Q3 2019 Earnings Call

Please standby.

Good morning, ladies and gentlemen, and welcome to the Avalonbay communities third quarter 2019 earnings Conference call.

At this time, all participants are in listen only mode.

Following remarks by the company, we will conduct a question answer session. You My answer the question and answer acute anytime during this call by pressing the star key followed by the digit one.

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Your host for todays conference call as Mr., Jason Riley Vice President Investor Relations Mr. Riley you may begin your conference.

Thank you Vicky and welcome to Avalonbay communities third quarter 2019 earnings Conference call before we begin. Please note. The forward looking statements may be made during this discussion there are variety of risk and uncertainties associated with forward looking statements and actual results may differ materially.

Discussion these risks and uncertainties and yesterday afternoon's press releases wells on the company's Form 10-K , a Form 10-Q filed with the FCC as usual. This press release doesn't include an attachment definitions and reconciliations of non-GAAP financial measures and other terms, which maybe to use in today's discussion.

Last but it's also available on our website at Www Dot Avalonbay Dot com forward Slash earnings and we encourage you to refer to this information during the review of our operating results and financial performance.

That I'll turn the call over to Tim Naughton, Chairman and CEO about one committees for his remarks.

Thanks, Jason and welcome to our Q3 call with me today, or Kevin O'shea, Sean Breslin, and Matt Sheerin bomb, Sean Matt and I will provide brief commentary on the slides that we posted last night.

All of US we available for acute afterwards.

Our comments this morning, we'll focus on providing a summary of Q3 and year to date results a an update on operations, including some areas of innovation and the operating platform.

Lastly, a review of this alma portfolio.

Oh, starting now on slide four highlights for the quarter include a core FFO growth I've, just over two and a half per cent for the quarter, 3.3% year to date.

Oh same store revenue growth in Q3, it came in at a 2.7% or 2.9%, including redevelopment or what's most regions clustered in the 2.5% to 3% range.

A year to date same store revenue gross stands at 3.1% were 3.2% including redevelopment.

We completed a 90 million <unk> $90 million community and Seattle This quarter at an initial yield at just over 6%.

<unk> 35 million so far this year at an average yield of 6.3.

We purchased two communities totaling 135 million in the quarter.

Excluding our third treasury, so far in southeast, Florida, where we also have one development underway.

We sold four communities in Q3 totaling 260 million.

Excluding the last two assets in Texas that required as part of the Archstone transaction.

Lastly in late September we've entered into a four contracts, Georgia million of equity, which will be several over the next year will help on the remaining cost to complete a development currently under construction.

With that now I'll turn it over to Shaw discuss operations, Okay. Thanks, Tim.

Turning to slide five this chart represents the trailing four quarter average rent change for our same store portfolio and shows the east and west converging to average roughly 3%.

During Q3, however, rent change for our East coast portfolio was 3.6% 80 basis points greater than the 2.8% produced by our West coast assets.

The last summer East coast portfolio outperformed the west from a rent change perspective was Q4 2010.

During Q3 is east coast portfolio was led by 4.6% rent change in new England.

50 basis points year over year at 3.8% in the mid Atlantic up a very healthy 140 basis points year over here.

On the West Coast, our Pacific Northwest portfolio produced like German change of 4.1%, which was essentially unchanged year over year, Northern and southern California deliver rent change in the 2.5% to 3% range each down more than 100 basis points year over year.

Turning to slide six I'd like to highlight a few of the components of revenue growth in the first half in second half of this year.

As indicated on the chart, we expect relatively stable rental rate growth, which is the primary driver of same store revenue growth throughout the year.

However, as I mentioned during our Q2 call revenue growth in the first half of this year benefited from the burned off of lease up concessions from new entrants into the same store pool, a reduction in bad debt and healthy revenue growth from our retail portfolio.

In total these composed contributed an incremental 70 basis points to rental revenue growth during the first half of the year.

We don't have a bunch of a tailwind from the same components in the second half of the year.

And the benefit we are realizing is being offset by the impact of run Capstead L.A.

And the recently adopted <unk> regulations in New York.

