Good day, and welcome to the Essex Property Trust Third Quarter 2017 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made in this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs, as well as information available to the Company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall, you may begin.

Thank you for joining us today, and welcome to our third quarter earnings conference call. John Burkart, Angela Kleiman and I will make brief comments and John Eudy is here for Q&A. I will discuss three topics: our third quarter results and preliminary thoughts about 2018, recent regulatory activities and an update on investment markets. We are pleased with the Company's performance during the third quarter, carrying forward the momentum from the solid first half of 2017. Occupancy gains, other income growth and non-same-store properties contributed to the core FFO beat versus guidance. As noted last quarter, market rents peaked in June, two months early compared to normal seasonal patterns, and then declined throughout the third quarter. On a year-to-date basis, same property market rents were up 3.5% from January through September, significantly lower as compared to the 6.3% market rent growth from January to June. The decline in year-to-date market rents during the quarter significantly reduced loss to lease, which was less than 1% at September 30 compared to 3.4% at June 30, 2017. Two primary factors contributed to these market rent reductions. First, new apartment deliveries with substantial moving concessions continued at a robust pace during the quarter. Second, unadjusted total non-farm employment declined across most of our markets in Q3, reducing demand and mirroring the broader U.S. after outpacing the country for over five straight years. As a result, given an ongoing apartment supply deliveries and lagging job growth, concession levels remained high and leasing incentives increased during the quarter, both undermining pricing power. Essex remains focused on understanding supply and demand dynamics across each of our West Coast markets, with demand driven principally by job growth. We now forecast 2017 job growth to be about 1.4%, about equal to the United States but materially less than…

Thank you, Mike. Essex had a solid third quarter year-over-year same-store revenue and NOI growth of 3.1%. Our quarterly year-over-year revenue growth rate continues to decline as expected, due to both market conditions as well as difficult comps from last year when we adjusted our strategy to emphasize higher occupancy. While Mike outlined year-to-date changes in market rent growth, I'm going to talk about year-over-year market rent growth rates. As we mentioned in the second quarter conference call, the seasonal peak in market rents was one to two months early. The result, of course, was that the year-over-year market rent growth deteriorated from about 3.5% in May for the portfolio overall down to below 1% in July 2017 compared to the prior year's period. Since the low in July, market rents for the portfolio have steadily increased to about 1.5% in September compared to the prior year's period. The negative impact of the early market peak will continue as a headwind for revenue growth into 2018, due to the volume of leases that we signed during the peak leasing months with little to no increase over the expiring leases. Additionally, our loss to lease for our portfolio has declined from 1.9% in September 2016, down to 0.2% in September of 2017, with several markets having a gain to lease, such as San Diego, San Jose and Seattle. Our operations team worked to increase occupancy by 30 basis points in the quarter to position our portfolio for the fourth quarter of this year. We increased the use of our concessions in the third quarter by about $725,000 over the second quarter of 2017. Our portfolio is now positioned well for the fourth quarter and our use of concessions will be reduced. Finally, as a result of the devastating California wildfires, Governor…

Thank you, John. I'll briefly review the full year outlook, then provide an update on our co-investment activities and conclude with comments on the balance sheet. For the full-year, we are reaffirming our same-property guidance of 3.6% revenue growth and 4% NOI growth at the midpoint. We are increasing core FFO by $0.06 per share to $11.89 at the midpoint. We are now projecting a 7.7% year-over-year growth in core FFO per share, which is now expected to be 370 basis points above the same-property NOI growth rate, as we continue to drive operating results to the bottom line. Moving on to our co-investment activity. We formed a new venture, which acquired 8th & Republican in Seattle and 360 Residences in San Jose. We sold Madrid, a joint venture asset located in a non-core submarkets, at a low 4% cap rate, achieving a 12.3% IRR on an asset that is 35% leveraged. We have previously discussed our plan to monetize the embedded promote within our private equity platform, and we have begun to do so subsequent to the quarter. We amended the Wesco I joint venture, where we negotiated a buy-sell and earned a $38 million promote. This promote is currently excluded from total FFO and net income forecast for the year, since we will plan to finalize accounting treatment in the fourth quarter. We have reinvested the promote into the joint venture, thereby increasing our ownership to approximately 58%, which results in an additional FFO of over $1 million annually. This execution is a good example of our ability to source and structure unique opportunities in response to changing market dynamics and creating shareholder value. Overall, the private equity platform has performed well, and we will continue to look for ways to optimize return. Turning on to the balance sheet. The balance sheet remained strong. Our BBB+ rating and stable outlook was recently reaffirmed by S&P, and our credit metrics continue to trend favorably. At quarter end, net debt-to-EBITDA improved from last quarter, now at 5.5 times, and our total debt-to-market cap remains low at 24.5%. With over $1 billion of liquidity on our line of credit and cash on hand, along with a light maturity schedule in the near term, we are well-positioned as we move forward to 2018. That concludes my comments. I will now turn the call back to the operator for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Nick Joseph from Citigroup. Please go ahead.

