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Edited Transcript of EQR earnings conference call or presentation 25-Jul-18 3:00pm GMT

Q2 2018 Equity Residential Earnings Call

CHICAGO Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Equity Residential earnings conference call or presentation Wednesday, July 25, 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

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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

* Andrew T. Babin

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

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Senior Associate

* John P. Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* 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

* 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

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Welcome to the Equity Residential Second Quarter 2018 Earnings Conference Call and Webcast. Today's presentation is being recorded. And now I'd like to turn the floor over to 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, Catherine. Good morning, and thank you for joining us to discuss Equity Residential's second quarter 2018 operating results.

Our featured speakers today are Dave Neithercut, our President and CEO; Michael Manelis, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer. David Santee is here with us as well.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

And now I'll turn the call over to David Neithercut.

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

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Thank you, Marty. Good morning, everybody. Thank you for joining us for today's call.

We're extremely pleased with the company's operating performance to date as we move towards the tail end of our primary leasing season. Because 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 combine to maintain very high levels of occupancy and record-setting resident retention that have enabled us to now expect to deliver growth in same-store revenue towards the high end of our original expectations.

With elevated levels of new supply across our markets this year, we had prepared ourselves for modest reductions in occupancy and weaker growth. But it was going to be a -- because it was going to be a very competitive marketplace for new prospective residents and/or existing residents, we have a lot of options from which to choose when their lease would come up for renewal, yet very deep and resilient demand for apartment living in our urban and highly walkable suburban markets continues to be the story. And here to take you into greater detail is our recently promoted Chief Operating Officer, Michael Manelis.

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

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Thank you, David. So similar to the trend we discussed on the last call, the overall demand for our product remained strong through the leasing season despite the elevated supply. Our team's ability to execute along with continued job growth has put us in a position to exceed expected revenue results for this quarter and increase our full year revenue growth expectations to 2.1%.

New York and San Francisco are driving the majority of the overall guidance increase. For the second quarter, we reported 96.2% occupancy. Our new lease change was up 1.4% and achieved renewal increases were up 4.7%. All 3 of these metrics were above our original expectations.

I'd like to take a minute and recognize our on-site teams. Renewing our residents in the face of elevated supply has been the team's #1 goal. Not only did they deliver a 4.7% achieved increase on renewals, but they also managed to reduce turnover again to 13.4% for the quarter while increasing our overall resident satisfaction to the highest level we have seen in the history of our company. In addition to being the lowest turnover percent that we have ever reported in the second quarter, when you net out on-site transfers, that is residents who are moving to a new unit within the same community, this number drops another 150 basis points to 11.9%. Their ability to deliver remarkable service to our residents is an inspiration to all of us here, and I can't tell you how proud I am of all of them.

So now onto the markets. Let's start with Boston. Gains in occupancy, a 20-basis-point revenue boost from parking income and a continued ability of the market to absorb the new supply has given us the confidence to increase our full year revenue guidance midpoint for this market by 50 basis points to 2.1%. Our occupancy for the quarter was 96.3% in Boston, which was 50 basis points higher than our original expectations and 60 basis points better than Q2 of '17.

As of this morning, our Boston base rents are up 2.7% as compared to the same week last year. And renewal performance remained strong, with 4.8% achieved increases in the second quarter. July is trending to a 5.1%, and August is projected to be 5.2%.

Moving over to New York. Consistency in operations and disciplined market pricing are the highlights for this quarter. 96.8% occupancy for the quarter was 70 basis points better than both expectations and that of the second quarter of 2017. Achieved increases on renewals were 30 basis points better than expected at 2.8%. Our use of concessions in New York remains very limited and strategic.

Our second quarter concessions were 37% lower than that of the second quarter of 2017. And for the past several months, we have only had approximately 5% to 10% of our weekly applications receive some form of move-in concessions.

We remain focused on competitive net effective pricing. And the use of concessions with our stabilized assets will remain targeted, but it is expected to increase in the softer demand period later in the year. Full year revenue guidance for New York is being increased by almost 100 basis points from negative 75 basis points to a positive 20 basis points. Today, our occupancy in New York is 96.7%, which is 70 basis points higher than the same week last year. Base rents are up 2.9% year-over-year, and this week is the 14th consecutive week of base rents being positive on a year-over-year basis and the fifth consecutive week being above 2%.

Achieved increases on renewals remain strong with 3.2% expected in July and 3.4% for August. So strong demand and disciplined market pricing in New York positioned us well for the peak leasing season. This provided us the opportunity to both raise rate and grow occupancy. That being said, we are not out of the woods yet as the third quarter is the peak delivery quarter for New York. Now these deliveries are concentrated in Long Island City and Brooklyn, where to date, we have not seen a significant impact to our operations. Our New York team has performed extremely well through the leasing season, and we like our position here heading into a softer period of activity.

Main headline for Washington, D.C. continues to be positive economic conditions have aided in the absorption of new supply, but the overall D.C. continues to be a market with minimal pricing power. That being said, this is a market that's going to continue to deliver almost 3,000 units per quarter through the end of 2019. Pricing power will remain pressured until we either see a decrease in supply or an increase in jobs above the 40,000 per year level.

Our second quarter revenue growth in D.C. was slightly better than our original expectations, primarily driven by 96.3% occupancy, which was 60 basis points better than expectations and 80 basis points better than Q2 of '17.

