedtouseforsharerepurchase.AndwhenthestockpricerecoveredandwewerenottradingatadiscounttoNAV,wedecidedtojustgoaheadandredeploythatwitha1031exchange.

Sotheevolutionofourthoughtprocessonthatistogoaheadandusethebalancesheet,becauseitseemslikethedislocationsinthestock,andwehadoneinthefirstquarter,thosedislocationsarerelativelytemporaryinnature.AndsoIdon'twanttogiveyouexacttargets,butofthe$250millionprogram,we'vedecidedtotakesomebalancesheetrisktotheextentthatthestocktradesatasignificantdiscounttoNAV.Andagain,I'mnotgoingtosharewithyouourtargetsandhowthatworks,butpractically,ifit'snot10%to15%typeofdiscounts,itprobablydoesn'tmakemuchofadifference.Sowewillusesomebalancesheetandwewilllookforsignificantdiscountsandwewillbereadywithinrelativelyshortperiodsoftime,givendislocationinstockprice.


Butletmejustaddtothat,asfarasusingthebalancesheet,thatwouldjustbeatemporarybridge,becausethenwewilllooktosellassetsinarbitrage,thepublicandprivatemarketpricing.Soultimately,thegoalwasstilltohaveittobeabalancesheetneutraltransaction.


Thankyou,yes.


Understood.Thankyouverymuch.

Operator :

OurnextquestioncomesfromthelineofTayoOkusanyafromJefferies.

T ayoOkusanya(Analyst-JefferiesLLC):

Yes.Goodafternoon,everyone.Justinlightofsomeofthecommentaryyou'vemadeaboutlumpynewsupplygoingforwardandsomeofthemarketdynamics,doesthatchangehowyouthinkaboutdispositionactivity,especiallyif,basedonyourcommentary,capratesreallyhaven'tmovedatthispoint?


Yes,Tayo,thisisMikeSchall.Atthispoint,totheextentthatwebelieveit'stemporaryinnatureandagain,lumpysupply,Idon'tthinkthatithasasignificantimpactonhowweallocatecapital.However,ifthatchanged,ifwesawjobgrowthdynamicschange,forexample,Ithinkthatwouldbemorefundamentalinnatureandthatwouldchangeourthinkingabouthowwewanttoallocatetheportfolio.

Soagain,wehavetheseexceptionaljobgrowthnumbersthathavecontinued,inQ1SanFranciscoat4.1%,Seattle3.2%,etcetera.That'satrailingthree-monthnumber.Thosenumbersareincrediblypowerfulwhenitcomestoowningapartments.Andsoaslongasthosenumbersremainasstrongastheyare,andnottomentiontheamountofwealththat'sbeencreatedwithinthetechnologyarea,Ithinkweestimatedthe10toptechcompanieshaveproducedabout$1.8trillioninwealth--andobviously,someofthatisnotontheWestCoast,butalotofitishere--thosedynamicskeepusexcitedaboutowningpropertiesinNorthernCalifornia,despitethelumpinessofthesupply.





Gotit.Andthenmysecondquestion,youguysarewellknowninthisspaceforbeingdatajunkiesandIknowyou'redoingalotofanalysissuggestingrentsshouldstillbestrong,occupanciescouldstillbestrong.AndatleastIhearfromyourtune,you'rekindofscratchingyourheadalittlebit,wonderingwhyiswhat'sgoingon,whyisthisreallygoingon?AndIguessthequestionis,ifwealldon'tknowbutyouhadtoatleastmakeoneortwoeducatedguesses,whatwouldtheybeandwhatdoesthattellyouaboutifthatcontinuesgoingforwardoriftrulythismightbetemporary?


Well,JohnBurkartandIarelookingateachother.Ihopewe'vecometothesameanswertothisone.Butclearly,theimpactofaffordabilityisonethatconcernsus.Andgenerallyspeaking,wethinkaffordabilityisaconstraint,notadriver.Insomemarketsit'sadriver,butnotinourmarkets.Andsoanythingthataffectsaffordability,andJohnmentioneddoublingup,longercommutes,workingfromhome,thosetypesofthingswouldbeconcernstous.Andweare,backtoyourdatajunkiepoint,wearetryingtofindwaystomeasurethem.Andwehavesomedataonthemandwedohavesomeinformationaboutthelevelofdoubleup,butit'snotperfectatthispointintime.Butclearly,wearetryingtobecomemorerefinedinhowwelookatthis.Andwherewehaveadisconnect,we'retryingtoexplainittoourselvessothatwecanobviouslyuseitproactivelytomanagetheportfolioandtodoabetterjobatcapitalallocation.