It's Michael Bilerman here with Nick. Mike, as I listen to you go through all these regulatory, which are pretty complicated, and all the onerous things that are going on in California, with local rent controls and you have the Costa-Hawkins and you think about Amazon HQ in Seattle, I guess, do you sit back and think about whether Essex needs market diversification, additional market diversification, away from those traditional West Coast markets? And like I know going way back, there was the whole Town and Country thing that you were going to do in a joint venture and I know we've had some topics over time, it just seems a little bit more direct today. We certainly saw Avalon announce going into Denver and South Florida. So, I just want to take your temperature a little bit about where your head's at in terms of market exposure and maybe mitigating some of the risk, and I recognize there is a lot of opportunity in your West Coast markets, but how are you sort of underwriting that today?

Michael, it's a great question. And the answer is we think about it a lot. We reviewed it in our strategic session with our board recently, and there are other markets that we compare and contrast ourselves against, and some of them, actually, almost all of them are on the East Coast, because of our basic formula, which is where is housing most supply-constrained and where are single-family homes or the housing alternatives, more affordable? We want to avoid those areas. In other words, we want to be in markets where other types of housing is very unaffordable, making the transition from a renter to a homeowner a very expensive one. So those are the core elements of our strategy, along with, of course, job growth, which our view is job growth is the driver of pretty much everything. And we all like to talk about demographics and other things, but I think that, that's a sideshow relative to the job growth forecast. So, as we evaluate the world, we are constantly looking, and I'd say we're compelled to go to other markets to the extent that we think that they will outperform over time the West Coast and the conditions on the West Coast. And at this point, we've concluded that we're going to remain here on the West Coast for a variety of reasons, and you have seen part of this. I mean, when tech is strong, it is incredibly strong. The Town and Country scenario is not analogous, in our view, to today. Remember, back in the early 2000, you had the Internet boom-bust cycle. In connection with that, rents in the Bay Area went up something like 40% in two years. And so, we thought rents were way out of reach relative to the common consumer…

Tech is not only on the West Coast, either, right? You think about where, how tech evolves, right, and it may not only be constrained to West Coast markets.

No, for sure. We think people are smart. We think companies are smart. If they can't find their people on the West Coast, they will look at other places. We believe all of that is true. We believe that if the United States is not competitive, then the tech companies will find and set up operations overseas. We totally agree with that. But I don't think it's going away. I don't think the concentrations are going away on the West Coast, and there will be other beneficiaries. I mean, I looked at a list of Alphabet companies the other day. If you look down the list, there's like 100 companies that fold in under Google and Alphabet. I mean, they're pursuing a lot of things. They're disrupting all sorts of things from the way we - taxis and travel and communication, and retail, obviously, and even governmental elections. I mean, it's a pretty extraordinary time and I don't think it's done. And so, we are not necessarily - we're not obviously a tech company, but we certainly are attached to them, attached to the tech train and it still seems like it's the right place to be.

Just on Costa-Hawkins. Is this the most momentum you've seen towards a repeal? And then what's the expected timing of the bill or how do you expect this to play out?

It's not a bill, Michael. It's a ballot proposition, so it's proposed to be on the 2018 ballot, and John Eudy is here. He spends a lot of time on the political side. And maybe I will defer to him, but I'll say that it still has a long way to go. It was just filed as a proposal last week, so we don't want to make such a big deal about it at this point in time. Let's see, in the process of getting it qualified and gathering signatures, see how much effort is behind it. I think the key part, the point I was trying to make in the prepared remarks, is that the bills that were passed, the 15 bills related to housing, did not affect rent control. And I think that there is a, at least a recognition at the state level, that rent control has some very significant unintended consequences. The biggest, from my view, is that it reduces turnover. In other words, rather than people being forced out to cheaper housing outside the core areas, they are now allowed to stay in San Jose or San Francisco, but that significantly reduces turnover. Reducing turnover, of course, creates greater scarcity for people moving into the area. It actually exacerbates and pushes rents up on those units. So, I think there's general recognition of this. Again, as I said in my prepared remarks, the proposal is being pushed by the labor unions and some tenant advocacy groups and therefore, it's really separated from the political process in Sacramento at this point. John, do you want to add anything?