Renewals was 30 basis points below expectations, with an achieved increase of 4.1% for the quarter. Today, our occupancy in D.C. is at 96.3%, which is 10 basis points higher than the same week last year and our base rents are 3.4% up year-over-year. We expect to achieve a 4.5% increase on renewals in July and a 4.7% increase for August.

We have revised our full year revenue projection for Washington, D.C. to 1.2%, which is a 20-basis-point increase from our original expectation at the beginning of the year.

Moving over to the West Coast. Our overall second quarter revenue results in Seattle were slightly below our original expectations. On our last call, we told you that we were experiencing continued moderation and that our ability to grow rate was less than expected. That trend has continued through the second quarter, and we are not seeing signs of pricing power improvement typically observed during the peak leasing season.

Occupancy for the second quarter was 95.8%, which mirrored Q2 of 2017 and was 10 basis points less than our expectations. Achieved renewal increases for Seattle averaged 5.9% for the quarter, which was also 10 basis points less than what we expected. The Seattle job market remained strong which has helped in the absorption of the new units, but we expect continued rate pressure from the new supply through the remainder of the year. The good news on the supply front is that the 2019 supply is less concentrated in any one submarket which should allow modest pricing power to return to our portfolio. Today, our occupancy in Seattle is 95.6%, which is 30 basis points lower than the same week last year, and our base rents are down 1.7% year-over-year.

We expect our achieved renewal increase to be 6.3% for July, and August is trending towards 5.5%. We have adjusted our Seattle full year revenue growth projection down 25 basis points to 3% to reflect lower-than-expected base rent growth.

Moving down to San Francisco. Pricing power and occupancy gains fueled by strong demand has resulted in another quarter of outperformance versus our original expectations. We have said in the past this market had the indicators that it could outperform the high end of our guidance range. We now expect our full year same-store revenue growth for San Francisco to be 2.9%.

San Francisco's occupancy averaged 96.2% for the quarter, which was 40 basis points better than expected and 50 basis points better than Q2 of '17. Achieved increases on renewals were up 5.2%, which was a 100 basis points better than we expected. Job growth remained strong in the Bay Area at 2.1% and is really fueling the demand and aiding in the absorption of the new supply.

Our own newly developed community, 855 Brannan, in downtown San Francisco is a great example of the strength of this market. This community is expected to stabilize approximately 6 months earlier than we initially thought. Today 855 Brannan is at 95% occupancy, and we just renewed 54% of all of our June and July expirations with an achieved increase of 4.2%. Overall, the new deliveries in downtown San Francisco will be limited in the third and fourth quarters. The bulk of our competing product has already delivered and is currently in lease-up.

Another example of the strength of this market is the fact that our own performance in the Peninsula with 28% of our Bay Area NOI remained strong in the face of steady year-to-date supply deliveries. We estimate that the Peninsula deliveries will decline by 70% in 2019, which should provide a favorable tailwind to already strong performance.

Today, we are 95.9% occupied in San Francisco, identical to where we were the same week last year. Our base rents are up 6.1% year-over-year. Our achieved renewal increases for July are at 5.5%, and we project a 5.4% increase for August.

Moving further down the West Coast, I am pleased to report that Los Angeles, which accounts for almost 30% of our portfolio-wide revenue growth, produced second quarter results slightly ahead of our expectations. We mentioned on previous calls that we had a strategy to increase occupancy early in the year to not only position us to raise rates but as a defensive move against the elevated supply in this market.

For the quarter, we had 96.0% occupancy, which was 20 basis points higher than our original expectations and 30 basis points higher than the second quarter of '17. Achieved renewal increases for the quarter in L.A. were up 6.2%.

In the past, we have been asked a lot of questions about delays in deliveries impacting our results. We have explained our process and outlined how, from an operational standpoint, we also focus on when first units begin leasing. Our response has been consistent and that we were not seeing delays beyond the typical 10% to 15% moves between quarters.

Specific to L.A., this quarter marks the first time we are seeing an above-average shift in the timing of deliveries. It is hard to quantify the exact benefits of this shift as we still had over 4,000 units begin leasing activity in the first half of '18, but we do recognize that our performance during the first half of the year was impacted in a positive manner since the delivery pressure was not as intense as expected.

Our occupancy in L.A. today is 96.6%, which is 10 basis points lower than the same week last year. Our base rents are up 5.6% year-over-year, and we expect a 6.5% increase on renewals for both July and August.

Based on modest gains in occupancy, stronger pricing power above our original expectations along with increased potential pressure in the second half of the year due to the supply shift, we have revised our full year revenue projection to 3.4%. This would have been a 3.5% increase. But as we disclosed in the release, during the second quarter, we had a onetime write-off from a retail tenant vacancy that will impact the full year results in this market by 10 basis points.

Moving to Orange County. Second quarter results were below expectations, primarily due to lower occupancy and lack of pricing power from lease-up pressure in the [market]. Occupancy for the quarter was 95.9%, which was 40 basis points lower than both expectations and that of the second quarter of '17. Achieved renewal increases for the quarter were 5.4%, which was 80 basis points lower than what we expected. Today, we continue to see moderate pressure on pricing in Orange County but our occupancy has recovered to 96.6%, which is 40 basis points higher than the same week last year.

Our base rents are up 1.9% year-over-year, and achieved increases on renewals are up 5.9% for July and trending to 5.6% for August. Given the lack of pricing power experienced year-to-date along with revised expectations going forward, we have adjusted our Orange County full year revenue growth projection down 50 basis points to 3.5%. While this was not as robust of a leasing season in Orange County as we had hoped, this market will still produce our second strongest results in the portfolio for 2018.

