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Edited Transcript of EQR earnings conference call or presentation 24-Oct-18 3:00pm GMT

Q3 2018 Equity Residential Earnings Call

CHICAGO Oct 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Equity Residential earnings conference call or presentation Wednesday, October 24, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Neithercut

Equity Residential - CEO & Trustee

* Mark J. Parrell

Equity Residential - President

* Martin J. McKenna

Equity Residential - VP of Investor & Public Relations

* Michael L. Manelis

Equity Residential - COO & Executive VP

* Robert A. Garechana

Equity Residential - Executive VP & CFO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Alexander J. Kubicek

Robert W. Baird & Co. Incorporated, Research Division - Research Analyst

* Dennis Patrick McGill

Zelman & Associates LLC - Director of Research and Principal

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Senior Associate

* John P. Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Richard Charles Anderson

Mizuho Securities USA LLC, Research Division - MD

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Equity Residential 3Q Earnings Conference Call.

At this time, I would like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

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Martin J. McKenna, Equity Residential - VP of Investor & Public Relations [2]

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Thank you, Jonathan. Good morning, and thank you for joining us to discuss Equity Residential's Third Quarter 2018 Operating Results. Our featured speakers today are David Neithercut, our CEO; Michael Manelis, our Chief Operating Officer; Mark Parrell, our President; and Bob Garechana, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities 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.

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David J. Neithercut, Equity Residential - CEO & Trustee [3]

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Thank you, Marty. Good morning, everyone. Thanks for joining us for today's call. As we reported in last night's earnings release, with the primary leasing season in the rearview mirror, we're pleased to now expect to deliver same-store revenue growth for the full year of 2.3%, which is at the very top of the guidance range we provided on our most recent earnings call in late July. Achieving this level of growth is the result of a couple of primary drivers: the continued strong demand across-the-board for rental housing; and the relentless attention to customer service delivery each and every day by our outstanding property management teams. These 2 factors combine to maintain very high levels of occupancy, record-setting resident retention and very strong renewal rates, all despite elevated levels of new supply across our markets. We could not be more proud of our teams across the country for the outstanding jobs they do, making living with Equity a remarkable experience for each and every one of our residents. I'll now ask our Chief Operating Officer, Michael Manelis, to go into greater detail in what we're seeing across our market today.

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Michael L. Manelis, Equity Residential - COO & Executive VP [4]

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Okay. Thank you, David. So let me begin with a huge shout out to our on-site teams. The third quarter represents our busiest activity period with just over 1/3 of the entire year's renewal and new leases taking place. The team's performance and relentless focus on delivering remarkable experiences to our residents delivered outstanding results for the quarter. With just over 24,000 transactions completed during the third quarter, we achieved a 5.1% increase on renewals and a 1.2% increase on new leases signed. This, along with maintaining our occupancy at 96.2% has delivered third quarter revenue growth of 2.3%, which, as David said, now gives us the confidence that our full year 2018 revenue growth will be 2.3%, which is the top of our previous reported range.

I would also like to highlight that the 16.4% turnover for the quarter is the lowest third quarter turnover reported in the history of our company. We renewed just over 500 more residents in the third quarter of '18 versus the third quarter of '17, with roughly the same number of expirations in each period.

During the third quarter, we also achieved our highest recorded resident satisfaction scores. Service-related surveys completed in the third quarter came in with an average rating of 4.8 out of 5. And year-to-date, we have increased our all-time high online reputation scores with both Google and Yelp. Both of these are by far the most important customer review platforms to our prospects. Bottom line is that service and leasing teams have been focused on delivering remarkable experiences and their efforts are paying off.

Before I move to specific market commentary, I would like to start by saying that the overall trends we've discussed last quarter have continued. Our average resident tenure currently at 2.2 years continues to grow. As a result of our exceptional renewal process, great service and the macro trends of millennials deferring life-change events like marriage, children and buying homes. Strong demand fueled by good job growth and record low levels of unemployment in our market have aided in the absorption of the elevated supply.

So let's start with Boston. Full year revenue growth expectations of 2.4% is slightly above the expectations we shared with you on our second quarter call, primarily due to stronger baseline growth, which has continued into October and stronger renewal increases. This performance happened at the same time that the majority of the 2018 new supply was delivered in the urban core and went head to head with most of our NOI. Our revised assumptions for 2018 include occupancy at 95.8%, a negative 0.8% on new lease change and achieved renewal increases of 4.9%. Deliveries will be light in the urban core over the next year, which should continue to bring modest pricing power to the market.

Moving to New York. Our current expectation for full year revenue growth has improved to 70 basis points. This is 50 basis points higher than the expectations we shared with you on our last call. This outperformance is a large contributor for us achieving the high end of our overall company same-store revenue guidance. Our full year assumptions for New York include occupancy of 96.5%, a negative 2.2% new lease change and achieved renewal increases of 3%. Concession use in our portfolio remains extremely targeted and is well below both last year and all expectations throughout the year. During the third quarter, we had moving concessions being issued to less than 10% of our total applications in New York. This resulted in only $260,000 in concessions in the quarter as compared to $830,000 in the third quarter of 2017. 2019 deliveries will be significantly lower than '18, with more than a 50% decline expected. The deliveries will continue to be concentrated in Long Island City and Brooklyn where, to date, we have not seen a significant impact for our operations. In fact, our base rents in New York today remain strong and sitting here in the last week of October, they have not yet started their normal seasonal decline.

As we think about D.C., there is not much news to report. Positive economic conditions continue to aid the absorption of new supply but the overall market continues to demonstrate very little pricing power. We have no change to our full year expectations of 1.2% revenue growth. Our assumption includes full year occupancy at 96.2%, a new lease change of negative 2.1% and an achieved renewal increase of 4.2%. 2019 will mark another year of elevated supply with just over 12,000 units expected.

Moving over to the West Coast. Seattle is expected to deliver 3% revenue growth for the full year, which is in line with the guidance we issued in July. Our full year assumptions for Seattle include occupancy at 95.7%, a negative 1.8% new lease change and achieved renewal increases of 5.7%. Seattle's supply is expected to slightly increase next year to just over 8,000 units. But for CBD, where we have approximately 40% of our NOI, should experience some relief in 2019 as the concentration of the supply shifts to the Bellevue, Redmond submarket where we have 24% of our NOI.

