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Edited Transcript of EQR earnings conference call or presentation 31-Jul-19 3:00pm GMT

Q2 2019 Equity Residential Earnings Call

CHICAGO Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Equity Residential earnings conference call or presentation Wednesday, July 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark J. Parrell

Equity Residential - President, CEO & Trustee

* Martin J. McKenna

Equity Residential - First 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

* Andrew T. Babin

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

* Hardik Goel

Zelman & Associates LLC - VP of Research

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* John William Guinee

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

* Michael Bilerman

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

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Allen Hightower

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

* Richard Charles Anderson

SMBC Nikko Securities Inc., Research Division - Research Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Equity Residential Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

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

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

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Thank you, Eduardo. Good morning, and thanks for joining us to discuss Equity Residential's Second Quarter 2019 Results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; 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.

Now I'll turn the call over to Mark Parrell.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [3]

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Thank you, Marty. Good morning, and thanks for joining us today. It is a good time to be in the apartment business. Very strong demand for our product has continued to drive absorption in new supply, and our turnover continues to be at all-time lows, resulting in same-store revenue growth that is exceeding our expectations and leading us to increase our same-store revenue, net operating income and normalized FFO per share guidance. The midpoints of all these new guidance ranges now exceed the top end of our original guidance expectations.

After I discuss our investment activity in the quarter, I'll turn the call over to Michael Manelis, our Chief Operating Officer, to give you color on our operating performance; and then to Bob Garechana, our Chief Financial Officer, to give you some detail on our normalized FFO and same-store expense guidance changes and our balance sheet, and after that, we'll open it up to your questions.

On the investment front, asset prices have remained generally stable in our markets, but there are more assets for sale than earlier this year, just giving us the opportunity to trade-in assets that we believe have more desirable long-term return prospects. We continue to see good demand for the assets that we wish to sell. This is often coming from buyers with a value-add thought process. As a result, we have increased our transaction guidance for the year to $1 billion of both dispositions and acquisitions.

And during the second quarter, we acquired 3 apartment properties. One was the 366-unit property in Rockville, Maryland, built in 2016 that we discussed on the last call. The second is a 312-unit property built in 2017 located in Castle Rock, which is a suburb of Denver that we bought at a price of approximately $92 million and a stabilized cap rate of 5% and a current cap rate of 4.7%. We are creating a property portfolio in Denver that has both suburban and urban exposure, but we expect that most of the portfolio will consist of assets in the urban core of Denver. The third asset acquired is a 387-unit property in San Jose, California, that was built in 2017, which was acquired for approximately $180.5 million at a 4.5% cap rate. It is located in South San Jose, across the street from the Caltrain station and within an easy commute of Downtown, San Jose and most Silicon Valley employers.

During the second quarter, we sold 2 of our wholly owned assets as well as 2 assets that were in joint ventures. One of the wholly owned assets we sold was our 806th Avenue property in New York, which we discussed on our first quarter call. As a reminder, 806th Avenue was a rent-stabilized property that is part of the New York 421a program at substantial property tax step-ups for the next several years. The second wholly owned asset we sold was a 295-unit property in the Longwood Medical Area of Boston. We sold this property for approximately $165.3 million at a disposition yield of 4.3%. The Longwood asset is a 1970 asset with dated floor plans and amenities. These sales generated an unlevered IRR of approximately 8.6%.

We also sold 2 properties that we held in a joint venture with an institutional partner. One was in South Florida and one in San Jose, California. These totaled 945 apartment units for an aggregate sales price of approximately $394.5 million and a weighted average disposition yield [up] 4.7%. We received net proceeds of approximately $78.3 million from these sales, and the joint venture generated unlevered IRR to us of 24%.

After the end of the quarter, we sold an additional property, Park at Pentagon Row. It's a 298-unit asset built in 1990. The sale price was approximately $117 million, and we sold it at a disposition yield of 4.5%. The property is located one block from the new Amazon HQ2 location. We took the opportunity to capture the excitement around the HQ2 process to lower our concentration in the area with the sale of this 30-year-old asset.

Now before I hand the call over to Michael, I want to make a comment on rent control. We agree that there's a shortage of workforce in affordable housing in many places in our country, but we disagree that the actions taken in New York and being considered in other states will help solve this problem. The new housing law in New York did not create any incentives to build new affordable housing. In fact, the recent legislation has created disincentives to build new supply at all. We also think that, over time, it will lead to the deterioration of the existing affordable housing stock.

In a moment, Michael Manelis will share our current estimate of the impact of New York's new law on our operating results. While we continue to work through the details of the New York legislation and its impact on our New York portfolio, at this point, we see the impact limited to caps on renewals for the approximately 3,200 rent-stabilized units in our portfolio as well as new limits on fees. Through our trade associations, we will continue to encourage policymakers in California and other states to embrace actions like zoning reform and the removal of other regulatory barriers to new housing construction as well as programs that create incentives for private market developers to build the affordable housing units our city so badly need.

Now I'll hand the call over to Michael Manelis. Michael?

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

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Thanks, Mark. I am pleased to report results from a strong leasing season with continued strength in demand for our product that resulted in acceleration of pricing power, reduced turnover and higher occupancy.

All of our markets are doing well, but the East Coast market and Seattle continue to outperform our expectations. Sitting here today, our portfolio is 96.7% occupied compared to 96.5% the same week last year. Base rents are up 3.7% as compared to 3.1% the same week last year. Renewal performance continues to be very stable with achieved renewal increases ranging between 5% and 5.2% for the last several months, and we expect this trend to continue.

Let me provide you some context around the underlying assumptions of our revised guidance range of 3.1% to 3.5%. The new guidance same-store revenue midpoint of 3.3%, which is just above the high end of our original range, assumes that we maintain strong renewal performance around 5% and that we continue to enjoy good new lease rate growth and high occupancy, but both of these moderate as we transition into the seasonally slower part of the year. The 3.3% midpoint of our same-store revenue range assumes occupancy of 96.3% for the back half of the year. This is slightly below our current occupancy due to the seasonal decline I just described but is still 10 basis points above what is a difficult comp period from the prior year. The 3.5% high end of the range is achievable if we do not experience the usual seasonal decline in occupancy later in the year, which is certainly possible given the strong demand that we are seeing but not typical. The bottom end of our range is achieved if occupancy underperforms.