And last but not least, San Diego. Our results for the quarter were in line with expectations. Occupancy was 96.4%, which is exactly what we anticipated, and achieved renewal increases for the quarter were 6.3%, which was slightly better than our expectation.

Today, our San Diego occupancy is 96.7%, which is 60 basis points lower than the same week last year. However, it's still in line with our guidance expectations. Our base rents are up 1.6%, as compared to the same week last year, and we expect achieved renewal increases for July and August at 6.3%. There is no change to our full year revenue growth expectation of 4% for San Diego.

In closing, we are more than halfway through our peak leasing season and we continue to see strong demand for our products. New supply is being absorbed at a rate greater than we expected and pricing of those units remains rational. New York and San Francisco drove the majority of our 50-basis-point positive guidance revision. Seattle and Orange County, 2 of our smaller markets, continue to be bit behind our original midpoint expectations. And Boston is ahead of our expectations and the rest of our markets, D.C., L.A., San Diego are basically on track and performing slightly better within 10 to 20 basis points of our original expectations.

A sincere thank you to the entire Equity team. Peak leasing season is exhilarating and exhausting at the same time. Your effort and results year-to-date are beyond appreciated. Your relentless focus on delivering remarkable experiences to our residents is clearly paying off. Keep it up. Thank you.

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

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Thank you, Michael, and good morning. Michael just discussed our markets and the upward revision to our same-store revenue guidance. And I want to take a couple of minutes here to talk about our revisions to our same-store expense guidance into our full year normalized FFO guidance.

First, for same-store expenses, we have lowered the midpoint of our full year same-store expense guidance to 3.75% from 4%. This is primarily driven by our expectation of modestly lower property tax expense growth and for lower on-site payroll expense growth.

As a reminder, these 2 expense line items together constitute approximately [65%] of our same-store operating expenses. Year-to-date, we have produced expense growth of 3.5%. We don't expect a big change in the growth rate of our expenses in the second half of the year.

Now I'll give you a bit more color. You saw us produce 4.5% growth in property taxes through the first 6 months of 2018. We now expect our full year property tax expenses to grow in the range of 4% to 4.5%, and that's down from the 4.75% to 5.75% prior range. This is due to both significantly better-than-expected appeal activity as well as our expectation of a reduction in the growth rate of our taxes upon the sale of the same-store asset that David Neithercut will discuss in a moment.

Also, we have lowered our expectation for on-site payroll expense growth to a range of 3% to 4%, and that's down from 5% before. At the beginning of the year, our budget assumed continued pressure on on-site payroll, especially compensation for our maintenance personnel. While we are still feeling wage pressure, especially on the maintenance side, our on-site payroll expense growth has been positively impacted year-to-date by a reduction in our estimate of medical reserve expenses.

Year-to-date growth of 2% in on-site payroll means that payroll expense growth will be higher in the back half of the year than it has been year-to-date, but that is mostly due to a harder 2017 comparable period in the second half of the year than any real change in trend.

Now moving over to normalized FFO. In our earnings release, we raised the midpoint of our full year same-store revenue guidance to 2.1% from 1.6%, driven by the strong renewals, low turnover and high occupancy in our portfolio that Michael just discussed. I just went over our expectation of a decrease in same-store expenses, which collectively allow us to raise the midpoint of our same-store NOI guidance to 1.4% from 0.75%.

On the normalized FFO side, we are picking up about $0.03 per share from higher same-store NOI and another penny or so from our 2018 transaction activity due to our narrowing of our investment spread and the timing of our acquisition and disposition activity. These positives are partially offset by $0.01 per share increase in interest expense, primarily due to the increase and timing of this same transaction activity and its impact on our intra-period borrowing. The result is a modest increase to our normalized FFO guidance from $3.22 per share to $3.25 per share.

All in all, revenues improved, expenses slightly lowered, normalized FFO slightly improved. And with that, I'll turn the call over to David.

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David J. Neithercut, Equity Residential - CEO & Trustee [6]

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Thanks, Mark. On the transactions front, second quarter was pretty quiet, with only 1 acquisition occurring and no dispositions. That acquisition being a 240-unit mid-rise property built in 1999 and located in Hoboken, New Jersey. Now as noted in last night's press release, through the first half of the year, we have acquired 2 assets for $200 million and sold 4 assets for $290 million at an accretive spread of 10 basis points. Also noted in the press release is a revised assumption for the year of $700 million of acquisitions and an equal amount of dispositions, which obviously will require a fair amount of activity in the second half of the year.

Included in that activity are several acquisitions under contract and in the due diligence process totaling nearly $500 million, which includes a couple of recently built properties in close-in, highly walkable neighborhoods of Denver. As we said repeatedly, our exit there was not market related but rather portfolio related.

We've continued to carefully watch Denver because it possesses many of the characteristics we look for in one of our markets, that being a highly educated workforce, strong growth in high-paying jobs and relatively high cost of single-family housing as a multiple of income.

And we think that with the new supply that has recently been and will soon be brought online in Denver, there will be additional attractive opportunities to acquire assets that meet our investment criteria as we rebuild the critical mass in the market.