On the previous calls, I mentioned the outperformance of the San Francisco market being a contributor to the upward revision of our revenue guidance. Not much has changed. We expect full year revenue growth to be 2.9%, which is consistent with our July call. Our full year assumptions for San Francisco include 96% occupancy, a positive 0.3% new lease change and 4.9% achieved renewal increase. Looking at the overall market, the tech companies continue to grow and the Bay Area is on track to surpass the 10-year high of 35 IPOs that was set back in 2014. There continues to be daily announcements highlighting the expansion of companies in this market. Office vacancy has continued move lower and all of this should support positive fundamentals in our space. The deliveries for 2019 in San Francisco are expected to increase by about 2,500 units to 9,500, with over 40% concentrated in Oakland and East Bay submarkets. At this point, it is still unclear exactly what the impact from the Oakland deliveries will be, sort of like the Long Island City situation on Manhattan. Although, this will have considerably fewer units coming online.

Moving down to Los Angeles, we expect full year revenue growth to be 3.6%, which is up 20 basis points from our July guidance. Our full year assumptions are 96.2% occupancy, 6.1% achieved renewal increase and 1.4% new lease change. Construction in the market continues to face labor shortage issues, which has pushed 2,000 units from 2018 into 2019. We now have 2018 showing just over 9,600 units and 14,200 units being completed in 2019. It is likely that we will see some of the expected 2019 deliveries be pushed into 2020.

That being said, the combined 24,000 units over the 2-year period has not changed and this total is spread out over a huge geographical region. Remember, we tend to feel the impact from new supply when it is delivered in a concentrated fashion in direct competition to our assets. For example, in 2019, our San Fernando Valley portfolio will have exposure to new supplies for the first time in a while, but that new supply will have very little direct impact on our West L.A. portfolio, which is many miles away. Regardless, the overall market in L.A. continues to demonstrate strong demand, which should continue to aid the overall absorption.

Moving to Orange County, our full year revenue expectations have modestly increased 10 basis points to 3.6%. This is tied with L.A. for our second highest revenue growth market for the year. Our full year assumptions have occupancy at 96%, achieved renewal increases of 5.5% and 0.3% new lease change. 2019 outlook for deliveries is about 500 fewer units at just over 3,500 units expected.

And last but not least, San Diego. Our full year revenue expectations remain unchanged at [6%]. This will be our highest revenue growth market for the year. Our full year assumptions have occupancy at 96.2%, achieved renewal increases of 5.9% and 1.6% new lease change. 2019 outlook for deliveries is about 700 fewer units at just over 3,000 units expected.

So now let me close with some color on 2019. While we are not issuing guidance at this point, nor will I be sharing any specific numbers on a market level, I do want to share some general thoughts on our guidance process and our preliminary view of the 2019 market performance. To begin, we have 2 different approaches creating our guidance. One that is bottom-up, completed by the on-site and property management leaders and the other that is a top-down approach completed by our revenue management and senior leadership team. We are in the very early stages of both methods and both methods consider supply, employment and our current posture in terms of renewals, new lease rates and occupancies. Today, we anticipate that both occupancy and achieved renewal increases will be very similar or slightly better next year. We also expect to see some improvement in our new lease change as modest pricing power continues to grow in many of our markets. To bucket our very preliminary expectations today, we would say that California markets, excluding any impact from proposition spend, may deliver similar results in 2019. Seattle will likely be less. And moving to the East Coast, New York should be better, Boston's on track to be slightly better and D.C. will most likely be about the same.

With that, I will turn the call over to our President, Mark Parell.

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Mark J. Parrell, Equity Residential - President [5]

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Thank you, Michael. As we expected, we had a busy third quarter on the investment side. We mentioned last quarter that we planned to reenter the Denver market after exiting that market in early 2016. Now we did so this quarter by acquiring 2 assets at a total cost of $275 million. As you may recall, we left that market because we had a portfolio that was primarily garden, surface-parked older suburban products and with a portfolio exit, not a market call. We have kept our eye on Denver and continue to believe that in the right locations and prices, this market can produce excellent long-term returns. We see in Denver many of the same attributes we see in our coastal markets and we think will lead to higher long-term returns such as single-family home prices that are high as an absolute matter as well as on a relative basis as compared to incomes, the creation of many high-paying jobs over an extended time frame, a history of strong rent growth and a market with a high quality of life, where our target millennial demographic wants to live, work and play as evidenced by strong population growth in the 25- to 34-year-old age cohort. And all of that comes along with a fiscally sound local and state government.

So some specifics for the assets in Denver. One asset was acquired for $140 million, which is about $395,000 a unit. The property was completed in 2017 and is a high-rise in the uptown neighborhood near downtown with a 96 Walk Score. We expect a 4.7% cap rate in year 1 and believe we purchased it at a modest discount to replacement cost. The other Denver property is a mid-rise located in the same uptown neighborhood. The property was acquired for $135 million or about $364,000 a unit, was built in 2017 and has an 83 Walk Score. We expect a 4.6% cap rate in year 1 and believe we also purchased it at a modest discount to replacement cost. We also acquired a high-rise asset in Boston for $216 million or about $572,000 per unit. It's located in the South End neighborhood and was built in 2015, has a 97 Walk Score and complements well our current Boston portfolio. We expect a 4% cap rate in year 1. And while we acknowledge that's a relatively low cap rate, we feel that it is a good trade as it was used as was funded, using proceeds from the sale of an asset on the Upper West side of New York. And a Disposition Yield at 3.9%. This property sold for $416 million or about $820,000 per unit. We earned a 9.8% unlevered IRR over our 5-year hold period. This property is in the burn-off period for the 421-a tax abatement program.

A quick note on our strategy in New York. We have significant -- have a significant concentration on the Upper West side of Manhattan and felt it prudent to reduce our concentration in that submarket and our exposure to outsized real estate tax increases in the future. We continue to believe that the New York market is an excellent long-term IRR performer as evidenced by the return on the asset we just sold. You can expect us to buy and build in New York as opportunities present themselves. As always, we'll continue to review our portfolio, both in New York and elsewhere, with an eye to maximizing our long-term total return including our cash flow growth.