As a result revenue growth and the second half of the year is more in line with the actual rental rate growth.

Turning to slide seven I'd like to share a little bit about what we're doing on the innovation front, which will enhance operating margins and allow us to reach new customers.

As indicated on the left side of slide seven we're leveraging various technologies, our scale and new organizational capabilities to create value through a number of initiatives, including those identified on the right side of the slot.

Some of our margin enhancement initiatives right to live relates to leasing and maintenance service.

<unk> addressed in more detail shortly along with customized renewal offerings and centralized renewal administration.

In addition, we're studying opportunities to use AI digitalization and various other technologies to improve the productivity of our property management organization, including our call Center operation.

We're also using our scale and technology to reach their customers in the residential space. So segmentation studies indicated that roughly 10% of the renter market would prefer a furnished apartment home. We started off rated furnished apartment homes in select locations about 18 months ago based on early results, we expect to scale at the 5% or more.

Our portfolio over the next couple of years.

In addition, we are pursuing a strategy to profitably serve the limited service segment of the rental markets for the development of a new humidity feature in high quality apartment homes.

An amended the light design and limited community services.

Compared to our typical development community they expect to reduce capital cost per home via thoughtful design choices materials and the elimination of almost all the amenities space.

On the operating side, we expect to reduce operating expenses by eliminating most of the onsites as most of the customer interactions would be facilitated by technology.

On the cost of maintaining what tends to be expensive amenity spaces.

The net benefit to the customer as a rental rate approximately 10% to 20% other below other new communities in the area.

First pilot community is currently under construction and we expect initial results in the next 12 to 18 months.

Turning now to slide eight to provide more detail on a couple of initiatives.

That 18 months ago, we mapped out all the customer journey is tied to leasing at an apartment and created a new technology enabled self service model for most leasing activities.

We started implementing the first phase of our redesign customer journey earlier this year, which includes the use of an AI powered automated leasing agent and the adoption of a more dynamic demand driven staffing model.

Our automated agent is now fully deployed across the entire portfolio.

The screen shot on the right side of slide eight represents a clip over recent techs conversation or agent had with a prospective residents.

The automated agent operates 24 hours a day 365 days a year and we're seeing an improved performance metrics as a result of our adoption of this technology, including about a 700 basis point improvement and leads into our conversion ratios.

We have a better as staffing model in two regions. This year and expect to adopted across the entire portfolio by the end of next year, we're seeing a substantial improvement in productivity across the two pilot regions and expect similar results in our other regions.

Other components of the new leasing <unk> split of more self guided tours and self service move in over one.

We expect to realize about a 50 basis point improvement and our same store operating margin as a result of our new approach the leasing which is primarily driven by an increase in the productivity of our leasing teams.

Turning now to slide nine we've also created a roadmap for our new maintenance service model. There will sit there are several phases to the plan, but it includes digitalize work flow in procurement.

Automated scheduling the a new optimization platform.

The application of data science to predict demand and enhanced associate performance faster metrics.

We're in the process of integrating the new maintenance platform with our other enterprise systems, which would allow us to implement the first phase in Q1 2020.

And realize stabilization at roughly mid year 2021.

We expect another roughly 50 basis point improvement in our same store operating margin from our new maintenance service model.

Which is primarily driven by an increase in the productivity of our maintenance teams.

And lastly, turning to slide 10, I'd also like to provide an update on some of our environmental initiatives.

Over the past few years, we have invested in a number of opportunities to reduce energy consumption and carbon emissions across our portfolio.

Including Elie delighting.

Which is already generating more than 3 million in annual and utility savings it onsite solar generation, which we have started to install more broadly after completing several pilots.

We are on track to have almost six megawatts of carbon free power generating capacity installed by the end of next year, providing strong returns on a 20 million dollar investment and with more opportunity to extend solar two additional assets in future years.

That I'll turn it over to a match to talk about development and Columbus Circle, Matt Hi, great. Thanks, Sean.