Our second half transaction activity will also include the disposition of an asset on Manhattan's West Side that is currently under contract at a price in excess of $400 million and at a very attractive disposition yield. This sale is expected to close late this quarter, with all contingencies currently waived and subject at this time to only normal closing conditions. This disposition will be discussed in more detail following closing, but it does represent an opportunity for us to reduce our exposure to the West Side, where we have a significant portfolio of assets, as well as an opportunity to address the negative impact on our New York City growth rates by reducing our exposure to properties with expiring 421-a real estate tax benefits. In fact, going back to Mark's comments just a moment ago on the expected improvement in our 2018 same-store operating expenses, this sale will reduce our portfolio-wide growth in same-store real estate taxes by 30 basis points.

Turning to development. During the quarter, we started work on our tower in Boston's West End neighborhood that we discussed on our most recent call. This is a 469-unit project that will be delivered in 2021 at a cost of $410 million. We're also very pleased to note in the last night's release that we now expect to stabilize 3 development yields on the West Coast 2 to 3 quarters sooner than expected, more clear examples of the continued strong demand for high-quality multifamily properties across our markets.

So I'd like to close with just a few comments on Proposition 10, this being the California ballot initiative to overturn Costa-Hawkins. For those of you unaware of the situation, municipalities in California have for many years been able to implement rent control. However, it would be subject to certain limitations as a result of the Costa-Hawkins law. One, it could only be imposed on properties built before 1995; and two, properties subject to rent control must be allowed to move their rents to market upon vacancy, which is known as vacancy decontrol. Proposition 10, which will be on the ballot in California this November, seeks to repeal Costa-Hawkins, which would remove these limitations on rent control for those jurisdictions opting to implement rent control, which, of course, not all actually do.

Now EQR has joined with the California Apartment Association, public and private landlords across the state, numerous trade organizations, affordable housing groups, state and local chambers of commerce, veterans and minority groups, nationally recognized independent research organizations among many others to create a coalition to defeat this proposal. This will not be an easy fight because on the surface, who isn't supportive of affordable housing? However, when made aware of the negative impact that rent control has on the existing housing stock and of the disincentive it creates to build more housing, which is truly the only way to address the shortage of housing, many people come to understand how bad rent control can be for the neighbors, neighborhoods and communities. So we will fight Proposition 10 at a cost to EQR of $1.6 million to date. And regardless of the outcome, we will continue to fight attempts at the local level to enact rent control because this is bad housing policy, plain and simple.

There is a reason that it has made no headway in the legislature and why the current governor and both gubernatorial candidates have come out against it, and that is because it is widely understood that rent control creates a disincentive to invest in the existing rental housing stock and a disincentive to build more rental housing and is, therefore, the worst possible action that could be taken to address the shortage of affordable housing because rather than address the problem, it exacerbates it.

The answer is to build more housing, and there's not one solution that will work everywhere there's a housing storage. But the basket of solutions includes inclusion area zoning, looking hard at some of the regulatory requirements that can add significant costs for new development projects, increasing federal low income housing tax credit program, addressing the NIMBY-ism that exists in many of the areas where the current housing shortage is the most acute.

There is no question that we have a serious housing issue across the nation, which needs to be addressed. And while the answer may not be easy, solutions do exist. And it has been proven time and time again that rent control is not one of them.

So Catherine, we'll be happy to open the call then now to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come 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 for the latest portfolio-wide color on 2019 supply and the expected delta versus '18. And if you could maybe just highlight which markets are seeing the biggest deceleration, if any are seeing an expected increase.

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

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

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

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And -- but the latest cut of the numbers, has there been any material move from '18 into '19, outside of the L.A. market, which you highlighted in your prepared remarks?

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

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No. No material change moving between years, outside of what we saw in L.A.

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

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

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Michael L. Manelis, Equity Residential - COO & Executive VP [7]

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Yes. So I mean, I want to just say on the new lease and I kind of -- I think I said this on the last call, so I think it's important I reiterate. We don't believe that looking at these results for any single one quarter is the best way to think about this metric at a market level. I'm just going to tell you that we just went through the process of updating all of our full year expectations when we went through the guidance revision process. And on our full year basis, our assumption changes were as follows: So New York was increased by 100 basis points in our expectations for new lease change; San Francisco was increased by 50 basis points; and Seattle and Orange County were both reduced by 100 basis points. The rest of our markets were either on track or had marginal moves in either direction.

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

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

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

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

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Operator [10]

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We'll now hear from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [11]

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On the re-entry into Denver, how many assets or what percentage of NOI do you need to own to reach an acceptable scale?

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David J. Neithercut, Equity Residential - CEO & Trustee [12]

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That's a good question, Nick. As we look at it, we think that we can get an appropriate sort of critical mass with, call it, 14, 15, 16 assets. That's probably around $1.5 billion or about 5% of our sort of NAV allocation, if you will, and these 2 assets we're underwriting get us 20% or so on the way there.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [13]

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Okay, so do you expect to reach that level over the next 2 to 3 years? Or is it more of a next cycle target?

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David J. Neithercut, Equity Residential - CEO & Trustee [14]

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I think it's hard to say. And a lot of it will just be -- we can find opportunities to trade out of other markets, sort of what we're doing here and trading out of New York and reallocating that capital in Denver. If there are opportunities, it might be faster, but I think it'd be hard pressed to sort of put a specific time line on it, but one that we will be -- really have our eye on and try and get there as soon as appropriately possible as we think about allocating capital.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [15]

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And you've done a great job with renewals [drive internals to] lower. Is there an opportunity to drive it further? Or do you think you're close to frictional turnover level?