So switching gears, let me provide you some color by market. Boston clearly benefited from a pause in competitive new supply. We experienced a strong leasing season that delivered 3.25% revenue growth with growth in both occupancy and rate. Our full year revenue growth guidance for this market has increased to 3.5% from 2.8%. The pause in supply is only temporary. Competition will heat back up by the end of the year as a number of large buildings bring their first units to the market in the urban submarkets of Boston and Cambridge, where we have almost 70% of our NOI. The good news is that demand is very strong in this market, which will continue to aid the absorption of these deliveries.

The New York market continues to demonstrate strength in overall fundamentals with a very strong leasing season. Foot traffic, a proxy for demand, is up 5.5% versus the same quarter last year, and new lease change is up 70 basis points. The last time we posted a second quarter positive new lease change in New York was 2015. Our new lease occupancy and renewal growth were all better than expected. We've revised our full year same-store revenue growth projection for New York to 2.5% from 1.8%. This reflects the overall strong performance of the market but also includes the impact from changes associated with the rent regulation law that went into effect in the middle of June.

Let me start here by reminding everybody that we have approximately 9,600 units in the New York Metro area, 1/3 of which are not in New York City. Of the approximate 6,500 units that are in New York City, about 3,300 are full market-rate and not impacted, and about half, or 3,200 units, are rent-stabilized and thus impacted by the changes to the regulation. We estimate that these changes will reduce our overall second half renewal rate increase by about 50 basis points, which will equate to about a 30 basis point impact on the full year renewal results in New York.

The changes in law also impact our ability to charge certain fees at all of our New York properties. We expect an $800,000 annual reduction in fees associated with new restrictions on application and late fees, of which $400,000 will impact 2019. Combined, these changes to the regulations will reduce our expected New York Metro market revenue performance by approximately 20 basis points in 2019. We will continue to monitor the impact to our portfolio, and we will likely find opportunities for savings on the expense side as we look to manage these units under the new laws.

Overall, there is good economic activity and strong demand for our products in New York. Companies continue to enter and expand their footprint in the market in order to attract top-tier talent. This top-tier talent wants to live at our high quality and well-located properties.

Washington, D.C. is producing better results than we anticipated. We've increased our full year revenue growth expectations for this market to 2.6% from our original guidance of 1.4%. Elevated deliveries in the district continue to impact pricing power at our D.C. assets, but overall, Class A absorption remains robust. The recent news of what looks to be an agreement on a 2-year federal budget that will raise spending over current spending limits will support the continued strength in this market. Most of the better-than-anticipated year-to-date performance is coming from Northern Virginia, where we have about 57% of our market NOI. The strength in this submarket is mainly attributable to the fact that the overwhelming majority of economic growth in the region is occurring in Northern Virginia as opposed to Maryland and D.C. 94% of all of the jobs created in the Washington region during the first 6 months of the year were located in Northern Virginia.

To share some perspective on the spread between submarkets, the district delivered about a 1% growth in the quarter as compared to just under 4% growth in Northern Virginia.

Heading over to the West Coast. Seattle continues to see well-established companies entering the market as well as existing companies expanding within the market. The market's critical mass of knowledge workers attract these employers and drive strong demand for our products. Foot traffic was up 8.1% on a year-over-year basis, which fueled this market's ability to outperform with stronger occupancy and a marked improvement in new lease change.

We now expect our full year same-store revenue growth to be 3.2% versus our original expectation of 2%, which given our current year-to-date performance of 2.5%, demonstrates the current strength in trajectory for the balance of the year. On the supply front, we're getting a break in the CBD, and we clearly have pricing power in that submarket. We have some exposure on the East side where the new deliveries are concentrated right now, but to date, we've seen good leasing velocity and are maintaining both rate and occupancy there.

Moving down to San Francisco. San Francisco continues to demonstrate tech-driven economic strength and job growth. At the end of May, the Bay Area reached an all-time record high of 835,000 technology-related jobs. We expect the full year same-store revenue growth to be 4%, which is 60 basis points higher than our original expectations and consistent with our year-to-date performance. We are seeing the strongest results in San Francisco and the Peninsula with some supply pressure in the East Bay and South Bay submarkets. At present, this market is projected to deliver the strongest full year same-store revenue results in our portfolio.

Moving down to Los Angeles. Our performance year-to-date includes new lease change and renewal results which were lower than expected being offset by strength in occupancy and growth in other income categories like parking. San Fernando Valley continues to be the submarket that is experiencing the most pressure and is running a little bit behind our original expectation. The rest of the submarkets continue to perform in line or slightly ahead of our expectations.

Our updated full year same-store revenue growth projection of 3.9% is basically unchanged from the beginning of the year. Our full year guidance continues to assume a deceleration due to anticipated pressure from new supply that is back-half loaded. Additionally, the occupancy comp from the second half of 2018 in L.A. is challenging, which means we don't expect as much lift from occupancy for the balance of the year.

Orange County delivered second quarter results in line with our expectations. Our full year revenue growth guidance is now 3.6%, which was increased based on the lift we received in the first quarter gains and a slight outperformance on occupancy and renewals during this quarter. We have a few properties that are experiencing a lack of pricing power due to deliveries in Irvine and Newport Beach. But overall, our Irvine portfolio is a diverse set of properties and not all of it is going to compete head-to-head with the 2019 supply.

San Diego is having a good leasing season but just not as strong as last year. We expect our full year revenue growth to be 3.4%. This is down from our initial forecast. Overall demand is still good in the market. Occupancy is on track, but we're experiencing a little less pricing power due to the newer product downtown.

On the initiatives front, we've had a really busy quarter. We're making great progress toward the sales and service road map that we shared in our June investor update. On the sales front, by the end of August, we'll have about 50 communities on our artificial intelligence e-lead platform. We'll have deployed self-guided tours at over 45 communities. On the service side of the business, we began testing our new mobility platform for our service teams, and we expect to be fully deployed by the end of the year. We also remain on track to have approximately 2,500 units enabled with smart home technology within the next 90 days.

Let me close with a huge shout out to the employees of Equity Residential. Their focus on delivering remarkable experiences to our prospects and residents is greatly appreciated. They have worked really hard to deliver strong results through what has been a very good leasing season.

I will now turn the call over to Bob Garechana, our Chief Financial Officer.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [5]

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Thanks, Michael, and good morning. Michael just discussed our markets and the upward revision to same-store revenue guidance. So let me take a moment to address our same-store expense revisions, normalized FFO guidance and touch briefly upon our recent capital markets activity.