Before I conclude my remarks, as you all know, our friend and leader, David Neithercut, is retiring January 1 after a remarkable 25-year career at Equity Residential. On behalf of our investors, our board and the entire Equity nation of employees, current and past, thank you, David, for your leadership and even more for being a person of great wisdom and integrity. Whether it was taking advantage of capital allocation opportunities like Archstone, navigating us safely through the shoals of the credit crisis or in your work every day to improve our operations and build our team, you always made the right decision in the right way. I also thank you for all the time and effort you've spent mentoring me over the years, and I look forward to having you continue to contribute to Equity Residential as a board member. You've had a great ride at Equity, and we wish you well in the next chapter of your life.

And now I'll turn the call over to Bob Garechana, EQR's new Chief Financial Officer.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [6]

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Thanks, Mark, and good morning. With Michael having covered our upward revision to same-store revenue guidance, I want to take a couple of minutes to talk about same-store expense guidance, full year normalized FFO guidance and capital markets activity. As is our custom with our third quarter reporting, we've raised our same-store guidance from -- we've revised our same-store guidance from ranges to single points. For same-store expenses, we expect to produce full year 2018 growth of 3.7%, which is effectively at the midpoint of the guidance range we provided during the last call.

Before I move to specific categories, I'd like to highlight that for the first 9 months of 2018, same-store expenses increased 3.4%. As a result, our guidance implies a higher expense growth rate during the fourth quarter of 2018. This is due to a low comparable period for the same quarter last year.

Now let me provide some color on the drivers of full year same-store expense growth. On property taxes, we produced growth of 4.1% through the first 9 months of 2018. We now expect our full year property tax expense growth to be approximately 4% or at the low end of our prior expectations. We've continued to have success with our field in refund efforts this year relative to our prior estimates. As a reminder, our prior property tax expectations already contemplated the sale of the New York assets subject to 421-a in the third quarter, as Mark discussed. As such, a 30 basis point reduction to property taxes was already included in our second quarter range of 4% to 4.5%.

Now moving to payroll, our second largest expense category. For the full year, we continue to expect payroll growth of around 3.5%. The job market remains highly competitive with near full employment. We, like many employers, continue to experience wage pressure in order to retain our best-in-class on-site employees and continue to provide superior resident service.

In our earnings release, we gave full year same-store revenue guidance of 2.3% driven by strong renewals, low turnover and high occupancy as Michael discussed. With same-store expenses in line with prior expectations, we now expect to produce same-store NOI growth of 1.7%, which is at the higher end of our previous range. This contributes approximately 1 additional $0.01 per share to full year normalized FFO. We've also updated our guidance for normalized interest expense and corporate overhead, which we define as property management and G&A. We now anticipate a $0.01 improvement in normalized interest expense, driven by lower-than-expected floating rates and later timing in our expected debt rate, the normalized corporate overhead we expect to come in at the top end of our previous range resulting in a $0.01 reduction to normalized FFO due to compensation expenses at the higher end of our earlier estimates. The net result of all of this is $0.01 increase to our normalized FFO guidance midpoint, moving it from $3.25 per share to $3.26 per share. All in all, revenue expectations have improved, expenses remain in line and the midpoint of our normalized FFO guidance has modestly increased.

Quickly on the capital markets front. You saw in the release that we prepaid a $500 million secured debt pool due 2019 with our line of credit. Our guidance contemplated prepaying this relatively expensive debt and we were able to do so without penalty. We expect to turn out all our portion of this debt in the upcoming months. With the majority of the anticipated offerings hedged at very favorable treasury rate, we would expect to issue at a rate well below the level of the debt that we prepaid.

With that, Jonathan, I'll turn it over to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Juan Sanabria with Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [2]

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I was just hoping you guys could give us a little bit of color on New York City and how you're seeing new lease rates trending into next year. It seems like that's a big variable. If you could just talk to the range of what's expected, for New York City in particular, given the meaningful dropoff in supply. Is that a market that is going to accelerate quickly or is that more of a 2020 story?

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Michael L. Manelis, Equity Residential - COO & Executive VP [3]

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This is Michael. So I think I said that I'm going to stay away from kind of the specifics of ranges at a market level. I would just tell you though, in New York, that while we do see this marked reduction in the supply, the 50 basis point, we like where the base rent growth is on a year-over-year basis today, holding strong into October. You are going to come up against the wave of renewals for all of the deliveries that occur this year. So it's not like you're completely out of the woods but you have forward momentum and New York definitely will be better next year or should be better next year than where it sits today, just because of that forward momentum and what we have embedded into the rent growth.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [4]

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Okay. Great. And then you kind of gave some parameters around supply expectations for '19, but do you have -- could you provide the percent change in expected deliveries? If we look at the latest action numbers, it seems like some of the West Coast markets are seeing an increase as a whole, and then you still generally feel confident outside of Seattle that things are going to improve. Is that correct?

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Michael L. Manelis, Equity Residential - COO & Executive VP [5]

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Yes. But I think I said even like in the San Francisco market we see about 2,500 more units coming concentrated in that Oakland, kind of East Bay. So I think our process that we go through and obviously, we start with this kind of active database, we look at what is competitive to us. So I think in those prepared remarks as I was going through each market, I mean the biggest marked decline is New York City, right? And then I would put everything else in these buckets of relatively similar and slight increase, like we just said, up in the Seattle and San Francisco area.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [6]

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My understanding was that...

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David J. Neithercut, Equity Residential - CEO & Trustee [7]

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I'm sorry, what was that?

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [8]

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Anything in the San Jose area? You mentioned Oakland. That would be a concern this year, relative increase for your portfolio exposure?

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Michael L. Manelis, Equity Residential - COO & Executive VP [9]

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No. I wouldn't say that there is really a concern. Listen, there is strong demand in that market right now and even at those submarket levels. I think what's hanging out there right now is what impact does these Oakland deliveries have on San Francisco, will there be the draw. And I think it's too early to understand that. But there is -- all of the drivers are a positive for the fundamentals of our business in that market. So I think these units will be absorbed that are coming to market. And I do want to clarify one thing that because of the shift that we -- as I said in my prepared remarks, in L.A. we do see a significant increase in the deliveries for L.A. in '19 as compared to '18.