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Michael L. Manelis, Equity Residential - COO & Executive VP [16]

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

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Operator [17]

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Our next question will come from Steve Sakwa with Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [18]

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

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

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

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [20]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [21]

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Well, it's harder and harder, Steve, particularly as these construction costs go up more quickly than rental levels. We thought -- in 2017, across our markets, we saw 4% to 8% increase in hard costs, and we're expecting and underwriting the same sort of expected growth this year. Even though that we may not be -- we're not bidding anything ourselves. But as our guys track those costs, that's what they're seeing again this year. And that is before any -- the inclusion of any kind of impact of tariffs. I've had, just my construction guy tell me, I think, steel because the results of tariffs are up at least 25%. And I know Mark has had some conversations with others that might have some color for you as well.

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Mark J. Parrell, Equity Residential - President [22]

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Yes, I mean, just, Steve, attending some industry events and hearing large general contractors speak to a room full of developers who, I'll tell you, had rapt attention on this point. I mean, what they're seeing was -- and this was before the steel tariffs, but just the general thread of it plus the lumber tariffs that already exist with Canada, that all of that was pushing hard costs up 4% to 8%. And indeed, was also adding the cost to a lot of construction contracts that created real uncertainty, where the general contractor and the subs weren't willing to take risk on some of these items, which really puts a lot of pressure on the developer and on their contingency.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [23]

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So I guess, it's fair to assume -- or I mean, can you point to or do you expect then that to just really lead to kind of a drop off in new supply here over the next kind of, say, 6 to 12 months?

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David J. Neithercut, Equity Residential - CEO & Trustee [24]

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Well, we've certainly -- we've said that for some time. Certainly, there's product in the pipeline that will be unaffected by this. Our deal that we've started in Boston is unaffected by any of this. That contract is sort of locked down. But certainly, we hear anecdotally all the time, Alan George and our investment guys hear all the time about projects that are being pushed aside, equity capital that is unwilling to go forward, and deals that are looking for new capital sources, specifically as a result of this. So I see no reason why this won't have a significant impact on the number of starts going forward.

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Operator [25]

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Our next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [26]

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There's been some news articles out there about pop-up hotels at your 100k apartments in D.C. I was wondering if you can provide the economics, average rents, margin, CapEx reserve on that building now, that will be more of a short-term lodging type focus versus, let's say, was 100% traditional apartments?

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David J. Neithercut, Equity Residential - CEO & Trustee [27]

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Well, I don't have that compared to what it would be, John. But we have cut a deal with this entity called WhyHotel, where they're taking down 95 units for 9 months in a property that will soon be delivered. We get a base rent from them as well as a participation over some thresholds. These are apartment-experienced guys. So they've been very easy to work with, very compatible to work with. We think it's a great opportunity to deliver some income in vacant units that would otherwise remain vacant over that 9-month period.

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Mark J. Parrell, Equity Residential - President [28]

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And John, they provide all of the goods. I mean they are providing -- they're furnishing the units. There's no additional capital on our part, and they're providing the staffing to address any concerns that their hotel residents, so to speak, have. So there isn't like a cost impact effectively on us.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [29]

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Okay, can you share a stabilized yield projection?

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David J. Neithercut, Equity Residential - CEO & Trustee [30]

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I beg your pardon?

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [31]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [32]

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On that particular property?

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [33]

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Yes.

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David J. Neithercut, Equity Residential - CEO & Trustee [34]

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100k. We think that deal will stabilize in the mid-5s.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [35]

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And then turning back to Denver, sorry if I cut you off there.

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Michael L. Manelis, Equity Residential - COO & Executive VP [36]

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No, just to be clear, though, the hotel part will go away. We'll lease this up. David's projection is strictly a residential apartment execution. There will be no hotel.

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David J. Neithercut, Equity Residential - CEO & Trustee [37]

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At the 12-month forward return on a fully stabilized apartment product, the existence of the WhyHotel will just provide some income in advance of that calculation.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [38]

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Okay. Turning back to Denver. When you're underwriting that market, again, obviously, I know it wasn't a market asset, but when you're underwriting Denver and long-term NOI growth in Denver versus your existing portfolio, how does that market rank against your existing markets?

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David J. Neithercut, Equity Residential - CEO & Trustee [39]

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

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [40]

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And one last one, if I may. To get the $500 million, will -- what other markets will be a source of funds to grow -- or at $1.5 billion -- I'm sorry, to get to the $1.5 billion. Current environment, what other markets will be source of funds to fund Denver?

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David J. Neithercut, Equity Residential - CEO & Trustee [41]

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Well, I guess, it's possible that all of them could. Again, this is just a relative trade process. I think it's possible we'll continue to look at other New York assets that are subject to the 421-a tax burn-off. But that's, it's not a requirement. So as we look at across all of our properties on a regular basis, and we've sold out of all of our markets from time to time, and it will just be -- it'll depend on what we think the best opportunity is at the time.

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Operator [42]

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We'll continue on to Rich Hill with 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 [43]

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One, I guess, macro question and then a little bit more micro. Talking about New York, the New York market for a moment, obviously, it seems like, for lack of better term, the worst case scenario has been taken off the table. And you're a lot more optimistic about New York City than you were previously, but I'm sort of thinking about the future, and is this less than 1% revenue growth sort of a new steady state, just given the supply versus demand technicals. And while it's not going to be nearly as bad as maybe some feared, is it fair to say that we're not getting back up to the 2%-plus revenue growth that we've seen in the past and will lag other markets. So I guess, what I'm trying to get your view on is supply versus demand technicals. And if supply ebbs over the next couple of years, are we expecting to see a reacceleration in same-store revenue? Or are we -- or is it really just more muddling along in this 0 to 50 basis point range?