As you saw in the release, we've reduced the top end of our forecasted full year same-store expense growth range. We now expect same-store expense growth between 3.5% and 4% compared to the 3.5% to 4.5% range we previously forecasted for the full year. This improvement is driven by better-than-expected performance in all major expense categories but most notably in real estate taxes.

Real estate tax expense, which makes up a little over 40% of overall same-store expenses, grew 3.3% through the first 6 months of the year. This was significantly lower than our original guidance back in January and is driven by lower-than-anticipated rates in Seattle, which we mentioned in our first quarter earnings release as well as the sale of the 421a asset during the second quarter. This along with continued success in actual and anticipated appeals has reduced our real estate tax expense growth expectation to between 3% and 3.5% for the full year. This improvement is approximately 100 basis points better than original guidance.

On-site payroll, our second-largest category, also performed better year-to-date than we originally anticipated. In order to maintain high levels of customer service, we've increased compensation benefits to our field personnel in the face of significant competition for their services. With the job -- While this job market has remained competitive, we believe we have adjusted fully to this new compensation marketplace and now expect modestly lower payroll growth versus prior expectations.

Like in prior years, we also continue to benefit from fewer losses related to medical claims driven in part by our continued focus on employee wellness. We now expect full year payroll growth of between 3.25% to 3.75% for 2019, also about 100 basis points better than originally anticipated.

Finally, our last 2 major expense categories are utilities and repairs and maintenance, which each make up around 13% of total same-store expense. Growth in utility expense is expected to remain contained in the mid-2% range for the full year. Repairs and maintenance, which was negatively impacted by storms and other weather-related items during the first quarter, has normalized during the second quarter. We are not forecasting any additional outsized growth in repairs and maintenance for the remainder of the year and therefore expect a mid-4% range growth rate for the full year of 2019.

Turning to normalized FFO. As noted in the release, we have meaningfully raised our guidance range for normalized FFO for the full year. Our new guidance range of $3.43 per share to $3.49 per share is up $0.07 at the midpoint driven by the following items: a $0.04 contribution from same-store NOI based on the strong performance in our core business as highlighted by the new revenue and expense assumptions that Michael and I just outlined; a $0.03 contribution from the timing of our acquisition and disposition activity in both 2018 and 2019 and the minimal to nonexistent cap rate dilution from this activity; a $0.01 contribution from lower interest expense due to lower-than-anticipated floating rates along with more favorable refinancing rates offset by $0.01 in other items, including corporate overhead.

Turning to capital markets. As you saw in our release, we accessed the unsecured markets in June for a very successful issuance of $600 million in 10-year notes. The rate of 3% was one of the lowest 10-year coupons in both EQR and the REIT sector's history. After quarter end, we used the proceeds from the issuance to repay a portion of $950 million in secured and unsecured debt that was maturing in 2019 and 2020. With these payoffs, we've effectively addressed all of our 2019 maturities and about half of 2020. Finally, this new debt was financed at an effective P&L rate that was nearly 75 basis points better than that of the debt that was paid off. Our balance sheet remains incredibly well positioned for the future given our strong credit metrics and limited near- to medium-term maturities.

With that, I'll turn it over to the operator for questions. Eduardo?

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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 Nicholas Joseph from Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Mark, appreciate your comments on New York rental control and Michael's comment on the impact to operating results. I'm wondering if you can talk about what you expect or what you're seeing in the market in terms of the asset pricing, maybe both for market rate and rent control assets in New York City specifically.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [3]

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I'm sorry, Nick, could you speak up just a bit. I think your question was on New York rent control and what we're seeing in other markets, but I'm sorry, I didn't...

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Robert A. Garechana, Equity Residential - Executive VP & CFO [4]

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No, asset pricing.

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

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Asset pricing.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [6]

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Yes. So it's on asset pricing, specifically. So I'm wondering if you've seen any changes to asset pricing in New York City, both market-controlled and rent-regulated. And then what you expect to happen going forward given the new rent regulations.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [7]

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Yes. Thank you for the question and for repeating it. It's just been 6 weeks since the new rules have gone into force. So there really hasn't been a lot of activity that we -- or really any activity that we've seen that's priced assets at a size that we deal with. There was, in the paper, a reference to a deal that was priced before the rules. I think the buyer was trying to get out of the transaction, but that's a different kind of discussion. So we've not seen any activity yet either direction.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [8]

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And then what is your expectation for what this could do to asset prices in New York City?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [9]

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Sure. I think it's going to take a little time for the market to just understand the rules. I mean we've got a great team here in Chicago and in New York, really pored over that, and we really feel like we've got a pretty good handle on it but even we're still learning. So I'd say it's going to take the market a little while to understand the rules and apply it to what they think the pro forma cash flows are going to be going forward. My expectation, rent control in New York has always been there, it's come, it's gone. It was more acute in the '80s, and it's been less acute lately, and now it's going to be a little bit more. So I think this market's used to having some [manner of] rent control in their calculation of future cash flows. I think there's going to be a lot less supply built in this market, which is bad for the city in general but probably good for cap rates and values for -- especially for the 3,000-plus market-rate units we own. So my expectation is that this will take a little while to sort out. That there'll be changes in people's perception not just of revenues but of expenses. And we -- Michael sort of alluded to that. I think we'll be spending less money on turnover cost because our turnover will be lower, less money on leasing and advertising because again, there'll be less need to fill the buildings that will be occupied more -- even more highly than they are right now. So my expectation is not to see big changes in cap rates. You could potentially see cap rates on market-rate deals go down.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [10]

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And just on updated guidance, specific to the $0.03 related to the 2019 and 2018 transaction activity, can you give more color on what's driving it? Is it the performance of the 2018 deals? Or is it timing of 2019? I know you changed the spread for guidance for this year but that seems to only have a minimal impact on guidance.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [11]

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Yes. I want to clarify a little bit more on the prior question as well. I -- my answer is limited to the kind of the product we own. So these rent-stabilized properties are relatively new. Some of the older rent-stabilized product might be more significantly impacted. The market-rate and rent-stabilized stuff that's relatively new in vintage that's going through 421a is where I was focusing my comment. So Bob Garechana and I are going to answer your question on that $0.03 difference. I mean a part of that is just timing. We bought a lot, a lot earlier in the year and that created this advantage where we have the disposition assets that will create NOI for us through most of the year. So as it relates to '19, which is most of what's going on here, it's really driven by timing. And then of course, the fact that we have almost no dilution. So a few years ago, we indicated you a lot more of our trading would be done flat or with very, very little dilution, and you're seeing that evidence this year. Anything you'd add, Bob?