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Operator [10]

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We'll take our next question from Nick Yulico from Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Appreciate the commentary on 2019 on some of the revenue drivers there. Any early look you can give on expense growth? As revenue is improving, is expense growth going to eat into that at all next year?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [12]

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Yes. Nick, it's Bob. I'm going to do the same thing that kind of Michael's doing and avoid any specific commentary on numbers. But thinking about the big expense categories, you really have real estate taxes, which we've seen a healthy run rate. I'm not sure that you would expect anything kind of different going forward in terms of an aggregate growth component. And then on the payroll side, we continue to be at full employment in the economy. And so we would expect to kind of see similar levels of employment or wage pressure as we look to retain and engage our employees.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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And then on New York City, you've had 6% expense growth this year. Some of that is due to this 421 tax abatements burning off. Can you just remind us where your portfolio in New York City is today in terms of the tax resets that have happened? What's still to come? And I guess, whether this issue is getting sort of better or worse in terms of expense growth for the New York City portfolio.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [14]

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It's Bob again. We currently have 14 properties in New York that are subject to the 421-a program. And what that means on our kind of real estate tax run-rate basis related to the abatement specifically is on a full year basis, call it, $2.5 million to $3.5 million for the next, call it, 5 years. Those projects are all at different levels of abatement and some of them don't even start until further out. But for the next, call it, 5 years, it's $2.5 million to $3.5 million on an annual basis.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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Okay. And just last question. You sold the West End asset. It was a low cap rate. It sounds like -- I heard that went to a valuated buyer, so I guess that supported a lower cap rate. I think you have 2 other assets you're marketing for sale in New York right now. I mean, are those similar low cap rate deals? And is there also any tax abatement burn-off there to consider?

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Mark J. Parrell, Equity Residential - President [16]

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Nick, it's Mark. Congratulations on your new role. What I'd say is we're not going to comment on any specific marketing activities. We're always out there putting assets on the market and doing recycling of assets through the system. But I wouldn't expect New York to be disproportionately affected necessarily by our sale activities. We've done well in the market. You can see we had a pretty good IRR on the asset we just sold. But I think overall, as we look at New York and the tax abatement assets, if you wanted to buy relatively new New York assets or builds, you bought them with this abatement. Nothing really was built that didn't have this abatement on it. So the fact that we have a significant portfolio of 421-a assets is a reflection of the fact that we have a significant portfolio in Manhattan. So again, I think we've done pretty well in these assets. Michael has mentioned some improvements in the supply picture. So I think there's some optimism in our mind about New York's performance. And whatever assets we'll sell, we'll sell because we get a good price and if we don't sell anything in that market, that's okay as well.

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Operator [17]

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(Operator Instructions) We'll take our next question from Nick Joseph from Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [18]

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You continue to drive turnover well. I know it's been a large focus. But what level of turnover do you consider frictional, at what point it can't go lower and new lease growth becomes more important?

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Michael L. Manelis, Equity Residential - COO & Executive VP [19]

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Yes. I mean it's an interesting question. I think -- I don't know if we're there yet but I would say that we're getting close. I think with record turnover being recorded now for the last couple of quarters, I would expect that trend to continue. I think that the team has done a fantastic job, as I said, with our relentless focus on delivering outstanding service and focus on renewals. I don't know exactly where we're going to land but I'm guessing that we're getting close to kind of normalizing on a turnover percent.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [20]

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And then you did the deals in Denver this quarter. Are you considering expansion into any other markets right now?

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Mark J. Parrell, Equity Residential - President [21]

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Yes, Nick, it's Mark. The best thing I can do to guide you on that, and we've been very open to evolution in our strategic process, is to refer you to our investor materials. There's a chart on Page 17 that has like a bit of heat map that shows you what we think are our market attributes that contribute to success long term. And Denver was the highest-rated market on there that we did know. So as we think about our markets, it's certainly possible that we'll enter other markets. But we're thinking about it in the framework of these classic characteristics where we think are good markets, which are relatively high single-family cost, places where our target demographic wants to live, work and play, high wage growth markets. Those sorts of things that are driving our decisions.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [22]

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It's Michael Bilerman speaking. David, just one question for you. And congratulations on your retirement and congratulations to the rest of the team in terms of this transition that was executed all with internal promotions, demonstrating a bench in the leadership that you've shown. I'm just curious about staying on the board. We've seen companies do different things, where a CEO retires and then exits completely versus they're staying on the board. Can you talk me through how you and the board came to the decision to have you stay on versus leaving?

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David J. Neithercut, Equity Residential - CEO & Trustee [23]

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Sure. We've had lots of discussions about that, Michael. And decided that really one size does not fit all, notwithstanding the fact there probably is best practices. Probably would've been impossible for me to have stayed on the board if someone was coming in from the outside. But I've actually hired Mark 20 years ago. He's reported nearly directly to me most of that time period. And so I think the general belief is that with that scenario, that it would be okay for me to remain on the board. I think I understand my boundaries. Mark and I have a lot of discussions about what role I should play in terms of going forward as well as what role I can play for him in terms of going forward. And I think we both go into this with our eyes wide open and with the belief that it will work very well.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [24]

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Now would you add another independent to the board to sort of balance things out a little bit because arguably, you are technically an insider?

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David J. Neithercut, Equity Residential - CEO & Trustee [25]

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I'm more than technically an insider. I am an insider. Look, we have had some board -- quite a bit of board refreshment over the past several years, and I expect that to continue.

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Operator [26]

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We'll take our next question from Steve Sakwa with Evercore.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [27]

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I know you guys aren't going to talk specifically about next year. But obviously, Seattle has shown a very, very large deceleration on your numbers. The same-store rental rate's gone from 6.6% a year ago down to 1.4%. And I appreciate your comments about maybe supply moving to some of the suburban markets next year. But just I guess how concerned are you about further slowdowns in the Seattle market in general as you look forward?