The only thing I can add is, again, Costa-Hawkins repeal measure is before the Attorney General, it's got about 45 to 60 days to get qualified before they can start gathering signatures. And if you recall, this same measure went before the state legislature earlier in the spring and it didn't make it out of the committee, because the long and short is everyone recognizes that rent control does not solve the affordable housing issue at the lower end of the spectrum. And most of these housing bills, if you look at them, that have gone through are trying to address that segment. And we believe, first off, that the repeal measure will likely be recognized for what it is. And we think that if it does make it to the ballot, we can beat it. And if it does get passed, in that event, it is not rent control. All it is, is it repeals a protection post-'95 product from possibility of rent control at the local jurisdiction. And if you look across the state, since 1995, very, very few examples of rent control being voted on by local jurisdictions were done for pre-'95 product, even though they could have been. From our radar, what we see is most cities, when you get down to it they recognize that it doesn't help solve the problem.

Thank you.

Our next question is from Gaurav Mehta from Cantor Fitzgerald. Please go ahead.

I joined the call and I'm sorry if you already talked about it. But for the new JV that was formed, can you talk about how much can the JV grow? And I guess, how to decide between what's being acquired by the JV versus what you guys acquire for your own?

Sure thing. In terms of how we think about the JV business itself, it's really a function of how do we optimize our cost of capital. And so, we don't have a specific requirement to contribute an asset to a joint venture or to put it on the balance sheet. These are not, if you will, a platform acquisition vehicle. And so, we do have that optionality to arbitrage between where our stock price is and the cost on the joint venture side, which also benefits from leverage. So, they're slightly higher levered, and so we can really optimize the cost of capital when it makes sense to do so. So as far as that piece, we try to - the self-imposed goal is to keep that business somewhere around less than, say, 20% of our total enterprise and right now, it's still well under that, as far as the component of our business. And so, it's truly just a way to arbitrage the cost of capital from that perspective. The promote embedded in this platform itself, at this point, I think last, the end of last year, I had mentioned the preliminary estimate was somewhere between $35 million to $50 million. And then so fast-forward to this year, with the current run rate and more robust update, now that we were able to monetize one joint venture, we believe that there's another, somewhere between $40 million to $50 million of embedded promote available to us.

Okay. And I guess second question, could you talk about what you are seeing in the private equity market?

Can you repeat the question, please?

Can you talk about what you're seeing in the private equity market? Are you seeing more demand or less demand?

Yes, this is Mike. I can comment on that. Well, the fact that we completed these transactions in the joint venture world at a price that we thought, as Angela said, was advantageous to the on-balance sheet cost of capital, means that, that business is alive and well. I think that institutions are struggling to find opportunities at a reasonable yield. And I think 4% to 4.5% cap rates with some growth is being considered pretty attractive by the institutions, and that's what enables this type of transaction. So maybe there aren't as many institutions out there, but I would say that the ones that are out there are still very focused on the market and there still is a very active buyer pool within the institutions.

Okay. Thank you. That's all I have.

Thank you.

Our next question is from Juan Sanabria from Bank of America. Please go ahead.

Hi, maybe just a first question for Angela. You talked about the other income kind of driving some of the same-store revenues. Was hoping you can just expand on that, kind of quantify the impact in the third quarter and maybe year-to-date and what's driving that?

Sure. On the outperformance in the third quarter, which is - if you're thinking about the, on the same-store perspective, we had last quarter guided to 2.8%, and we ended up at about 3.1%, so about 30 basis points higher on a same-store. But if you translate that to the actual FFO impact, out of the $0.05 beat, $0.02 is timing, so let's take that off the table. As of $0.03, only $0.01 of that is really attributed to same-store and $0.02, other pennies, is non-same-store. And the components of the $0.03 beat are occupancy and the other income. And the other income component, that includes your typical other income, like parking garage income, some [indiscernible], so those are the key drivers. But it's mostly on the non-same-store and that's one of the reasons why we did not make any adjustments to our fourth quarter outlook.