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

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No. I think that sums it up. You'll see that corresponding or offsetting component of that is the slight increase in weighted average debt that you see in our guidance adjustments. And that's really just funding it related to that change in timing. But I think Mark hit it on the head.

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Operator [13]

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

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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This is Trent Trujillo on with Nick. So just to go back to rate growth, if you're seeing such strong demand across your markets, how much are you looking to push rates given occupancy is better than expected and turnover is at an all-time low?

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Michael L. Manelis, Equity Residential - COO & Executive VP [15]

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Yes. So I mean I think we actually moved rate a lot through this leasing season. And the fact that the rents are up, call it, 60 basis points more than where they were this time last year at 3.7% sitting here, that's actually pretty good growth. My guess is that we're going to see that kind of continue for the tail end of the leasing season. And then I would expect that while we'll moderate for the balance of the year, we just may not moderate quite as much as we've done in the past. So I don't -- it's hard to understand exactly how much of this gap is going to close between the renewal and new lease, but clearly, I think we're pretty pleased with the results that we posted for the second quarter and like the momentum that we have in place for the third quarter as well on the new lease side.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. I guess just a quick follow-up on that. Is it still fair to think about your confidence in the ability for new lease rate growth to narrow to about 150, 200 basis points spread to renewals?

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Michael L. Manelis, Equity Residential - COO & Executive VP [17]

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I think over a period of time. Yes. I don't believe that that's going to take place this year. I think that the gap was just too wide when we entered the year to express -- to expect them to compress that quickly. But I think over time, as you see strong demand and good pricing power, you will see that spread start to narrow back to that range, call it, between 150 and 200 basis points.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Are there any particular markets that you're most enthusiastic about when you look forward?

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

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Well, yes, I mean, I like New York right now with what's happening. I like D.C.'s momentum that we have and Seattle. So really -- I mean the only market that I would say is kind of -- that we're putting out there is the (inaudible) really points to Southern California right now, where we're just trying to get the pricing power in check to understand for the balance of the year. But I don't think that, that spread is going to narrow down in Southern California right now. The other markets, I think, still have potential to narrow.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Okay. One more quick one, I'm sorry. But you've spoken -- the team has spoken about the possibility of taking leverage up a little bit in the past. So how much consideration did you give to recasting guidance showing Equity Residential as a net acquirer this year?

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

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So it's Mark. I think that depends on what more opportunities the team sees. If the investment team -- if we see on the ground there are more deals for sale right now, Trent, we see more we like, we certainly are capable either with that $300 million of net cash flow that we've spoken of after payment of our dividend and CapEx every year we have, we can use a good portion of that to buy additional assets. We could certainly borrow more. So we're open to that possibility. We haven't seen enough good stuff yet to justify taking leverage up, but we're certainly open to it.

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Operator [22]

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We'll now take your next question from Rich Hightower from Evercore ISI.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [23]

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I guess related to the first half performance, could you guys pin down maybe an estimate of what supply is shifting from the first half to the second half or beyond? How that impacted your ability to push rents during the first half of the year?

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Michael L. Manelis, Equity Residential - COO & Executive VP [24]

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Yes. So this is Michael. So we really -- this quarter, we're tracking supply in a couple of different ways from completions versus first unit hitting the market. We really did not see, in this quarter, any variations from what we expected to have take place in the second quarter from first unit hitting the market. I think what we could see, as we get into the balance of the year, you could see some of the typical markets start to show the delays in deliveries and start shifting from one year to another. But for at least for the second quarter, we kind of hit the markets to exactly what we thought was going to happen to us from a new delivery in the market. So I don't think we benefited from any kind of delays more than what we already anticipated.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [25]

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Okay. That's helpful, Michael. And then maybe going back to the comment earlier about the impact to overall New York revenue performance of, I think, you said 20 basis points for '19, I mean, given what you said about still -- not withstanding the people that have worked on it up until now but kind of still working your way through the law and the implications, I mean, how much variability around that 20 do you think could be possible whether for the remainder of this year or even into 2020?

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Michael L. Manelis, Equity Residential - COO & Executive VP [26]

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We have a pretty high degree of confidence for the balance of this year that is not going to be materially different than that 20 basis points. We're benefiting a little bit because the law went into effect in the middle of the year. So it's half of the impact, and you did a lot of your transactions before the law as well on some of the fee impact. But if this was a January 1, it would be a 40 basis point impact to this market for this year. As we think about next year, the difficulties is really trying to project where are renewal -- where were renewals going to be because then you can figure in, okay, what are these restriction going to mean to you, the fact that you can't achieve what would have been otherwise possible. So we still have a little bit more modeling to do, and it's early to try to start thinking about 2020. But it's pretty clear, when you look for the balance of this year, what the impact is going to be to us.

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Operator [27]

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

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [28]

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Michael or Mark, just following up on that question. I'm less concerned about 2020, but call it, the next 3 years, as you adjust your expense playbook as market demand supply factors adjust, do you see the new rules as a net negative to EQR's NOI? Is it neutral? Is it a modest positive? How do you think longer term about your operating cash flow in New York?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [29]

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Yes. Thanks for that question, John. I think I'll start by saying we definitively see it as a net negative for New York and for housing production in New York and for addressing the affordable housing issues that New York has. As it relates to us specifically because we cannot own some of this older post-World War II rent-stabilized heavily regulated product that got hit the hardest, the impact on us is less. I think it also creates uncertainty in the development and lending communities that may evidence itself in there being considerably less supply in New York than the already low numbers that market has. I think I can make an argument that New York has just become the most supply-constrained market that we operate in. So I would suggest to you that we may do modestly better on our market-rate assets than we would have expected on revenue. And I think on expenses, we're going to have an opportunity as we figure out what our new turnover numbers are with these lower renewal increases. We contract out for a lot of turnover costs, and we're going to have lower turnover, so those expenses will go down.