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Michael L. Manelis, Equity Residential - COO & Executive VP [28]

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Yes. Well, I think clearly and you can tell from the prepared remarks that we expect Seattle will produce lower revenue growth next year. It's almost just taking what's embedded today with the rents in place and modeling it forward. I will tell you I feel better right now about Seattle than I did sitting here 3 months ago when we were talking about the market. We've kind of stabilized the occupancy, albeit at a lower price point. But sitting here today, our occupancy is up at 96.1%. So we had some growth in occupancy over the prior period. And I think we're going to kind of run this portfolio with a little bit of a conservative play and build up this occupancy and let us get through kind of some of the spike. I think the job growth side, it remained a diverse market for job growth. We see that Amazon's got like -- they're back up to like the record number of open positions at 7,700 in Seattle. So I feel like there's some good fundamental things happening. We had to work through some of the supply. We're seeing some of that relief in the CBD. Now next year, there'll be that shift, like I said, into the Bellevue, Redmond. I think we'll be able to kind of work our way through that with some of the expansion and strength from Microsoft. But this is just something we've got to kind of let play out a little bit, and I think we know how to kind of navigate our way through this.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [29]

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Okay, so it sounds like things are stabilizing. Obviously, we just some of the natural maturation of the numbers. But in your perspective, it doesn't sound like it's getting worse from here.

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Michael L. Manelis, Equity Residential - COO & Executive VP [30]

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No. Other than like the erosion of the pricing power that I just alluded to, it feels like we've kind of stabilized and we think we're in a place that we know how to navigate our way through this.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [31]

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Okay. And maybe switching gears to development. I'm not sure you wants to field this but just in general, as you guys are evaluating new projects and thinking about potential land purchases this late in the cycle, I'm just curious, what are you seeing in terms of construction costs and sort of what is your experience in the market in terms of other developers, new projects, the pace of new starts. I mean, we clearly continue to see a push out of the current pipeline. But I'm just sort of curious on your expectations maybe over the next 12 months in terms of new starts, given a sort of stabilizing market but certainly rising construction costs.

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Mark J. Parrell, Equity Residential - President [32]

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Steve, it's Mark, and David may amplify my answer a little. Just to answer the question on cost, what we're seeing is generally 4% to 8% hard cost escalation, with the 4% to 6% number more at the East Coast and the numbers in the 6% to 8% range being more in Seattle, San Francisco and Southern California. We do look across our markets and we go to events that are industry events and hear developers speak to the pressures they're under, both under -- in terms of hard cost escalation, the tariffs, high land cost, the slower growth we've seen in rents of late, not keeping up with those costs as well as, of course, financing costs up. We do see construction continue to go on. We think it is abating but not in some material sense, except in New York as Michael alluded to. We do think these developers are under significant pressure. We do think they're building to IRRs that are, from our perspective, too low. A lot of the product that was being built is good product and maybe it's product we'd be interested in buying at some point in the cycle. But at this juncture, I can't tell you I see some material significant decline across-the-board, again except in terms of New York City.

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Operator [33]

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We'll take our next question from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [34]

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Curious. Some of your office REIT peers have been pounding the table on an inflection point in D.C. demand. And I know multifamily supply is still high. Curious if you're seeing any inflection points from fiscal stimulus defense spending where big employers are starting to enter the market.

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Michael L. Manelis, Equity Residential - COO & Executive VP [35]

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Yes, so this is Michael. Hold on, I'm trying to see if I can get you the foot traffic count. I think the overall market right now is showing increasing demand. Let me see if I can grab that percent. So for the month of September, our foot traffic was up 1.4% over September of '17. So call it stable to increasing. What I would say as demand, people are willing to take the time to come in and take a tour with us. It's still not demonstrating the pricing power that we need. So I do think there's this stable, improving demand component that is aiding in the absorption of the new supply but nothing that's really giving us a position for pricing power.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [36]

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Okay. And D.C. is kind of like New York, is a magnet for capital and cap rates are pretty low. And at least for the near-term growth prospects, cap rates seem irrationally low perhaps. Curious how you're thinking about D.C. as a source of funds potentially other expansion markets and how you kind of rank the return prospects of D.C. versus some other East Coast markets you operate in.

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Mark J. Parrell, Equity Residential - President [37]

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John, it's Mark. We're constantly looking at all the markets, including D.C. improving low-performing assets. You can expect us to continue to do that in D.C. And we're certainly aware acutely of the high supply and the impact that's had on our numbers in the last few years. But I do want to point out, D.C. over time has been a terrific performing apartment market. And coming out of the Great Recession, it was -- it did very well for us. So it does have some countercyclical benefits. It does have the fact that it's performed well over long periods of time. So there are things about D.C. that we do find appealing. Certainly would be great if the supply abated a bit. But at this juncture it isn't like we think that D.C. -- in fact, we just completed an asset, $100k that's just started its lease up that so far is going very well in the sort of NoMa area, so to speak, of Washington. So we like the market in many regards but we do acknowledge difficulties of late in terms of supply.

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Operator [38]

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We'll take our next question from Rich Hill from Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [39]

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I'm sorry if you mentioned this earlier, but I haven't heard any discussion on it. Do you have any updates on Costa-Hawkins? We're hearing various different things but I was wondering if you had any updates from ground given it's less than a month away, couple of weeks away at this point.

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David J. Neithercut, Equity Residential - CEO & Trustee [40]

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David Neithercut here. Really the only update we would have is things you're sort of hearing too. Just the results of we see more and more newspaper editorials coming out opposing prop 10. We do probably see the same polling that you're probably seeing. So no real updates I can give you going into now just 14 or so days away from Election Day. But generally, I can tell you we've got a -- we've assembled a really good team, very ably led by our senior most leader on the West Coast as well as Essex has a senior leader there. And those guys have really been doing a terrific job getting the message out about what a mistake this would be to address a very serious housing problem in the state. And polling is suggesting at least initially that the electorate is understanding that this is not the way that one goes about addressing a very serious housing problem. So we're going to run through the tape on this and we feel like we've got a good message and the electorate is here.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [41]

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Got it. That's helpful. I wanted to circle back to New York City for a second. Look, I have complete appreciation why New York City is a really attractive asset class over the medium to long term. But I'm curious if you think about New York City and supply coming down. Is this just the worst case scenario coming off the table or do you really expect growth to inflect? And I guess the question I'm asking you is, how do you as an owner of multifamily properties in New York City balance near-term, maybe, growth that's not as attractive as some other markets but recognizing that medium to long term in the IRR potential is still really attractive?