Okay. And then I was just hoping you guys could go through the new and renewals for the third quarter, and any data points you have on October. I think you spoke to maybe the renewal offers out, but if you can go through that again, that would be great?

Certainly, this is John. So, what I had mentioned is we had sent our renewals out for the fourth quarter and or are sending them, in the process of doing that in the 3% to 4% range. But it's important to understand that, as we mentioned earlier, our loss to lease right now is about 20 basis points. That means that the market is pretty near where our actual rents are. And so, where exactly that ends up, some will get negotiated down, most likely, and we'll go from there, ultimately case-by-case. But from the market perspective, as I mentioned, the market, on a year-over-year basis, hit a low in August, but it's subsequently come back up, and so at this point in time, we're about 1.5% above where we were last year from a low that was below 1%. So, from my perspective, the view is optimistic. We know last year we had a tough fourth quarter, so the comps get a little bit easier and so overall, we're doing good. Moving forward, it's not the extreme job growth era that we had a few years ago, but things are pretty solid out there.

Do you mind going over the new and renewals by the major buckets…?

Sure. So, SoCal, we have renewals going out at about 3.7%, and the year-over-year SoCal rents are around, just up around 1%. In Northern California, we have renewals going out also at about 3.7%. And in Northern California, year-over-year rents are up about 2.3%. And then in Seattle, we have renewals going out at about 4.1% and the new rents year-over-year are up about 1.3%.

Okay. And what was the third quarter renewal number, though?

Third quarter renewals?

Yes.

Third quarter renewals came in somewhere around 4% overall.

Thank you.

Our next question is from Dennis McGill from Zelman. Please go ahead.

Hi, just to close out that last question, so in the third quarter, new versus the renewals at forward new was what?

In the third quarter, new rents for the quarter were up about 2.5%. So, they've - yes, new rents in the third quarter were up - actually, let me rephrase that, sorry. New rents for SoCal in the third quarter were up about 2.5%. NorCal was about 20 basis points up and Seattle, about 2.7%. It went down. They peaked up and then came back down.

Okay, thank you. And then with respect to concessions, you talked about them being elevated today. How would the concession activity today compare to what you would have anticipated, call it, three, four months ago?

The concession activity in the third quarter was significantly greater in both the second quarter and the third quarter of last year. It really was across all markets, but the biggest area of impact was Southern California. So, to put it in context, last year, we had three assets that constituted 90% of our concessions in the same-store portfolio, and that was really focused around Downtown LA and West LA. This year, that broadened, so 10 assets constituted 80%, and that was also Downtown LA., West LA and then some into the Tri-City, Glendale, Pasadena. So, we saw much greater use of concessions in the SoCal area. As we look in Northern California, the concessions were much more spread out. Its 21 assets constitute only 40%, the top 21 assets were only 40%. Basically, in Northern California, concessions were used as a look-and-lease, a tool to close, whereas in Southern California, in several cases, certainly around the downtown area, they were used just as part of the market. In essence, a month free on some existing assets competing with all the new supply out there. When we go to Pacific Northwest, again, the spread was pretty significant. It was 13 assets at 75% of the total concessions, and that was really largely in the Eastside and North area, not in the downtown area. The downtown area has remained pretty strong as far as demand goes.

Hey, John, let me just add one other thing. And Dennis, I think just connecting the dots back to the comments in the script, the third quarter this year we had actually net negative employment growth. And so, what happened, I think, is you have the same lumpiness of supply hitting the marketplace. And when you have net negative job growth, in other words, unadjusted total employment actually went down from June 30 to September 30, there is no demand being naturally created during the quarter. And so, the concessions start pushing through the lease-ups and into the stabilized portfolio, which are the numbers John just mentioned. So, you still have the lease-ups with pretty robust concessions, that always happens. They're trying to hit 25 to 30 units a month in absorption targets. If they can't get it from job growth, then they start trying to steal from, or they take from the stabilized communities, which is what is happening. But I think that this is, the difference between the quarters is that the stabilized communities were affected to a greater extent than in prior quarters.

That's very helpful, and I think you kind of answered my next question with that. But when you think about the comment of visibility on concessions maybe being more limited today than they've ever been, and yet at the same time, deliveries are expected to be down next year in the majority of your markets, as you walked through, so you would think that developers would be pushing less aggressively versus more as they get closer to the end. But you're actually seeing the opposite, but you'd put that more on the unemployment side than on the supply side?