Thankyou.


Thankyou.

Operator :

OurnextquestioncomesfromthelineofRichAnderson,MizuhoSecurities.

RichAnderson (Analyst-MizuhoSecurities):

Thanks.Goodafternoon.I'msorrytokeepitgoinghere,butjustacoupleofquickones.Gettingbacktotherentcontrolissue,whileyoumadethepointthatitdoesn'thityoubecauseyournewerassetsandalloftherest,butisthereanindirecteffect,doyouthink,thatisplayingaroleinsomeofthequote-unquotechoppinessthatyou'reseeingintheBayArea?Isthereanywaytoseethat?


Idon'tthinkso,Rich,becauseI'dsaytheopposite.Totheextentthatpeoplethatwereforcedoutofthemarketplacecannowstaytherelongerandturnoverratesaregoingtobereduced,thenumberofunitsthat'sactuallycomingtomarketthereforeisreduced,andthereforeyoushouldhavebetterpricingpower.Soonourportfolioit'sprobablyanetpositive,justbecausewedon'thavethatmanyunits,again,subjecttowhatmighthappeninthesereferendums,becausewedon'tknowwhatcitiesthey'regoingtobeaffectingatthispointintime.ButbasedonSanJoseandOakland,forexample,wethinkwehaveprobablyapositiveeffect,notanegativeeffect.


Becauseoftheturnoverfactor,youmean?


Yes,becausemorepeople,there'sgoingtobefewerunitsvacating,theturnovergoesdownwithrent




control,right?We'llgo,portfoliowide,we'llgofrom50%to30%turnover.Soyou'regoingtoturnonly30%ofyourunits,thereforeyourunitsavailableforleasingtopeoplemovingintothearea,you'regoingtohavefewerunitsavailabletoleasetothesamenumberofpeople,andthereforeit'sgoingtoputmorepressureonpriceastotheunitsthatareturning.Soagain,becausewedon'thavethatmuchrentcontrolproduct,itprobablyhasafavorableeffectonus.


Gotyou.Andthensomehavebeenalludingtowhyyouhaven'taddressedguidanceinthisquarter,andIunderstandalloftheanswers.Buttome,I'mwonderingiftheguidancedirectionshouldbeupordown.Ithinkmostpeopleareindicatingthatmaybeyoushouldhaveraisedguidancebecauseyoubeatnumbersinthefirstquarter.Butisitasclearcutasyourbiasisupward,ordoesthelumpinessintheBayAreaputatleastthemintothepossibilitylistthatguidancecouldweakeninthefuture?


Ithinkwhenyouraiseguidanceinthefirstquarter,youbetterbereallysureaboutwhatyou'redoing.Otherwise,whydoit?Wejustgaveyouguidanceacouplemonthsago.Sothat'sthebasicpremiseofthewholething.Obviously,we'regoingtopushtomaketheyearandnextquarterasgoodasitpossiblycanbeandtoreactappropriatelytochangingmarketconditions.ButIjustdon'tseealotofmotivation.I'mprobablyoneoftheonesthatpreventedtheguidanceincreaseofthegrouphere.Butthat'sthebasicbackground.It'sreallyuncertaintyandthefeelingthatraisingguidanceafteraquarterjustdoesn'tmakealotofsensetome.


Okay.Butatleasttheconversationwasup,notdown?


Well,wehavelotsofconversations.Butyes,mostofthepressurewasonup,notdown,yes.


Okay.Thatmakessense.Andthenlastly,youtalkedaboutsomeofthesesupplynumbersinthesecondandthirdquarter.Whatareyouguysseeingbeyondthat?Isthereanotablereductionthatyoucouldspeaktoforfourthquarterthisyearandbeyond?


Yes,thereis.However,thecommentImadeinthefourthquarter,onthefourthquartercall,abouttransactionsdeliverwhentheydeliver,wemayschedulethemtohappen,andIbetalotofthetransactionsthathitinthefourthquarterlastyearwerescheduledfordeliveryinthesecondandthirdquarter,buttheygotdelayedtothefourthquarter.Mypointis,theydeliverwhentheydeliver.Andweactuallyhaveourpeoplegoaroundandlookatbuildingsandtrytoseeexactlywhatisbeingdelivered.Buthavingsaidthat,youdon'thavegreatcertaintywithrespecttoexactlywhenit'sgoingtobedeliveredanditcaneasilyslideaquarter.