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Michael L. Manelis, Equity Residential - COO & Executive VP [44]

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Yes, so this is Michael. I guess I would -- So I'm not going to speak too specifically about '19 or into '20, but I guess I would tell you, just given where we are in the trajectory that we have and the ability for this market to absorb the unit that they seem to-date in a rational way, I would suggest that we will start to see modest pricing power start to return and it may be neighborhood-by-neighborhood, submarket-by-submarket, but I think we will be in a position to get back to what you just described as more normal growth, 2%, 2.5%., something like that.

I'm not sure that that's going to happen immediately in '19, but I think, clearly, you're going to see some of that momentum start to emerge.

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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 [45]

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Got it. That's helpful. And then back to the micro question. It looks like a retail move-out in L.A. It might have been just a little bit of a top line headwind. I'm sorry if you mentioned this. But it looks like just back on the envelope, that was maybe 10 basis points off the top line? Am I thinking about that correctly?

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Mark J. Parrell, Equity Residential - President [46]

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Right. So for Los Angeles, we had 1 -- 2 retail tenants vacate as a single asset. It was about $500,000 in straight-line rent that we reversed. So by the end of the year, it will have no effect on the entire portfolio. And I would say to you right now that it had at a very minimal rounding effect on the 2.2% we reported for the entire portfolio. For L.A., you saw the footnote there was an impact, and that's why we footnoted it. By the end of the year, as Michael mentioned in his script for Los Angeles, it might be a 10 basis point negative, but not much.

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Operator [47]

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Our next question comes from John Kim with BMO Capital Markets.

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

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And just a follow-up on that retail vacancy. Was this an unexpected vacancy? And do you see this occurring in other markets, just given the tough retail environment?

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

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Sure. Just to give context, about 2% of our total rental income is from retail. We have a very small retail portfolio. We run it mostly as an amenity for our residents in our buildings, so coffee shops and the like are very common tenants. So now this uncommon. It's lumpy. I wouldn't -- we don't see this as a repeating event.

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

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Okay, and then couple of questions on Denver. One, do you expect to develop in this market or growth acquisitions? And two, one of the arguments about being in this market was new supply. And what makes you comfortable about overcoming this characteristic?

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David J. Neithercut, Equity Residential - CEO & Trustee [51]

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We currently will reenter that market through acquisitions. We will certainly consider some joint venture development opportunities if they present themselves, and that is the way we got into the development business back in the 1990s. And if appropriate, we believe there's capacity to develop ourselves there, we will certainly consider that. Just with respect to the market, we've said for quite some time that this was not a market-related exit, but it was a portfolio-related exit when we sold the last time. And as -- when we did so, we saw this new supply coming and new that it would have an impact on the marketplace. We also thought that, that new supply would likely represent opportunities for us down the road, if and when we decided to reenter the market, and that's exactly what's happening right now. So as I said previously, we're not expecting to get terribly robust revenue growth maybe in the first or second year in Denver. But we think we're buying it -- great assets at a very good basis that will perform very well as we get into 2019 and we begin -- we see that new supply begin to abate.

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Operator [52]

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We'll continue on to Michael Lewis at SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [53]

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You guys talked a bit about the low turnover, and rightly, it sounds like a lot of that is due to what you guys have been able to achieve. I was just wondering if there's anything more macro out of your control that you think is causing the wind to be at your back on the turnover? Maybe it's -- in your markets, maybe SALT deduction is causing sort of people to move out from home ownership? Or maybe it's some other factor of exit, either continue to help you or turn against you in that front?

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Michael L. Manelis, Equity Residential - COO & Executive VP [54]

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

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

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Maybe a Part b to that question. The demographics are interesting. The oldest millennials are 38 this year. Have you seen anything on the margin there with movement, maybe an increase move toward home ownership?

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Michael L. Manelis, Equity Residential - COO & Executive VP [56]

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No.

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David J. Neithercut, Equity Residential - CEO & Trustee [57]

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

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [58]

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And then, you've had the 2.2% year-over-year same-store revenue growth, actually each of the past 4 quarters, and the quarter before that was 2.1%. And the midpoint of the guidance this year is 2.1%. So it's really kind of steady now in this range, and I'm sure your cost [as you were talking about] 2019. But given this kind of steadiness, and it looks like maybe supply is going to ease a little bit, I mean, do you think 2019 since your revenue growth is going to be higher or lower than '18? Or do you think this is kind of where we're at right now as far as kind of a balanced market?

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David J. Neithercut, Equity Residential - CEO & Trustee [59]

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

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Operator [60]

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Our next question comes from Rich Anderson with Mizuho Securities.

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [61]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [62]

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

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Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [63]

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Okay, great. And then if I could just ask the other recent question a little bit differently. I'm not going to look for 2019 guidance, I know you're not going to give me that. But maybe you can give '21 -- '20, '21 guidance. And the reason the way I'm thinking about it is, do you feel like this is a tide-turning kind of situation with regard to your new guidance? I can appreciate it's going better for you in this current year. But having experienced cycles in multifamily for many, many years, not to date you, I'm curious, where do you think we stand right now in terms of how it's playing out versus history? In other words, you did revenue of 2.2% last year, maybe you're getting close to that this year. Are we at the bottom or at least nearing the bottom from your perspective, particularly when you consider the decline in deliveries that you're seeing in your markets?