Yes, I mean again, that's a good question. I think developers have a different economic objective than the stabilized owners. The developers want to fill up the development and minimize free rent over the lease-up period, whereas - and as soon as they become stabilized owners, they're like us, they want to minimize concessions. So, there are very different motivations and that is why this is so challenging to figure out. But our econ really study - our economic research group, and the way we view this stuff after doing this a few years is that job growth really matters. And we need job growth in order to create that demand. And if you get a quarter where job growth actually turns negative, and we know what the lease-ups are going to do, they're going to continue to push to hit their absorption targets. When those two intersect, bad things happen. So, it seems like this time of year, many times in the past, you start seeing the deceleration theme that's happening out there. And I would caution everyone on that a bit. And the reason why we didn't publish a full-blown 2018 S-16 is because looking at this time of year, weird things happen with rents because of the drop-off in demand. This is a normal thing. The extent of the drop-off this year is out of the norm, which is, leads us to believe well, is this an aberration or is this the start of a new trend. And that really is the issue and really is the key to this. And so rather than sit here during what we know is the seasonally most weak period of time, and try to determine what that means for next year, we would, candidly, rather wait and see what happens and then we'll have a better view of the world after the next couple of months go by. And we'll get a feel of what happens after the New Year as we go into our Q4 call in early February. So that was the logic behind it. I mean, we could have easily put some numbers down on a piece of paper, but we want to have conviction with what we think, and more importantly, we want to make sure the team is - stands behind and feels responsible for delivering what we put out there. So again, this year's a little bit different, I think, than normal. And so, we just adjusted our overall program to consider the fact that it's different and we're - it's a little bit more challenging to figure out what's going to happen next year, and we have limited visibility. So hopefully, that makes sense.

Certainly, it does. Appreciate the comments. Thank you.

Our next question is from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead.

With regard to the slowing job growth and demand commentary you've had, what are you seeing specifically in terms of traffic at your properties or on your websites versus prior periods? And has it coincided, I guess, with the moderation in market rent growth that you've seen or is that more a function of the concessions?

No. So the answer to your question, what we've seen is traffic is actually up. It's probably up about 5% across the board from last year same period and good overall. But traffic is always a tough, tough metric to look at and try to get insight into the market, because is it that we're doing a better job with our marketing, is it that people are looking more - for more options, or is it that demand's up? It's hard to understand sometimes exactly driving it. And I think it's tough to understand what the root cause is, but traffic is definitely up for us.

Interesting and then, I guess, just thinking about supply growth and decreasing in 2018, perhaps some of the heavy concessions starting to burn off. What level of job growth do you think you need to see market rent growth reaccelerate into the peak leasing season next year?

This is Mike, and that is the million-dollar question, so you get an award, which is a piece of Halloween candy. It's a great question. I think next year is going to start pretty strong again. I think, again, when we look at the number of open positions at the tech companies, it still seems like there is very significant demand. It seems like the business plans for these companies are being developed now and we hit the New Year and those business plans get implemented, and they all involve hiring good people. And so, I honestly don't - I think we're going to have a strong recovery into Q1. And the question will be whether we peak early again next year. And so, I think the first part of the year will be - will continue to be good. But you bring up another key issue, which is we do track how many of the lease-ups are starting to get into their final phases, and there's a pretty significant number of them. For example, in Northern California, about one-third of the 7,600 units that are in lease-ups, are 90% or higher leased, so that should help quite a bit. LA., which has really been disappointing on the job side, and has pretty heavy supply, I don't see a whole lot of relief there. San Diego, which has been - which has really led Southern California portfolio, will actually accelerate in terms of lease-ups in the downtown. So, it's a mixed bag, but I think we'll start pretty strong next year, and we'll have to wait and see how that trend goes into the summer. This year, it was interesting, we peaked early, but our year-to-date rents were actually higher when we peaked than the year before. So, every year is a little bit different, but I'm thinking that we're going to have a strong start to next year.

And then one quick follow-up to your comment on leasing, lease-ups in their final phases, do you typically see concessions pick up as potentially looking to stabilize ahead of coming out of the peak leasing season, any thoughts there?