Our development activity continues to be a strong driver of both NPV and earnings growth, even thus far into the business cycle as seen on slide 11. We currently have $975 million of development that is currently in lease up whereas recently been completed across 10 communities with a weighted average initial stabilized yield based on today's.

Red Sun expenses of 6.1%.

We believe these assets would be worth roughly $1.3 billion in the private market generating $325 million in value creation on completion, which translates directly into corresponding gross and net avi.

Slide 12 illustrates the future NOI growth, we expect as we complete all of the development currently underway on the left hand side of the slide you can see that it stabilization, we anticipate $60 million in an ally from the $975 million worth of asset shot on the previous slide that are currently in lease up plus another 100.

And 3 million an ally from the 1.8 billion in assets that are under construction, but not yet and lease up for a total of 163 million in future NOI to come.

And as shown on the right hand side of this slide this activity is almost completely match funded between our recent forward equity deal free cash flow and cash on hand.

In addition, the projected sources of capital as shown does not include proceeds from pending asset sales or condominium units sales, which we expect to realize in Q1, 2020, and which exceeds 100 million remaining to fund.

With initial yields well above our marginal short term cost of capital. This development activity is projected to contribute meaningfully to earnings growth over the next two three years.

Speaking of condominium sales proceeds slide 13 provides an update on our mixed use building at Columbus Circle in Manhattan, which has been renamed the Park Logia.

As we've discussed on prior calls we began marketing individual apartments in the building as for sale condominiums back in April and based on the market response to our offering we can now confirmed that we are proceeding with a condominium execution for the residential component. The park Logia has been the top selling property in Manhattan since the sales launch and we currently.

Got 40 signed contracts, which we expect will move to settlement in early 2020 once the individual tax lots have been recorded but the city.

The retail component also continues to be well received by the market with our anchor tenant target opening for business any day now.

The 67000 square feet of total retail space available for lease about 45500 has been leased so far and we are in advanced negotiations for another 10300 square feet on the second floor, which would leave us with about 11000 square feet left to lease most of which is on the ground floor with Broadway frontage ultimately we expect.

To generate roughly $10 million in total and away from the retail component of this project once it reaches stabilization in 2021.

That I'll turn it back over to 10 for some concluding remarks.

Okay. Thanks, Matt.

So in summary apartment markets remain quite healthy.

Most markets and balance producing consistent revenue growth of 2.5% to 3%.

For the first time as Sean mentioned since late 2010 East Coast is performing.

Either inline or slightly ahead of the west coast.

We are investing aggressively in our operating platform leveraging scale technology and capabilities to grow margins by driving efficiencies and leasing maintenance and utility costs.

I expect our investments in these areas to stabilize over the next several quarters.

And we continue to create significant value through our sector, leading development platform.

Activity, that's consistently delivered 30% plus value creation margins over this 10 year expansion cycle.

Combined with our practice of match funding should contribute meaningfully to earnings growth over the next couple of years.

With that Vicki, we're ready to open the call for today.

Thank you and as a reminder, pediatric question. Please press the star Keith followed by the did you want on your Touchtone phone well take our first question today from Nick Joseph with Citi. Please go ahead.

Thanks, Sean you highlighted the rent growth converging given what you're seeing today what are your expectations for the east to West Coast from here do you think will see sustained rent outperformance from the east coast over the next 12 months.

Yes, Nick.

On here good question on that topic.

Theres a number of factors out there that kind of relate to the outlook for.

Demand and supply as you move into 2020.

On the supply side, if you ought to think about it we're seeing some benefit on the east coast going into next year for the most or is in New York City.

Where supply is coming down projected to be roughly in half and 2020 as compared to deliveries in 2019 2018.

So we expect a little bit of benefit there that may be muted to some degree obviously by the regulations. The first half of next year, we're going to see some impact from that.

As it bleeds through as you know it started mid year. So we had the back half of 19 in the first half 20, we will see a little bit of dilution from that but from a pure market fundamentals perspective, if you want to look at it that way.

In New York City, it looks pretty good.

Boston, we are going to see more supply in the urban Submarkets of Boston next year.

And then as you come down to the mid Atlantic.