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David J. Neithercut, Equity Residential - CEO & Trustee [64]

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

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Operator [65]

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We'll go to Drew Babin with Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [66]

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A question on -- kind of taking the supply out of the picture, lots of question on supply, I guess, which markets would you say that on a seasonally adjusted basis you're seeing the strongest pickups in demand, both from an employment growth standpoint and a wage growth standpoint? Which markets do you feel are the most exciting? And I guess, which markets are kind of the most sluggish at this stage of the year?

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Michael L. Manelis, Equity Residential - COO & Executive VP [67]

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Well, I mean, San Francisco clearly kind of topped the list right now with the most momentum. I don't know how you can look at this stuff without thinking about the supply and the ability of a market to absorb the supply that's coming into the market. But that market, I think we've said now for a while, has been having these indicators of showing strength. And I gave you kind of great, 2 great examples not only for our own portfolio, the Peninsula, but from our own lease-up of that market, just to kind of put that into context. From a sluggish standpoint, it has to be the 2 markets that aren't kind of meeting the expectations that we laid out originally, which would be the Seattle and Orange County, and I think both of those to me are short term because of the impact of the supply. They still have diverse job growth occurring, and I think we just need to see, we just haven't found equilibrium in those markets, which is the ability to consecutively raise rate and keep velocity at a place we need, which tells me that we've got to work our way through the supply for those 2 markets.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [68]

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

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Michael L. Manelis, Equity Residential - COO & Executive VP [69]

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No, I don't think so. I think that's kind of all within check of what the original expectations were from job growth and where the job growth is coming from? I don't think [there is any surprise].

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [70]

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Okay. And then on kind of segmenting the New York performance from Manhattan, but the New Jersey Hudson Waterfront properties. Can you can you talk a little bit about that area? I know there's been a little bit of supply there? And just talk about whether you're seeing concessions and increments of pricing power in the near term there?

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Michael L. Manelis, Equity Residential - COO & Executive VP [71]

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

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [72]

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That's great. And one more for me, the -- I was hoping you can talk about the stabilized yield expectations on West End tower in Boston. And I guess, kind of classify that as a spread to some of the acquisitions that you've made and are going to make in the tradition of this year. I guess, more specifically, kind of newer properties, obviously, Denver is a much different market than Boston, but some of the recent developments you've been acquiring. I guess, what is that spread? And do you feel that that's enough for the spread to compensate you for the development risk in the Boston case?

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David J. Neithercut, Equity Residential - CEO & Trustee [73]

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Well, we think that our yield on that Boston deal at current rents will be in the low to mid-5s and would likely stabilize somewhere with a 6 handle. That -- we think that that's a terrific yield in a marketplace where that asset would probably trade today maybe with a high-3 cap rates. So we think we're getting appropriately compensated for the 10 years' worth of blood, sweat and tears that's gone into to try and get that deal. Plus, its mark -- we think Boston is a great long-term market. There's a lot of exciting things going on in Boston and in Cambridge, and this will be a perfect asset for us to own and operate for a long time.

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Operator [74]

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John Guinee with Stifel has our next question.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [75]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [76]

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I don't have that level of specificity here. We had a land-based -- essentially, we've owned that property on which that tower's being built for 20 years or so. We have a land basis of about $20 million in that property, so that represents a lot of what we've done. We're incurring some demolition cost today of the existing garage, and that's all that's really been in there today is that land basis and some demolition cost as well as a capitalized cost that we've incurred in terms of architectural and engineering and all those sort of things. So there's not a great deal of hard costs in there yet, and I don't have the break down at my fingertips of that transaction.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [77]

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Okay. Well, looking at your completed but not stabilized $724 million, it looks like your second quarter '18 number is about an annualized 3.5% yield on cost. What do you think these 3 completed not stabilized assets will stabilize at, 855 Brannan, and the 2 Seattle deals? You're at about 3.5% now at 90% occupied on average.

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David J. Neithercut, Equity Residential - CEO & Trustee [78]

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Well, 855 Brannan, we expect -- excuse me, to stabilize at a high 4%. Excuse me, the Helios deal at about 5% and the Cascade deal at about 6.3%.

And those are 3 deals? Yes.

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Mark J. Parrell, Equity Residential - President [79]

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And the Cascade deal at about 6.3%. But when you use the numbers in the release, that's -- wherever these properties were at that particular moment, so this is going back in time and looking at these numbers. So having $6 million as this thing is ramping up. That's not the right way to do. That's not that correct math. That's not going to get you a number that's going to make any sense.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [80]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [81]

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

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [82]

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Okay. And then the last question on the -- I guess, maybe using your Manhattan West asset as an example. What's the yield impact on the 421-a tax burn-off? For example, let's say, your trailing cap rate's a X and the buyer's stabilized cap rate post 421 burn-off is Y, how much yield erosion is there as those tax abatements burn-off?

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

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Well, it also depends on what one is underwriting on the top line as well. But bottom line growth will be negatively impacted as those roll off and depending on what property is at roll off between 2 and 3 to 5 or 6 years from now. Well, I mean, the cap rate -- the valuation on those buildings will not change as that occurs because the cap rate will reduce as the income is negatively impacted by that, and those deals will ultimately trade on a fully tax basis somewhere in the 3s most likely.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [84]

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Okay. So if you hold your top line constant, what's the yield erosion over the burn-off period? Or is that a impossible number to give us?