Yes, I think, again, I think that the philosophy of the lease-ups is pretty consistent, and they're not done until they're done. In this quarter, again, we saw something that we haven't seen, which is we see some of the lease-ups hitting stabilization and dropping concessions, but continuing concessions. We saw that in Seattle. We saw it in Downtown LA So in other words, the thing that I think is different is the use of concessions post-stabilization, again, I think exacerbated by the fact that you had no demand growth, is something that was new in the quarter that we haven't seen, and obviously, we hope that goes away very quickly.

Appreciate the thoughts. Thanks guys.

Our next question is from John Kim from BMO Capital Markets. Please go ahead.

It may be a little early to digest fully, but the House Republican announced tax bill includes a reduced cap in the mortgage interest deductions for new homes. Big picture, do you think this significantly impacts housing developments? But specifically, to Essex, do you track the percentage of departures that move into new home?

We do. And I don't - John, do you have those numbers?

Yes, well, we have move-outs to buy a home, not specifically to new homes, and when we were looking to see where people were moving. In the third quarter, we were about 11% of people moved out to buy a home, which is in the long term - long-term average is about 11% as well. So that's not changing much, but we don't separate between a brand-new home versus [re-built] home.

No, exactly. But the other number that is very substantial is the median home price increases on the West Coast, which are striking. California averages about 8.4% increase year-over-year in the median price home. Seattle was 14%. So, San Jose was 13%; Oakland, 12%. These are very striking numbers, which again, it goes back to our view of condos versus apartments. As you know, we have about 8,600 apartments that are condo convertible. We have over the last several years spent significant amount of efforts to maintain the ability to convert to condos, and we've just taken one of our Senior Vice Presidents and basically said, "Okay, this is your new job, to work on the condo side of the business." So, the - we think that all these things fit together in some level. And where the bad news is that rents aren't growing as fast as we want them to, the good news is that there is something else that perhaps can compensate for that and allow us to add value to the portfolio.

Okay. And then John discussed this in his prepared remarks, but a lot of the new office developments in Northern California have been filling up in recent months. I realize that's not all expansions necessarily, but it seems like office tenants are optimistic. And I'm just trying to align that disconnect or the seeming disconnect between that optimism versus your expectations for slowing job growth.

Well, yes, but again, job growth - we're talking like this is a horrible thing. We're still at the U.S. average. There are a lot of places that - the fact is that we had fantastic job growth and we've reverted back to the mean or the average. It's not that job growth has completely gone away. And so, we're maybe beating ourselves up a little bit too hard for that issue. And again, we still expect job growth. We track, for example, the number of new positions, and one interesting change is Amazon's been between 8,000 and 10,000 new positions over the last couple of years and now it's down to 7,000 open positions. I don't know if that has something to do with HQ2 or not. We'll have to wait and see. But again, there's still a lot of those positions that remain open and I presume that a lot of these things are going to be absorbed into the space that's being built currently. Again, we struggle to produce 1% of housing supply overall, and there has been and continues to be a lot of office construction that would imply that the demand for people is going to continue.

Okay, thank you.

Our next question is from John Guinee from Stifel. Please go ahead.

Okay, thank you. Two questions, so if I'm a tenant in one of your properties and I just got my renewal notice, which was an up 3.4, but I heard that the loss to lease was about 20 basis points, I should try to negotiate you down about 3.2%? Is that the best way to look at it?

Wow, I hope you don't live in one of our buildings, John.

In the big picture modeling world which is why I refer to it that way for sure. On the practical side, it's obviously a case-by-case situation and the tenants are looking at the same things we are, which are what's going on with the comp and the quality of life that we provide them. So, in the end, I know that a lot of people on the call here are trying to figure out how to model and that's why I'm trying to help give some perspective there. But on a practical basis, obviously, no matter what, people are always looking to try to come in and negotiate the rent. It's part of the American consumer culture. But how it really works out is people are looking at what's going on in the comparable marketplace and the services that we provide, which I think are very great. I think our team works very hard, so we find, more than you may expect, more often than you may expect, perhaps from my comments, people will say this is a great value and that we appreciate it and we want to stay.

All right. And then my real question is if I listen to, I think what you said, Mike, about all these bills, which clearly, my eyes glazed over, at the end of the day, I think it means development oriented towards transportation-centric locations and much more density and much more urban locations, but correct me if I'm wrong. What does this mean to how much it's going to cost to build multifamily in the future? And do you expect these bills to generate more or less supply?