In terms of capital, we've got to be very thoughtful about where we're putting our capital as well, and we will adjust to that. So I -- when you talk about a longer-term impact, that's yet to be fully determined. But I think there are modest positives as well as -- especially to an operator of the kind of assets we own, including the fact that there's just not going to be much built in New York because of this for quite a while. And if you own market-rate product in every year, we're going to get 200 or 300 units more of market-rate product because our 421a rent-stabilized assets will transition as the burn-off period concludes into the market-rate assets, I think that's going to be, to us, an incremental positive.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [30]

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Okay. But operating income for you when you put it all together, the pros and cons, is the event of the new regulation in that modest net negative, modest net positive?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [31]

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I'd say either even, or it could be a modest net positive just because of the shift from rent-stabilized to market rate for us over time and the impact on supply in the market. But I can't emphasize enough how awful this is for the New York and as a housing policy matter.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [32]

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Sure. Okay. And a question -- I know it's just one disposition but a question about your broader exposure to D.C. I mean it finally does seem like an improving market, and there is job growth drivers to like more than we liked 2 years ago. So I guess why prune in D.C.?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [33]

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Well, we've got some assets that are a little bit older in D.C., and we've got a big concentration in Crystal City around the HQ2 property. So that -- for us, this was simply an opportunity to get rid of some older assets. I'll say that D.C. -- what's most exciting to us isn't just HQ2, it's Virginia Tech's new technology kind of (inaudible) technology campus they're building and the kind of jobs you're going to get in the district and in and around the area. So they won't be just sort of government-dependent, but [they'll] also be a big technology -- private market technology aspect there. So that's exciting to us. The supply, the continuation of relatively high supply numbers in D.C., which we do expect will go on, is a net negative to the market. So for us, as we look at D.C. having a modestly lower exposure to that supply makes sense to us, but we'll continue to buy and build assets in that market, try and freshen the portfolio. But seeing modestly less exposure to that market given the supply considerations I just discussed. And the fact that this is the first time I think we've talked positively about D.C. in 4-plus years, for us, that -- it seems like a sensible approach.

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Operator [34]

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We'll now take the next question from Shirley Wu from Bank of America.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [35]

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So Michael, I did want to follow up with your earlier remark on L.A. So new leases year-to-date are trending at, call it, around 0.4% versus your initial guidance of 1.4%. And you mentioned that, that would continue to accelerate into the back half of supply, and occupancy would get more challenging as well. So I'm just curious as to the color around you maintaining your revenue guidance for that market. Is that coming from, let's say, other income?

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

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Yes. So -- and I think I said in the prepared remarks, we outperformed a little bit in the first half of the year with occupancy, so that was a boost to the number. And we definitely had other income, primarily parking, that contributed to a little bit on the outperformance or mitigated the downside from the underperformance on new lease change and renewals. There is something on the new lease change that I guess I can call out, which is the one you drew the comparison of a 0.4% to our full year new lease change, but you got to remember, there's a lot of seasonality to that metric by quarter, so you need to understand what -- where was that relative to last year. So last year, we were running at a 2.3% new lease change in L.A. compared to the 40 basis points positive. A lot of that impact had to do with the fact that there's some anti-gouging proclamations that were put in place, and those proclamations really restricted our ability to obtain short-term lease premiums in the market during the second quarter. So last year, we sold about 15% of all of our leases as short-term leases, and those leases typically add premium, call it, anywhere between 15% and 30% higher than a standard 12-month lease. With the proclamation that was put in place that limits your ability to have growth greater than 10%, we chose not to sell short-term premiums because the premium wasn't going to be enough for us to have those leases in place. So that's a lot of the dilution that you're seeing in the quarter numbers right now.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [37]

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Got it. That's good color. I just had a second question for you guys on WhyHotel. Could you talk to your experience with WhyHotel at 100 K in D.C.? Maybe some of the things that you have learned from that experience. And if you would consider using their platform with any of your projects currently under development.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [38]

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Sure, it's Mark. Yes, we had a very good experience with WhyHotel. We know that we were sort of first out of the gate working with them as a bigger -- the bigger public companies, and I know others are considering or planning to do things with them. So we had a good experience. I think it's a great way to mitigate that lack of income on the lease-up of a project, and we'd consider using them again.

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Operator [39]

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

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [40]

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From recollection of a couple of years ago when the market was softer, you guys were signing more 2-year leases with the second year essentially flat. And I'm wondering what that dynamic is now? How many 2-year leases are you signing? And what's the embedded growth in that second year?

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Michael L. Manelis, Equity Residential - COO & Executive VP [41]

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So I don't have that with me. I will tell you, we looked at that specifically in New York, where we did do a lot of 2-year leases several years ago. It's something that's common in the marketplace. We actually had increased turnover in New York this quarter in that -- a year-to-date basis. And a lot of that increase was due to the fact that we had 2-year leases expiring, and we were not selling quite as many 2-year leases today going forward. So we're seeing it drop down, but I just don't have the stats in front of me to quantify.

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

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It's not terribly material. I mean you have to offer 2-year leases in New York statutorily, but we don't have a lot of 2-year leases, not -- frankly non-12-month leases on the portfolio.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [43]

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So outside of New York, that dynamic doesn't exist?

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

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No.

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Michael L. Manelis, Equity Residential - COO & Executive VP [45]

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No.

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

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It's uncommon.

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Michael L. Manelis, Equity Residential - COO & Executive VP [47]

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Yes. Very limited.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [48]

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Michael, in your prepared remarks, you discussed the bifurcation between Northern Virginia and the rest of D.C. Metro. Do you see this as a longer-term trend given HQ2 and the other tech companies going in the market? Or do these submarkets tend to revert back to the norm?

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Michael L. Manelis, Equity Residential - COO & Executive VP [49]

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Well, I think a lot of that too is just the pressure on supply in the district could mitigate some of that future revenue growth. No, I think Northern Virginia's got a lot of good things working in its favor to demonstrate strong revenue growth for the future. And I think there will be some spillover into the district in the other areas but probably not at the same pace.