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Mark J. Parrell, Equity Residential - President [42]

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John, it's Mark. I want to repeat back the question because you broke up a little there. You're asking sort of our view short and medium term on New York? Is that right? Rich?

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [43]

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Yes, mainly.

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Mark J. Parrell, Equity Residential - President [44]

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Yes. I'm going to go with that because I can't quite hear. Again we're not in a position to give you the exact numbers at this juncture, but just in 2015, this market was a 4% revenue market. That wasn't that long ago. So we think that with the supply abating, the continual cycling in of new media jobs and technology jobs into that market, there's no reason this market, and I'm not suggesting it's 4% next year, but can't go back to a good run rate on revenues at some point in the near future. So we like the market short term, medium term and long term, all across the board.

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Operator [45]

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We'll take our next question from John Kim with BMO Capital.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [46]

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The 2 stabilized developments you had this quarter in the K, that 4.3% stabilized yield, I'm wondering if that came in below your expectation. And if so, what drove this?

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Mark J. Parrell, Equity Residential - President [47]

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So I'm sorry again, the question was relating to Helios?

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [48]

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Yes, Helios and 855 Brannan.

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Mark J. Parrell, Equity Residential - President [49]

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Yes. We see those as a stabilizing at a mid-5% yield. Again, they're still occupying, concessions are burning off, all that still goes on in those assets. So we're happy to bring those in at a kind of a mid-5% yield is our expectation.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [50]

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Okay. And then on your partnership with WhyHotel in D.C., can you give some kind of indication as to how much that could add to your development in returns or development yield on the project?

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Mark J. Parrell, Equity Residential - President [51]

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So it's Mark. I mean, we think that could be $800,000 or something like that to normalize FFO. And really, just to be clear, none of the numbers that we're going to show you as to occupancy and stuff on the development page have anything to do with WhyHotel's occupancy temporarily of units in that property it does its hotel execution. So in the long run, what you will see from us is just $100k numbers, strictly from a residential -- permanent residential perspective. But I think you should think about it not as affecting the development yield but really just affecting in FFO next year.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [52]

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Okay. Great. That was my next question. Turning to your New York strategy, do you still feel like there's a need to reduce concentration in the Upper West Side and/or are you encouraged some more given the pricing that 101 was then?

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Mark J. Parrell, Equity Residential - President [53]

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Well, we certainly felt the pricing on West End was good from our perspective. We don't feel compelled to necessarily lower our exposure further there. I think, again we'll have assets in the market -- in all our markets at varying points in time and if a bid came in we liked we might take it and reinvest in Denver and elsewhere. But I don't say -- we're here as a team. We don't feel like we're overexposed anymore to the upper West Side. But again, we'll look at each opportunity as it comes.

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Operator [54]

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We'll take our next question from Michael Lewis from SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [55]

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You talked earlier about rising construction costs and what that might mean for supply. I wanted to ask a little bit more specific to you. You haven't had to raise the budgeted costs on your active developments. Could you talk a little about when in the process you locked in cost, how much you lock in? And if you've changed your process around that at all given we're in a rising cost environment?

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Mark J. Parrell, Equity Residential - President [56]

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I'm going to start and David may amplify some of this. On, for example, the West End tower deal, the so-called Garden Garage deal, we're 90% bought out on that deal. It was a matter of great interest to both the board and to the investment committee internally that we not go forward unless we were very certain about our construction costs and had an appropriate contingency. So I think we are very focused on these things. I'm not sure I have the level of detail you're asking for on each one of these deals. But as we've approached both West End Tower and 249 Third Street, which are our 2 most recent starts, we've been very focused on making sure that as much as possible, things are bought out and if there are some risks that we've got an appropriate contingency in them. So right now we feel comfortable, very much so, with our budget.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [57]

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No. That's helpful since West End is the biggest one and has the longest lead time. My second question is more of a bigger picture question. A lot's been talked about millennials finally getting to marriage age. They're older, right, but they're getting up until their late 30s, the oldest ones. I was wondering about the following divorce rate and if that's in any way impactful and if you think these things together could become a drag on household formation as that demographic wave of kind of moves through the snake?

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Mark J. Parrell, Equity Residential - President [58]

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We don't think about it. A very good question. We don't think about our assets as only attracting millennials. I mean 20% of our residents are 50 and older. We think our kind of product in the areas we're in with the urban and dense suburban amenities we have attract people of all ages. But I guess I'd answer it and say that certainly true the millennials are aging. Our average age in our units is 34 and the biggest cohort is 26 right now of millennials. So we still got people coming feeding demand. 40-plus percent of our units are single occupant units. So again, we see continued demand across all age groups for our product. That Gen-Z group that's coming up, I'm not sure why they would like an urban lifestyle any less than their slightly older siblings. So I mean we feel pretty good about all the demographic numbers.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [59]

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Do you think the falling divorce rate is worth paying attention or do you think it's mostly immaterial and not important?

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Mark J. Parrell, Equity Residential - President [60]

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Yes, I think that's kind of hard to say. I mean, I don't know. I don't know if that's a trend or if that's this year's number. I know the birth rate went down and down and now it sort of went up a little bit. I don't -- as I said, I'm not sure what to make of something when it just happens for a year or so.

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Operator [61]

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We'll take our next question from Dennis McGill from Zelman & Associates.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [62]

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One question with relation to the employment outlook. As you guys think about and plan for 2019 in general and maybe rising uncertainty in general about the economy, how do you think about some of the key drivers, whether it's employment growth, wage growth, things like that as you build the plan? And what type of ranges would you put around that with uncertainty maybe a little bit higher, deeper into the cycle, et cetera?