Well, that is a great question and Mr. Eudy is here and he's got lots of thoughts on this, I know. But I will answer the first part of the question, which is California has been a sprawl type of world, where you build the next road 10 miles further out, you build 10,000 more homes, and that's how we're going to grow. Sometime over the last 10 or 15 years, California said that's the wrong idea and it's really driven by the global warming concerns, et cetera, where California wants to be a leader on that. So, it passed in 2006 its Global Warming Solutions Act, which tries to mandate housing on, in the urban areas and on the transit nodes, and it is trying to execute on that plan. Unfortunately, the transit nodes are not nearly plentiful enough. We need a lot more transit in order to make this transition work and the properties that will be built on the transit nodes and in the urban areas are almost by definition incredibly expensive. And cost of construction is going up pretty significantly. So, I'll leave it to John to fill in the next part of that question, but John, how difficult is it to find development deals now?

We've talked about this the last several quarters. Financial feasibility, at the end of the day, is what drives the bus on how much gets built. And while these bills are an attempt to try to help spur at least certain portions of the housing that could be created, but the reality is if you impose other restrictions, for example, the Wiener bill, SB 35, has an attempt to expedite the process to make it more ministerial, if you're zoned, to go quicker in the process, but then it has a prevailing wage requirement, which kills every deal, just about, outside of San Francisco, which he represents. So, form over substance sometimes gets in the way of what this really is going to produce. And we try, with our cost of capital, to be as aggressive as we can, and you've seen our portfolio of development transactions go down a lot over the last couple of years. Not because we want it to, but because of the financial feasibility. And that is going to be the natural backstop from things going hog wild, all of a sudden, you'll see an oversupply created. We see going in the opposite direction, see the tailing off of the supply deliveries that we're predicting are going to happen over the next two years significantly less than what they were in the last two years.

Great, thank you.

Thank you, John.

Our next question is from Wesley Golladay from RBC Capital Markets. Please go ahead.

Good morning everyone. When you're looking at the supply forecast to go down next year, are you looking at that on a nominal basis or just from a weighted average - from a timing perspective? So, would late 2017 deliveries be impacting the 2018 number at all?

Wes, it's Mike. Yes, they changed from last quarter. And again, we sent our people out, our econ research team out to drive pretty much everything in the marketplace to get a better idea of what's going to be delivered when. It's always very difficult to pinpoint it, because again, with high density buildings, you end up with the exterior done and the life safety done, but you don't know how much of the interior is done nor do you have access to the building in general. So, it's going to continue to be something that we cannot do with great position and so we're not going to really be able to refine this until we know exactly what happens from quarter-to-quarter. But the analysis that we do is, again, driving all the significant buildings in the area and trying to get a sense for what happened. And so, from last quarter, having driven the sites, we thought that there would be net total about 5,000 units reduced. Now, we're sitting - next year 2018 over 2017, now we're at 2,800. So, some of the units that we forecasted previously into Q4 have driven into Q1 of 2018, so - but still significant reductions overall. So Southern California, a little bit of an increase overall, about 5% increase overall, really dominated by San Diego and LA as well. But reductions, significant reductions, in Northern California and a smaller reduction in Southern California - I'm sorry, Seattle.

Okay, but from a timing perspective, as far as are these, some of these are 2017 deliveries, are they coming in later this year and should we expect supply pressure to remain somewhat elevated in the front half of this year and then really get the big benefit next year in the second half?

Okay, again caveat with what I just said, it's not perfect. In Southern California, Q4, around 6,500 units, Q4 2017 going to 5,000 units in Q1 and then up a little bit in Q2 and Q4 is at 3,700 units. In Northern California, Q4 2017 is about 2,200 units and Q1 2018, 2,200 units, about the same and then it drops off each quarter thereafter, such that Q4 is about 1,500 units. Seattle, 2,800 units in Q4 2017, dropping to 2,000 and then picking up in Q2, Q3 and then dropping in Q4. So, it's going to be a mix. And again, we feel much better with the supply hitting when the jobs are hitting. I can't overemphasize this issue. When we're in the peak leasing season, in our peak leasing season, jobs are going, that's when most of the jobs are being created, and when the supply hits, there is natural demand being created to absorb some of that supply and so concessions don't go completely crazy. When you get later on in the year, Q3 and Q4, depending upon when the peak occurs, that's when we start being concerned about more supply, because that has an outsized impact. You have zero, let's say, somewhere around zero demand growth, and you end up with supply and that is what softens the markets very quickly, again concessions 1.5 months, two months concessions being the key driver there.