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Operator [50]

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We'll now take your next question from Drew Babin from Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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I was hoping to hit on the moving parts of the expense guidance change, kind of what's implied for the second half of this year. I was hoping you could talk a little bit just based on the visibility you have with the cadence of expense growth in the third quarter versus the fourth quarter from an ease-of-comps perspective and also anything that might kind of be lumpy that's in there.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [52]

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Yes. It's Bob Garechana, so I'll take that real quick. So for the -- for year-to-date, we've produced 3.9% growth, and we're guiding at the midpoint to 3% and 3.25%. I cautioned on all expense growth that $750,000 equals 10 basis points, so it can be volatile. But at the moment, we don't have anything. We expect the back half to be slightly better than the front half. A lot of that is due to expectations that in the fourth quarter, we won't see any anomalies like we saw in the first quarter related to repairs and maintenance. But otherwise, things are pretty much in line for the back half relative to the front half.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [53]

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Okay. That's helpful. And one more question that's maybe a little more conceptual. A lot of our third-party research that we've read suggest that cap rates in secondary locations, B-class properties have converged quite a bit on urban A cap rates, so there's still some spread, but it's historically very narrow. Does EQR look at this and think that maybe it's time to double down or maybe even look at issuing common equity at some valuation to kind of double down on urban A-type properties with this better long-term growth prospects? Or do you look at that data and say, "Maybe this is just irrational pricing on the B and secondary product. We'll just still continue to do what we've been doing"?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [54]

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Yes. I think we do think about continuing to do what we're doing. I mean I -- I think you hit the nail on the head in terms of where the value is. The fact that there's been this convergence is mostly as a result, in our opinion, of some of these secondary markets being overvalued because they're just a higher yield. They're just a slightly higher yield, they're more suitable for leverage. And there's just a lot of money chasing apartment product. And if there's any way you can talk yourself into something being a mid-5 cap rate, you're going to do it. And -- So you've got a lot of money-hitting markets and doing things that we think are going to be difficult. Because a lot of these secondary markets aren't feeling the housing -- single-family housing pressure right now that they're probably going to feel at different points in the cycle, and we don't think we're going to feel that on the urban end. So we continue to look at the suburbs in our markets too true, like the dense parts of our suburbs, like the Rockwell deal you saw us do. So you'll see us buy suburban product where we see the customer base the same as our urban product. But to use the ATM to go hit that really hard at this point, it does not seem like that opportunity is as of yet so compelling, but we'll keep our eyes open.

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Operator [55]

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I'll take the next question from Richard Hill from Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [56]

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You've got Ronald Kamdem on the line. Just 2 quick ones for me. The first is just on sort of (inaudible) technology. Where are you guys on the -- in terms of getting maybe smart lock and smart home technology? And in terms of just on the operating side, what sort of opportunity is there to sort of reduce either overhead or manpower through technology? And curious if it's millions, tens of million, how you guys think about that?

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Michael L. Manelis, Equity Residential - COO & Executive VP [57]

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Yes. So this is Michael. So I opened in some of the prepared remarks just around some of the stats of the things that we were doing on the initiatives front. So we're on track. We'll have about 2,500 units with smart home technology in the next 90 days. We've got about 50 of our properties up and running with both kind of the artificial intelligence e-lead platform and self-guided tours, we got mobility on the service side. I think I stated this last quarter, and we talked a little bit about this at NAREIT, which is from our standpoint on these initiatives, the focus has really been around transparency, control, convenience and flexibility to our customers. We've done a lot of the centralization and eliminated roles on site in prior years. We're not saying that we're not done, but I know that we're going to need to see the technology platform enabled through our portfolio just to see and understand what efficiencies and opportunities we're going to create. So we're excited about the momentum that we have in place, and I think as we get closer toward the end of the year, we'll be able to put some numbers to it. I mean each one of these right now, we're in these initial pilot phases, but I can point to, on a standalone basis, we'd look at like the mobility platform, we have initial expectations that is worth a couple of million dollars to us, could be worth more from reduction in dependence on third-party contractors and overtime and things like that. So -- but we want to see these up and running for a little bit. We want to make sure that the results that we see are sustainable over a long period of time before we start putting numbers into the results for you guys.

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

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And it will take a while, in any event, to evidence itself. I mean '19 is about implementation and putting these things out there. And '20 and thereafter is more about seeing results. And some of the stuff will work great and some of this stuff won't, and we'll be very open both directions. And we'll use the entire 80,000-unit platform to leverage any technology that we do like.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [59]

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Great. My second question, just -- I love to talk a little bit about affordability. Maybe as you think about your markets, East Coast, West Coast, sort of how that's trended and what you think the outlook of that is for the next 3 to 5 years.

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

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Sure. So you did ask about markets, but I want to talk about the company, first a little bit on affordability. We have -- our residents -- our average household customer income is $155,000 a year, they're paying us $2,800 a month in rent, which means they're giving us about 19% of their income in rent. So our customer, just specifically the Equity customer, is not terribly stressed. They've done well, they've gotten raises, we see that in the statistics that we have. So we talk about affordability of the rent check they're paying Equity now, we feel really good about that. We do recognize the bigger affordable issue in our markets that, I think, on the workforce side is pretty common. We think that a lot of the things being done, for example, in Minneapolis and were done in part in Seattle, that were done with the old 421a program in New York where you encourage and incentivize developers to create both market-rate and affordable housing, where you reduce zoning barriers. I think this -- the answer is housing production to address this affordability issue you're bringing up. And for that to occur, the government's got to both [think --] encourage private industry to work as an actor to create these units, and I think, to some extent, get out of the way on some of the things that it does that create barriers to that. So again, there's a great article on Minneapolis that came out just today, I think, talking about their new zoning system that effectively got rid of single-family housing zoning in Minneapolis, and it's likely to encourage a lot more production of housing.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [61]

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Great. If I could just follow up on that if I may. Just trying to get a sense of -- obviously, you've been in the industry a long time. As these conversations are coming up over production of housing and sort of you mentioned, do you feel like the conversation may be more productive today than they -- with regulators than maybe they were 3 or 5 years ago? Or do you still feel like there's still a little bit of a education or hill to climb? Just trying to get a sense of the [tealeaf].

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [62]

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There are still things we need to do with the policymakers. We're pretty active through our trade associations having these conversations. A lot of rent control is, to us, a bit of a well intentioned but misguided attempt to just relieve these rent pressures on people. But it's not going to help in the long run. So to answer your question directly, I think the industry needs to continue to push on the education front both with policymakers and with the public. And cities like Sydney, Australia and Toronto repealed rent control a few years ago, and they're seeing in Toronto lower rent growth than they did before now that they've repealed it. In Sydney, Australia, they're seeing rents actually go down in high-quality and workforce housing because they've produced so much housing. So it isn't like the industry doesn't have facts to back up its position. There are very few, if any, economists that think rent control's a good idea. So I think we just need to keep putting our message out there. This stuff cycles, and there will be a time when they sort of stop doing this and get rid of it like they did in the early '90s, when all these preemption measures came across all the states that didn't allow localities to do rent control and when New York started to liberalize its rules.