Okay.Thankyou.


Thanks.




Operator :

OurnextquestioncomesfromthelineofKrisTraftonfromCreditSuisse.

KrisT raf ton (Analyst-CreditSuisse):

Hello,guys.Justwantedtocirclebackonthepreferredequity.Andobviously,there'salotofdemandforthiscapital,butcouldyouspeaktoalittlebitaboutthesupplyofpreferredcapital,maybetheotherplayersinvolvedthatareofferingit,andthenmaybehowyou'remitigatingitintermsofrisk?


Yes,it'sMikeSchall.Ithinkthereareseveralpeoplethatareactiveinthatarea,differenttypesofspecialtyfinanceorganizations.Sowehaveplentyofcompetitionthere.Andmuchlikeacquisitions,wedon'twinnearlyallthebusiness.Andpartofthereasonforthat,anditgoestoyourriskmitigationpoint,isweonlywanttooriginatepreferredequityonapartmentsthatwewouldliketoown.Soithastomeetourlocationalandothercriteria.Andagain,ifeverythinggoesgreat,thenit'sagoodpieceofcapitalforthedeveloper.Ifthingsdon'tgogreat,we'reinapositiontostepinatwhatwouldbeanattractivepricetous.Sothat'showwethinkwehavethebestofbothworlds.Wehaveahighyieldingvehicleandwealsohavesomethingthatissynergisticwithourportfolio,ifthingsdon'tgowell.


Thatmakesalotofsense.Secondquestion,onwhenyou'relookingwithinamarketandyou'relookingatthecapratesthatthey'retradingat,doyouseeadifference,obviouslyadjustingforqualityforpropertiesthatarejustaboveorjustbelowtheyearwhereyoucandorentcontrolinCalifornia?


Youknow,Ihaven'tlookedatitreallythatclosely,butlet'ssee.I'vejustlookedatOaklandandSanJose.Andthenagain,thestatewidelaw,[Costa-Hawkins],hasapre-1996date.Andsowehaveobviouslymorepropertiesthatarewithinthe[Costa-Hawkins]realmthat'spre-1996.ButwithrespecttothecitiesthatalreadyhaverentcontrolordinancesliketheonesinOaklandandSanJose,theywerepreexisting,thenicethingaboutthemistheycan'tbumptheirpriordate,theireffectivedate,theircutoffdate.Theycan'tmoveitto1995,atleastatthispointintime,becausethatwasprohibitedby[Costa-Hawkins],aswell.Soagain,Ithinkouroverallexposuretorentcontrolisactuallynotthatsubstantial,asIlookattheportfolio,aswelookattheportfolio.


Okay.Andthenjustonelastquickone.Ithinkyouroriginalguidancewastohavethreenowdevelopmentsin2016at$230millionatshare,andyoujuststartedonehereat$230million.Isthatincrementaltotheotherthree,orwasthatoriginallygoingtobeaJV,orcanyoujusttalktowhat'supdatedtherefordevelopmentstartguidance?


Theonethatweannouncedisoneofthethree,soit'snotincremental.


Okay.Sothatwasoriginallygoingtobeat50%orsomething?





No,no,thatwasalwaysgoingtobe100%.I'msorry,Ididn'tanswerthatpieceofyourquestion.


Okay.Ithoughttheoriginalguidancewas$230millionforthreeproperties?AmI--


No,itwas$220million,somewherearoundthere,fortheyear.


Right.


Oh,that'saspend,notstarts?


That'sthespend,correct.


Gotyou.Okay.Thankyouverymuch.


Thanks.

Operator :

AndournextquestioncomesfromthelineofConorWagnerfromGreenStreetAdvisors.

ConorWagner (Analyst-GreenStreetAdvisors):

Goodafternoon.HaveyouseenfewerpropertiescometomarketintheBayAreainrecentmonths?


Cometomarket,youmeanforsale?


Yes,inthetransactionmarket.


No,actuallythere'saprettydecentdealflowoutthereandwe'relookingatquiteafewproperties,soI'dsayactivityisgenerallypickedupabit.


Andfromyourearliercomments,Igatherthatsellershaven'tresettheirexpectations?