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Mark J. Parrell, Equity Residential - President [63]

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Yes. Great question. Just to be fair about our process, we don't have algorithm where we input 150,000 jobs per quarter -- or per month, pardon me, new jobs and come up with a revenue number. It's more the on-site teams and the in-market teams talking about the hiring they're seeing and hearing about and supplemented by what our investment teams think across our markets and here in Chicago. So I don't want to give the sense that again there's some computer that's spitting out a number for us. And again, a lot of the job growth numbers are national and our portfolio is not national, it's in certain places. So our focus is a bit more micro than maybe your question implies.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [64]

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Okay. And just as you think about that micro impact, I'm sure you've looked at it that way, is the preliminary look at the numbers that you laid out as far as directionally markets, is that largely assuming that the employment backdrop that was in place in 2018 holds in 2019?

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Mark J. Parrell, Equity Residential - President [65]

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Yes. It roughly is. And we feel like we have -- from our end, and Michael's remarks gave you a little color on that, we see hiring occurring in all our markets, whether it's a new tech company in Boston or some other hiring relating to media in Los Angeles. So we see it across the platform. But yes, we basically, in our minds right now are assuming that things -- we have rising wages across our resident base, combined with employment that's roughly equivalent in '19 to '18.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [66]

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Okay. And then separately can you maybe just discuss what you're hearing and seeing, whether it's your own team or just out there in the market, conversations around capital availability from the lending side as well as capital interest in the assets in general?

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Mark J. Parrell, Equity Residential - President [67]

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Well, I'm going to take part of this and ask Bob to speak on the lending side. But there continues to be a strong bid across-the-board for our assets and for assets, we think, in the apartment space in general. We do think that Chinese buyers have retrenched and are a little less participatory in the market. There still are other significant foreign buyers, Canadians, Europeans and the like as well as a lot of U.S. money still chasing the asset class. You kind of see that in development side, right? You mean you see the continued development flow as people try to get exposure to our space. And again, we think flows continue to be very strong on the equity investment side. I'm going to turn it to Bob to talk just about the debt availability part of your question.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [68]

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So breaking that up and following on Mark's comment, on the stabilized piece, you continue to see very healthy supply or multifamily kind of with the GST kind of lending arrangements. So overall costs have gone up because interest rates have gone up, but that has been very healthy and no meaningful changes versus kind of prior history. On the development side, really kind of echoing Mark's comments as well, we continue to see banks lending. Construction lending is -- pricing has actually come down a little bit in terms of spread but rates have gone up with LIBOR going up, so all-in costs are maybe a push to slightly higher. But banks are continuing to lend on their lending at relatively conservative kind of advance rates. So longest cost rates. What you are seeing in the space that is probably different than maybe what we saw a decade ago is alternative sources of debt capital in the form of private equity debt funds, et cetera that are willing to be a little bit more aggressive and we see all of those kind of sources providing capital to the space.

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Dennis Patrick McGill, Zelman & Associates LLC - Director of Research and Principal [69]

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As you look at that on the development side, does that imply that development is going to last longer or prolong some of what would otherwise be a decline in competition from the supply deeper into the cycle?

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Mark J. Parrell, Equity Residential - President [70]

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I guess that remains to be seen. But I will say that this capital, that Bob just alluded to, that's in the middle, that's above the bank and below the equity is very expensive. This tends to be very pricey capital and is going to make the pro formas even harder to pencil. It's not like that money is coming in at the same cost of the banks. I mean it's considerably higher. It's double the cost or more. So with that in mind, I think it isn't necessarily going to extend things too much just again because the money is particularly expensive on a relative basis.

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Operator [71]

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We'll take our next question from Drew Berman from Baird.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [72]

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This is Alex Kubicek on for Drew. Hope you guys can give us some color on the recent Boston acquisition with long-term NOI growth expectations, relative to the 101 West End asset you sold?

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Mark J. Parrell, Equity Residential - President [73]

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Sure, I can give you a little color on that. So the asset is fully occupied. There's a fair amount of competition there. So our first year number in terms of revenue growth is relatively low, around the 1%. And then we saw rent growth more averaging, as it often does for us, in the 3s and then a few 4s here and there. With expensive growth for us 2.75% to 3%. We generally underwrite these deals over a 10-year hole. That gives you some color there. We can certainly comment on West End but I will say this, I don't know what the buyers' pro forma looks like. I don't know what renovations they're going to do, what things they have in mind, other potential uses they have. So from our perspective, we saw relatively muted near-term rent growth, relatively high real estate tax increases in the near term. But again, at some juncture when this burns off, you can reset those units to market. I mean, there is certainly value that I'm sure the buyer underwrote in the deal.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [74]

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That's really helpful. Additionally, could you give us some insight on your long-term IRR expectations for your third quarter acquisitions, most notably the Denver assets? We were just curious how you anticipate Denver's long-term NOI growth trend and whether the relative residual value argument holds up compared to the coastal markets.

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Mark J. Parrell, Equity Residential - President [75]

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Yes. Good questions. I mean, we were looking at the Denver deals as mid to high 7 IRR's unlevered over 10 years, which is the way we generally measure that. They did have -- we did have in our pro forma some increase to the cap rate on exit, with the thought that even though these are high-rise and mid-rise construction that there would be some cap rate expansion at the end of the pro forma.

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Operator [76]

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We'll take our next question from Alexander Goldfarb with Sandler O'Neill & Partners.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [77]

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Two questions for you guys. The first is just on retention. It was a question earlier in the queue. But if you guys are raising renewals at 5%, it doesn't seem like you're holding back on the renewals and yet you're still retaining more and more tenants. The retention is improving. So do you think there are other things at work? Like, are people just less willing to move apartments the way they were a decade ago? Or have home move-outs suddenly declined? Or what do you think is going on that's allowed you to push 5% overall in the sort of 1% to 2% market and still have -- keep more of your tenants than lose?