Okay, and then looking at the building blocks for the market to get normal trend, 3% growth. Would concessions be the biggest driver of that easy comp for next year? And at what point does the strong wage growth start to offset some of the weaker job growth?

Again, we didn't talk about wage growth, but it continues to be strong and it continues to be better than rent growth. So, I think it's a slow improvement to the market. Rent-to-income ratios continue to go down. And interestingly, in our numbers, we now have a couple of Southern California markets that are higher rent-to-income than the Bay Area. So, it's interesting, it's changing, and the Bay Area's strong income growth is definitely helping.

Okay, thank you.

And our last question today comes from Conor Wagner from Green Street Advisors. Please go ahead.

On the preferred equity program, what's the type of demand you're seeing from developers and what is your - what's the spread on these deals?

Conor, how are you? We're still seeing reasonable demand. It's not as strong. We expected it to drop off toward the end of this year, but we're still seeing reasonable deal flow. And in terms of pricing, there's been some competition coming into the marketplace. And as we start - as we approach high $300 million to $400 million in commitment, we may scale back our appetite a little bit or look for another funding source or a number of different things. So, but I think right now, as we look at that business, we still see pretty good demand and we're also seeing cap rates move down, as we talked about. Obviously, rents are growing more slowly or NOI is growing more slowly than construction costs. That continues to be the case, which means these deals need more equity and which we're willing to provide as long as we're in a pretty safe position in the capital stack. So, I don't think that business is going to go away this next year, but I think it will slow down somewhat overall.

Okay, thank you. And then on the comments on the housing bills, given your assessment that they won't do much in terms of alleviating the housing shortage in California, but that we do see a new willingness on the part of the legislature to act, what are your thoughts going forward on what the next steps could to be or if they could - if a repeal of Prop 13 could be on the table to help fund some of this affordable housing or longer term, what do you think California will be doing, since you've acknowledged these bills really won't do much in the short term?

This is John Eudy. I'll take a stab at it, a difficult one to answer completely accurately, but the attempt right now is to fill the gap on the affordable side of the equation, because that's where most of the squawking is. And as you know, that California used to have a redevelopment agency in all cities up until 2011, that was disbanded by the governor, and that went away. It took away a primary driver to help the affordable folks produce housing. I think that's where it's going to go. It's going to go in a direction to help, create an incentive, whether it's through this bond measure that's being proposed for the ballot next fall, or a combination of that and other incentives, to basically help create the housing that's needed. And if it's attempted to take it out of the very thin pie that is available on the development side, that is making it difficult to make development deals pencil, it's not going to happen. It's got to be a form of public-private partnership, if you will, and yet to be seen what's going to exactly happen. But I'm sure you will hear a lot of chatter here in the next legislative session, because it is top of the radar for everybody.

I think the LA Times article that I referred to in my comments said the $4 billion bond issuance could support about 14,000 homes and - but again, it has to be approved.

Right.

It's going to be on the ballot, it has to be approved and then those homes have to be built. So, we're in favor of what the government has done. We acknowledge that there is an enormous shortage of housing here. We see it every day. There used to be, most of the traffic in the morning was on the freeways, now it's cutting through the neighborhoods and everything else because the freeways are so jam-packed. And I know down in your area, that happens as well, Conor. So, these are real problems. And John Eudy and I talk about the effect of CEQA, which none of these laws - really, they touch CEQA, but they don't really directly address it. CEQA is the law, California Environmental Quality Act that allows people to object to and fight a proposed development, based on environmental matters, which includes traffic, noise, et cetera and the CEQA challenges, they're real. The traffic is real and it's disruptive and everyone talks about the NIMBYs need to just go away. But it's not going to happen, because these are real issues. Even neighborhoods are jam-packed with cars now and it needs a resolution and I think back to Michael Bilerman's initial comment, why are staying in California, that resolution is many years away. We don't see anything in the short term that is going to make a dramatic impact on this. All of these issues require multi-pronged, multi-year approaches, with a whole lot of money, a lot more than what we're talking about.

Great, thank you.

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

Thank you. Well, in closing, we appreciate your participation on the call, and we look forward to continuing the conversation at NAREIT in a couple of weeks. Thank you so much. Have a good day.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.