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Operator [63]

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We'll now take your next question from John Guinee from Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [64]

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Just a couple of balance sheet questions. You sold out of your unconsolidated JVs, but you still have a $52.9 million of unconsolidated entities on the balance sheet. What does that refer to? And then second -- and if this information is somewhere else, let me know, your $281 million of lease liabilities, are those ground lease obligations?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [65]

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Yes. So -- It's Bob Garechana, I'll take the second question first and then talk about the investment on unconsolidated. The ground -- the ROU or the liability and the ROU on the balance sheet are predominantly related to ground leases. So we have 14 ground leases, but there are also corporate leases, et cetera. I think in the Q, we probably do a very specific job of kind of outlining that, that they are predominantly ground leases.

On the investment and unconsolidated, there are some unconsolidated investments. There is a predominant -- $40 million of that $52-odd million is related to a unconsolidated condo kind of joint investment structure related to one asset that we own that is there as well as our private equity technology investments that we disclosed previously. And that makes up the balance of that $52 million. But there are no true operating assets that are unconsolidated anymore post the sale of the 2 that we mentioned in the release this quarter.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [66]

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Okay. And then are you also -- are you providing any information anymore on your consolidated joint venture? I think maybe you have a partner who has a 20% interest in that?

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

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Well, that -- those were the 2 that were sold this quarter. So that's gone away.

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

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Those are the unconsolidated. So the other piece that we have is -- which I think is also in the Q there some, we do have some consolidated ventures that have minority interest in them. There is, I think, 17-odd properties or so that have limited partnerships that we refer to as the group B stuff. There is another asset that is in the D.C. market that is -- got a 25% minority interest. There is some disclosure in the Q and in the K related to that.

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Operator [69]

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We'll now take your next question from Rich Anderson from SMBC.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [70]

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There -- So -- Is part of the education process with regard to New York rent control the ability for existing stabilized units to graduate to market and if that -- is that perhaps like a sort of an unintended impact to all this? And could that actually help you again, given that you have a lot of market rate in New York?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [71]

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I may not have followed your question exactly. Is it that we need to educate policymakers or continue the conversation about the conversion in market rate, not that...

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [72]

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Yes, I'm saying will that process be impacted by all this in a way that's not -- it's not understood quite yet?

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

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Yes. I think there are probably a significant number and in the prior question on this, I probably hit on it. There's a significant things we don't understand and unintended consequences the policymakers have triggered. So they're going to -- they have to figure some of those things out. I think, again, they've created disincentives to certain types of conduct, like investing in some of this post-World War II product that is, I think, the backbone of New York's workforce housing supply. So I think there is this conversion part they may not fully understand, and they may just be very happy not to have those rental rates go up. But what they've also done is discourage people from putting money into those deals, so that's going to have that impact on deterioration now. So I [agree] there's probably more to come here, I would think, over time in terms, once they start to see this negative impact, hopefully, the policymakers react to that and change some of the rules.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [74]

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And how would you compare and contrast what's going on in New York with what may or may not happen again in California, Costa-Hawkins part 2? I mean would you say that that's a little bit more of a fluid situation from your perspective? Just curious how you're approaching that.

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

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Yes. Thanks, Rich. I think the good news in California is that the dialogue is much more public. So the activists of the industry have a seat at the table, they're talking to policymakers, there's a lot of back-and-forth. We all know about the Assembly Bill AB-1482 that has cleared the assembly. And once the Senate comes back from recess in a couple of weeks, will be discussed there, and we think that, that is, again, not the right direction to go, but at least we're involved in that conversation again as our activists in the public in general. What happened in New York seemed to happen in the dark of night. And I think it's going to have a lot more unintended consequences because it wasn't really carefully vetted and thought through. And so I can't speculate as to how California will end up, but the quality of the conversation so far to us seems pretty good.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [76]

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Okay. Last question. You mentioned dense suburbs and looking in that direction. Do you feel like when -- there's a lot of talk about how the suburbs have outperformed urban core up to this point. Maybe you don't see it that way, but a lot of people have said that. Do you feel like EQR has left some money at least temporarily on the table by virtue of the fact that you're -- you have this sort of urban-centric model?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [77]

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Well, coming out of the Great Recession, we're leaders with the urban portfolio. The demand we see and the resiliency of that demand, we think what happened in the suburbs to the positive was mostly about just the dearth of supply. So -- and when you do see supply, and Michael Manelis has spoken to this and for example, the San Fernando Valley, not a lot of [employment] drivers there. Now we've got a bunch of supply, and we're having a tough time at it. So whenever we see supply fall onto a suburban submarket, we see a lot more dire consequences where these urban submarkets just work through it because the more that's built in these urban submarkets, the more appealing those areas become. And so they draw in even more people, and it serve this virtuous circle, and though it hurts us for a while in our numbers, in the long run, we're in a lot of these properties at a very low basis on a relative scale compared to what people bill to, and it's -- we feel like, in the long run, our NAV growth and our IRR and our FFO growth will be better. So I think our emphasis on the dense suburbs is just more a bit of a slight shift. I mean we're looking for the same kinds of customers, so the guys we use, the folks that usually are in our units in D.C have $120,000 household income numbers per year, and the folks in Rockville, they average about $110,000. These are the exact same customers, they just drive to work because of the nature of that location as opposed to take transit. So we want to find more people like that, Rich. We think those areas are good investments. But just to be in far suburbs, hoping there will be no supply, the minute there is some supply, your product is obsolete, and you struggle for a long time.

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Operator [78]

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We'll now take our question from Hardik Goel from Zelman & Associates.

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Hardik Goel, Zelman & Associates LLC - VP of Research [79]

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Not to beat a dead horse with this New York regulation thing, but I think I understand the moving pieces, please correct me if I'm mistaken. Of the assets that are currently stabilized, can you tell us how many of those are actually under the 421a development plan and will at some point become market-rate units? And maybe a little bit on the cadence of when you would expect to see them become market-rate units since I know the structure is going to be quite different.

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

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Yes. I think it's effectively all of them. Thank you for that question. And it's -- one way to think about this is from now till 2028, so it's a long period of time, somewhere between 150 and 300 units a year -- and that's because it's as chunky because it's properties. And we have a property that, just in the last few weeks, moved into this category. We leave the rent-stabilized world and enter the market-rate world. There are transitional rules, it doesn't all happen in a day in terms of the change in our ability to grow revenue at that property, but it happens. And so I think that's, again, a built-in advantage of the kind of owning the kind of assets we own in these markets, that these sort of properties are in the market that's going to have even less supply, we're going to have more market-rate units created with no incremental development risk every year for the next 9 or so years.