Yes.Again,thisisourexperienceandweunderwritelotsoftransactions.AndIcanthinkofadealinFreemontthatwerecentlyunderwroteandwegothandilybeat,andonthattransactionspecifically,that




was,Idon'tactuallythinkthatisclosedyeteven,soIthinkitjusthasbeenawarded.Again,aswelookatthetransactionsoutthere,wedon'tseealotofevidencethatcaprateshavechanged.Andagain,wewinsome,welosesome,butweunderwritealot.Andfromourview,thingshavereallyhunginthere.Whichiswhatweexpect,bytheway.


Great.AndthenIjustwantedtoconfirm,earlieryousaidthattrafficatyourpropertieshasnotsloweddown.AndIknowyou'veindicatedbeforethatyouthinkthat'saleadingindicatorofjobgrowth.Butisthatcorrectthatactualtrafficatpropertieshasnotslowed?


Well,yes,thisisJohnBurkart.Idon'tthinkwespokeabouttrafficearlier.Butasitrelatestotraffic,it'sactuallyupyear-over-yearreallyacrossthewholeportfolio.Buttrafficisachallengingnumber.Sometimesitcanbedriven,ofcourse,bybettermarketingandavarietyofotheritems,butitisupandit'sverystrong.


DoyouguysgetthesensethenthatperhapsrentersintheBayArea,becausetheyreadtheheadlinesaboutslowdownsintechandjobgrowth,thatperhapstheybecomemorecautiousonwhatthey'rewillingtospendortheirwillingnesstotradeup?


We'renotseeingthatinthesenseofanecdotals,hearingaboutthat,obviouslyhearingpeoplemakecommentsoranythingelse.Butobviously,asbeensaidalittlebitearlierinthecall,we'retryingtoreconcilethesupply/demandequationwiththerealityinpartsofNorthernCalifornia.AndIdon'thavetheanswertothat,withwhat'sexactlycausingthattonotfallinlineexactlyaswe'veexpected,otherthansomelumpinessinsupplyandpossiblesomedoublingup.


Great.Thankyouverymuch.


Thanks,Conor.

Operator :

AndourfinalquestioncomesfromthelineofKarinFordfromMUFG.

KarinFord (Analyst-MUFG):

Hello.Goodafternoon.JustwantedtogobacktothedivergenttrendsbetweensomeofthemarketsinNorthernCalandSeattle,givensimilarjobtrends.Ontheaffordabilityside,doyouguystrackrenttoincomesineachofthosemarketsanddoyouthinkthere'sabigdifferencebetweenthemetricsinthosetwo?


Wedodefinitelytrackthemonanongoingbasis.Andyes,there'sverysignificantdifferences.SoSeattle,whichhasmuchmoreaffordability,obviously,therenttoincomeisaround19.6%,andsolessthan20%.InNorthernCalifornia,thosenumbersareinthe25%to27%range.Sodefinitely,affordabilityismuch,




muchdifferentinSeattleandSanFrancisco,andthatwoulddrivewhatJohnBurkartwastalkingaboutwithrespecttodoubleups.Themoreaffordabilityenterstheequation,themoredoublingupyouwouldexpecttohappen.

Soclearly,Seattle,ifyoulookatmedianincomelevelsarehigh,about$84,000,whichislessthanSanFranciscoandSanJosethatarebothover$100,000,butnonetheless,whenyoulookatthatrelationshipbetweenaveragerents,whichareabout$1,400inSeattle,onaverage,thisisthewholemarketplace,there'sahighlevelofaffordabilityinSeattle,thereisnotinNorthernCalifornia.


Thanks.Sojusttoroundthatout,whereisSouthernCalonthatmetric?


SouthernCalonthatmetricisinthe21%to24%range,soitisbetweenthetwo.


Betweenthetwo.Gotit.Great.Thanksverymuch.


Thankyou,Karin.

Operator :

Ladiesandgentlemen,therearenofurtherquestionsatthistime.I'dliketoturntheconferencebackovertoMr.Schallforanyclosingremarks.


Thankyouverymuch.Wereallyappreciateyourparticipationonthecall.Andobviously,we'repleasedwiththeresultsandwelookforwardtoseeingmanyofyouatNAREITnextmonthtocontinuethediscussion.Haveagreatday.Thankyou.

Operator :

Ladiesandgentlemen,thisdoesconcludetoday'steleconference.

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