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Michael L. Manelis, Equity Residential - COO & Executive VP [78]

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This is Michael. I would say it's probably a little bit of everything that you just kind of alluded to. I would say from a reason for move-out to buy a home, we're actually seeing very little change in our portfolio. On a year-to-date basis, we're actually down a little bit to 11.3% of those that move out citing that reason. That was compared to 11.8% last year. Put that all in, it's 200 fewer people this year-to-date moving out with that reason. I think in the third quarter, we renewed, I think, I alluded to it, 500 more residents than we did in the third quarter of last year with roughly the same amount of expirations. And I think it's a little bit of everything. I think it's differing life changes. I think honestly, we see the relationship between high customer service and retention and we saw marked improvement in our customer service. This is something we have done and we're seeing the efforts pay off. So I think all of those things put in the blender is contributing to this retention. And to allude to the 5%, part of this too is, remember when you're pricing these renewals -- so we have a lot of our transactions occurring, we're pricing these renewals 3 months before and where is the rent going to be and we're issuing those renewals at that point. So I think this is demonstrating the fact that in many of our markets, our rents are up 3% year-over-year and you're quoting these renewals and you're negotiating through this process and a lot has to do with where these residence prior rents were in relationship to that market as well.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [79]

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Okay. And then the second question is just on D.C. It's been sort of developer's paradise the past number of years. Popular speculation is that Amazon will go to Northern Virginia. Is your view that if that happens, suddenly you and other apartment landlords will benefit because suddenly there would be an increase in demand? Or is the fear that the developers are already waiting for this and will just ramp up on the development side and therefore, any pick up in jobs is going to be more than offset by development?

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Mark J. Parrell, Equity Residential - President [80]

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Yes. It's Mark, Alex. I'm not sure that anything happens instantaneously. I mean, I don't think Amazon is going to open an office and immediately have 5,000 new employees and then get to 50,000 or whatever the number is. To me, that asset's obviously going to be more gradual. Depending where this is, there's certainly the capability the developers have to build into this. But if it's near some of our well located assets that are there already, I think it certainly benefits. No doubt.

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Operator [81]

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We'll take our next question from Rich Anderson with Mizuho securities.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [82]

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Costa-Hawkins, I know where you stand on it but have you guys done kind of a sensitivity such that it, let's say, gets repealed and every single municipality chooses rent control and vacancy control, what the impact would be on your growth profile? Would it be 100 basis points when you look at the entirety of your portfolio? Have you done that exercise just to think of a worst-case scenario?

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David J. Neithercut, Equity Residential - CEO & Trustee [83]

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It's David Neithercut here. Rich, we have not done all that math because, of course, that's the absolute worst-case scenario. We don't know what municipalities that currently have rent control, how they might amend, we don't know what municipalities that don't have rent control might enact rent control, which is, in fact, a right they've had since Costa-Hawkins was first put into place and even before that. And you don't know what limitations they'll put on -- what the properties built before 1995. There are going to properties built between -- until 2000 or 2005 or 2010. So it's just a little bit of some game theory that I'm not quite sure is a productive use of our time. We do know how much NOI or current revenue we've got in markets that we currently have rent control. We know how much of that might be impacted if a certain market went from 1995 to 2005 or whatever. And so we -- but it's just not productive use of time to do what you suggest. But we certainly do know where we have exposure, understand how much income might be at risk if certain changes are put in place. But as I said earlier, we feel like we're in a very good place with respect to defeating prop 10, again which is not the best thing for the State of California. It's the worst thing they could possibly do. We've got a good team in place. We're running hard, we're going to go right up until the bitter end and we feel good about our chances there.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [84]

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And then second and last question. Talking a lot about social changes, Nick brought up divorce. But one thing, and forgive me, but about 75% or 80% of your portfolio now has recreational use of marijuana legalized. And I'm curious how you feel about that. Probably going to 100% over time. Do you have the ability to write your own laws within your communities because perhaps there could be some mismatches within your community about people who are for it and against it? Or maybe just let it roll and let people do their thing and perhaps they're happier and everybody's happy because of it? What are your thoughts about that issue?

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Michael L. Manelis, Equity Residential - COO & Executive VP [85]

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No pun intended there, Rich. So this is Michael. I would say it's not that we write our laws. I mean we have lease agreements in place. I would say almost our entire portfolio is smoke-free today. I think we have some outlier properties that we have not deployed that with. So to me, the use of smoking marijuana is no different than cigarettes. Cigarettes are legal today, marijuana could be recreationally legalized in those markets. In our communities, we are still a smoke-free community.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [86]

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Right. But they can smoke inside their apartment and run around out in the community, right?

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Michael L. Manelis, Equity Residential - COO & Executive VP [87]

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Well no. That would be kind of a lease violation. So just like cigarettes, if somebody is smoking inside their apartment, neighbors smell it, then that's a lease violation.

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Operator [88]

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We'll take our next question from Omotayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [89]

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Again, you guys have been a dynamic duo for a very long time but again, with Mark now stepping to the CEO role, just curious, Mark, are there any changes that you could kind of portend making to the EQR strategy now that you're kind of in the CEO seat?

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Mark J. Parrell, Equity Residential - President [90]

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Well, not quite in the seat. I'm very close to the seat, but I'm not quite in it, I don't think. Well, thank you for those nice comments. We've never gotten a dynamic duo conversation before. I've been at the company almost 20 years, been in the CFO role for 11. The strategy, I think, I'd tell you is one that I embrace and in terms of urban, dense suburban product and the advantages long term of owning it. We evolve all the time here and we certainly evolved back into Denver. So I think the strategy will naturally change over time in response to changes in conditions and then in our thought process. So I wouldn't expect it to be static but I don't expect dramatic changes especially on the core investment strategy either.

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Operator [91]

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At this time, we have no further questions. I would like to turn the floor back over to David Neithercut cut for closing remarks.

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David J. Neithercut, Equity Residential - CEO & Trustee [92]

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Great. Great. Thanks, everyone. As we now close what I think is my 100th and final earnings call, I want to thank everybody in the REIT community for your support, your confidence and probably most importantly, your friendship over the last 25 years. I can tell you iit's been a great pleasure and honor to work with all of you. For those of you I'll see in San Francisco in a few weeks, I look forward to thanking you in person. For those of you I will not see, please know that I step down at the end of the year with extraordinary gratitude and with great confidence in Mark, the leadership team here at Equity and the future of Equity Residential. So thank you very much, and best regards to everybody.