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Operator [81]

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We'll take our next question from Alexander Goldfarb from 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 [82]

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Just 2 questions. First, just continuing on the 421a theme. What are your thoughts on keeping -- for a while, you guys have been selling your 421a, especially to avoid the increased real estate taxes that abatement burns off. And saw on a local publication, you guys are marketing Ten23, which I think is a 421a. But what are your thoughts on retaining the remaining 421a assets and accept the higher real estate burn-off pressure on OpEx for the advantage of owning those market-rate units longer term? Which, Mark, I agree with you, they're going to be vastly more valuable given that housing stock in New York is going to go down, and those units are going to be more in demand. So what are your thoughts on keeping remaining 421a versus this selling that you've been doing?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [83]

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Yes. Thanks for that question, Alex. So I'm not going to comment on any specific asset. But I think you'll see us continue to sell a few of these 421a assets that have just begun their burn-off period. That are 6, 8, 10 years from entering and sometimes even longer. It isn't always true that the end of the tax abatement period is the end of the affordable housing period. So that's an important thing to keep in mind. For us, everything I've told you is the case, but assets we've sold lately, some of them at the abatement end and their requirements to stay affordable go another 10 years or more. So we're going to be thoughtful about this. When we have assets where we think cash flow growth over the next 6 to 10 years is almost certainly negative, it's going to be very hard for us to hang onto those assets, thinking that 10-plus years from now, there's a payday. But assets that are anywhere near their expiry date, I agree with you, those assets have probably a special and different value, and those are probably assets we're even more interested in holding onto than we have been before.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [84]

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Okay. And have you guys -- I mean I know it's early on but given that asset values are going to be negatively impacted by the regulated units, presumably your tax assessment pushback is going to grow. Do you see this as a potential significant savings of reduced real estate taxes because the value of the buildings has gone down?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [85]

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Yes. Well, I'm not sure the values of the buildings are going down or not. Like I said earlier, we're just not sure about that. But we intend to be more aggressive. And absolutely, you show your income and expenses for the accessory, have these discussions, Michael is a pro at this. [There's] a team that works in the investment group that does this for us, and we're all over it. So you can be assured that we'll be on top of any appeal opportunities this presents.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [86]

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Okay. And then just finally, bigger picture on the back half of this year, it almost sounded like where you're talking about more supply coming in Boston, the negative headwinds on lower New York revenue growth, and it sounded like there were few other markets in there which may have some supply. It sounds like there's some increasing pressure in the back half, yet your guidance increase obviously suggests that things are pretty healthy. So did I mishear? Or are there a few markets that are going to be some headwinds in the second half of this year?

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

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No, I think that's absolutely correct. I mean I'll just point to L.A. L.A. is very pronounced back-half loaded kind of on the delivery side. But I think what you've got to remember as that pressure starts to come in towards the later part of Q3 and Q4, the volume of transactions less the impact on the full year revenue numbers is less because you're only being impacted for that stub period for the balance of the year. But supply definitely in several of the markets is back-half loaded, and we're just going to see, if demand stays strong, it's going to be absorbed, and we'll be just fine, and if demand softens a little bit, it's just going to basically play into our next year's forecast and what's going to happen to our embedded growth next year.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [88]

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Yes. And that's the important point, the embedded growth as Michael and I have been talking over the last few weeks. We're going to roll into, into 2020, and we're not giving guidance on the call, but we -- it is important because your question's forward-looking, I mean, we're going to have much better embedded growth likely going into next year but tougher occupancy comps. Some of the supply pictures at some of these markets like New York and L.A. will be better in 2020 than it is even in 2019, and a lot of the others will be about constant. So we feel terrific about the back half of the year, the usual seasonal variability is going to occur. But there isn't some like particular risk that's coming in. I mean you're going to have -- we could easily end up at the top end of the range if occupancy just doesn't moderate, and that's happened as recently as last year.

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Operator [89]

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We'll now take our last question from Nicholas Joseph from Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [90]

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Mark, it's Michael Bilerman here with Nick. I recognize John was -- he was asking about the operating income relative to New York and whether there was a modest net positives, negative or even you sort of came out and said it's probably even to a modest net positive. So I guess I step back from that. If that's the case, why are you spending so much time, money and effort in fighting all these regulations? Is it more altruistic about the impact it could have to housing in your core markets? I'm just trying to put those 2 things together.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [91]

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Well, we're certainly charitable folks here at Equity Residential, but I'm not sure we're motivated to interact with politicians through altruism. I think -- We don't know what they'll do and what they won't do. And so when we enter into these conversations, I think, on our own behalf and on behalf of we think the greater good, we want these cities to thrive. We think this policy, even though it didn't hurt us, is bad for the city as a whole. And in the long run, as citizens of New York City because we're enormous investors in that market, and we have employees that live in that market and residents, we think good policy is better for us. So [they] could easily do some things that would be bad for us, and we just need to stay in front of them and keep that education process going. So I guess for us, having more political interaction is probably the way it's going to be from now on, at least until all of this pressure kind of moderates across the country.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [92]

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So you're saying in the long term that potential detrimental effects to a city in terms of rent control and what that may do in terms of people wanting to live here and do things that ultimately will drive and thrive for people that are multifamily house that's -- if that is going to disrepair, it has impacts on the quality of life and the quality of the city and so even though it may not have a direct -- a large negative impact to your values or income, you rather the city be more prosperous?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [93]

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Yes. And I think just as citizens, we should [hope] that. These big, great cities like New York and San Francisco are creating all these great jobs. They don't have places for people to live. And so you're unable -- I mean a lot of the job growth that may be slowing in places like San Francisco is just because no one else to employ, they have nowhere to live. So I mean there's a lot of studies that GDP growth in United States and average earnings per family would all be higher if we were able to house people more effectively in all these cities. So I think you've hit it precisely.

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Operator [94]

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This concludes today's question-and-answer session. I'd like to turn back the call to Mr. Mark Parrell. Please, go ahead.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [95]

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Well, thank you all for your time on the call. Hope everyone has a safe summer, and we'll see everyone around the conference circuit in September.

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Operator [96]

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This concludes today's call, you may now disconnect.