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David J. Neithercut, Equity Residential - CEO & Trustee [85]

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

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Operator [86]

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Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [87]

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Just 3 really quick ones. So I'll just go quick. First on Denver, David, are you guys sort of just thinking like Cherry Creek area? Or how broadly are you defining your target Denver MSA portfolio?

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David J. Neithercut, Equity Residential - CEO & Trustee [88]

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Well, the 2 assets we have under contract now are both in the sort of uptown, downtown area, if you will, not in Cherry Creek. So we'll continue to look for downtown -- highly walkable sort of locations, and certainly consider Cherry Creek. But the 2 assets that we have on the contract today are not in Cherry Creek.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [89]

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Okay, okay. That's -- but are you looking broader in the greater MSA or you really want to be more Denver proper?

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David J. Neithercut, Equity Residential - CEO & Trustee [90]

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Well, again, we're looking for higher density walkable sort of property. So I guess, by that saying we would not be in distant suburbs, but we'll look at properties that have got transportation components or certainly walkability to properties that have high walk scores.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [91]

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

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

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [93]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [94]

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Again, I'm sorry I'm not picking up the question. I mean, certainly, it is in our benefit to have that spread be as narrow as possible or positive, right? To be selling lower yields and buying higher yields, provided that you believe we're strategic -- investing capital long-term strategically appropriately. So it's not as though we're going to be selling New York and reinvesting in light spread assets. But if we can invest in our core markets in the kind of assets we want to own long term, it's in the benefit of the company and the business for that spread to be as narrow as possible, if not positive, which would be highly unlikely they would be positive.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [95]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [96]

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Look, I think people's feelings about this, Alex, are all over the board. There are some groups who will not listen to that side of the story, who just believe that it's incredibly important to make rents affordable to the populace today and are unwilling to -- or unable to sort of understand what the long-term impact on the housing market that will be. There's -- our belief is that while when people are initially asked about rent control and affordable housing, they are generally in favor of such. But when one describes what the long-term impact is on the existing housing stock and the negative impact on valuations of the housing stock and of single-family housing and all, they will generally realize that perhaps it's not the right thing to do. But I'll tell you, people have opinions all of the board on the matter.

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Operator [97]

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Our next question comes from Tayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [98]

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When we first had the change under the tax reform issue, there was all this concern about a big disadvantage for states that have high state and local taxes. I was just kind of curious now that it's kind of been around for couple of months? Are you seeing that impacting demand for your assets? Or is that kind of just nothing or just kind of had the 0 impact or 0 impact on demand in many of your key markets?

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David J. Neithercut, Equity Residential - CEO & Trustee [99]

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I think in the short term, any impact we've seen has been very positive, based upon the business communities, very positive reaction to the tax law change and the capital expenditures we now see them taking place in the hiring and the increase in wages as a result. So the very short-term impact has generally been very positive.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [100]

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Got you, okay. Any concern about any longer-term negative impact though? Or no?

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David J. Neithercut, Equity Residential - CEO & Trustee [101]

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Well, I think that there are a lot of questions about the impact on some of these communities as a result of the limitations on SALT on the state and local tax expenses. And therefore, the increased tax burden of people in some of these higher tax states. But as we discussed, I think, on the last call, these continue to be extremely important economic centers of our country and all continues to be seen to be prospering extremely well as a result of lots of different things, including the new tax bill, and we'll sort of see what happens. But right now, I mean, in New York and California, 2 very high states -- tax burden states, things seem to be going pretty well.

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Operator [102]

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We'll go to Wes Golladay with RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [103]

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

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David J. Neithercut, Equity Residential - CEO & Trustee [104]

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Well, we've not contemplated any specific reaction to this just yet. So I think there is -- one of the concerns that many have about rent control is the fact that it could take existing housing stock and turn it into for-sale stock and remove it from the rental stock, which would, obviously, be a negative. With respect to new construction, I think that's mostly impacted today by costs. It seems to me that whatever happens with rent control, there will be some limitation as to on what year product is built. So the product likely built today would not be negatively impacted by any changes in rent control as a result of the repeal of Costa-Hawkins, but all that remains to be seen.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [105]

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Okay, and then going with the cost, can you remind us what the allocation of steel is to the overall construction cost of, call it, maybe a high rise in a major city?

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David J. Neithercut, Equity Residential - CEO & Trustee [106]

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Yes, on our property in Boston, where my development guys are suggesting that the cost of steel would be about 25% greater today than what was priced when we bid our deal, represents about 1% of the total cost of the project.

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Operator [107]

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And with no additional questions, I'll turn this -- I'm sorry.

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David J. Neithercut, Equity Residential - CEO & Trustee [108]

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I'm sorry, I'm sorry, that's a 4% cost, which is an effect of 1% on total cost. So it's 4% -- steel is 4% of the total cost.

Okay, so with that, thank you, Catherine. Yes, this Equity Residential, we're really were pleased to celebrate our 25th anniversary as a public company on August 12. Who knew back in the summer of 1993, what our 22,000-unit apartment company with an enterprise value of $800 million would become. We are extremely grateful for the support of so many in the investment community over that time, for the dedication our Board of Trustees both past and present and for the many thousands of hardworking apartment professionals that have helped to build this company. It's a very special and enduring culture. So many thanks to you all. Best wishes to you all for an enjoyable summer, and we'll you see in September.

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Operator [109]

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Thank you. Ladies and gentlemen, again that does conclude today's conference. Thank you all again for your participation. You may now disconnect.