For the most par things will be roughly at par from a supply standpoint, and if you pivot to the the west coast for the same question.

We are expecting more supply in northern California across all three markets San Francisco, The East Bay, and San Jose and a little bit more in L.A.. So if you think about.

So the supply side of it assuming that the van side was relatively stable and there is never reasons why you'd expect it to potentially decelerate a little bit.

From job growth perspective, et cetera, based on macroeconomic you know sort of factors, yes. Those are the markets for probably going to see.

Some change either to the to the upside or the downside this on the deliveries.

The one interesting component I point to is sometimes it's all not all just embedded in.

The jobs data that we see go to supply does that we see so in the mid Atlantic and as an example, it's had a nice tailwind this year jobs and supply has been about what weve expected, but federal procurement, so quite a bit and that tends to bring a lot of contractors to the region. So to some of those factors that come into play.

So net net you'd have to look at it sort of market by market, but there are good reasons to expect east coast to continue to perform well based on what we see whether it's at par above the west coast is yet to be seen so.

If you want to add anything to that Tim Yes, No I think I think that's all right John I think Nick.

I think one of things that sort of remark was just how tightly clustered all the markets are well east is slightly outperforming the west I think what's.

It's really striking to us is that it does seem right.

The markets performing within 50, or 100 basis points, which I just cant remember a time this cycle, where thats a curve. It just seems like where we're pretty close to equilibrium almost across the board, which again is.

Kind of remarkable you think about how supply sort of moves up and down through the course of cycle.

In any one market so it's.

I don't know Theres, a from house view that east or west was going to outperform.

Next year as much as.

The markets are basically in.

Balance and.

Approaching equilibrium apart from our view.

Thanks, that's very helpful. And then just on the upper West side condo sales for the 40 sign contracts, what's the average sales price.

Yeah, Hi, Nick it's Matt.

I want to give too much detail, but.

We do 40 sign contracts.

The average.

Price of those particular units is about 2 million sevenfifty.

And yeah, there in different parts of the building.

Okay. Thanks.

And we'll get a rich hightower with Evercore.

Hi, good morning, guys.

Good morning.

So just a question on.

Some of the detect spending that it looks like you guys are ramping up on I know you expressed this in terms of.

At this point of in Hawaii gross impact, but could you.

Maybe translate that into sort of an old fashioned ROI you know what what incremental spend do you expect to roll out and what sort of the estimated ROI on all of that if we if we take all the categories together.

Yes risks as Sean I, when I give you had just a little bit on that.

Terms that where we are.

A number of these things.

That we're doing particularly you all just focused on the leasing and maintenance side for the moment, because they're all pretty far along as compared to say the the development communities they'll have their own independent capital budgets that are.

Different when you look on each one or at each one kind of on a per home basis, but in terms of sort of the backbone of it on the leasing and maintenance side you know the expected investment.

To deliver or the kind of margin enhancement, we're talking about which is roughly 100 basis points.

It's about 10 million so for 10 million dollar investment you can run the math pretty quickly on a 100 basis point improvement in operating margin that that's a pretty good ROI.

Okay, Yes, we can do that.

And then maybe.

Secondly, just in terms of I think there was an uptick in our NIM expense last quarter and a couple of markets and I know this is part of the larger conversation that were there were having a in terms of technology and efficiency spend a good maybe maybe just if you could talk too.

Labor expense growth not only as a function of the tight job market in general, but also as a function of new supply in your markets. How did those two factors sort of interplay with the.

<unk> expense growth and some of those categories.

Sure Yeah happy to address that and maybe a couple of broad comments to begin with one is a you know when you look at each quarter here things can be pretty lumpy.

So we tend to ask people to it really consider focusing on sort of where we are from a year to date basis.

Since there's lot of different things that are happening. So when you look at the quarter. As an example, yeah. There was a lot of lumpiness in our NIM spend in Q2 late Q2, Q3 is sort of the peak for when you're completing maintenance projects given the weather, particularly in some of the markets in the northeast as an example.

And even here in the mid Atlantic.

And so there tends to be greater spend there, obviously, there's seasonal patterns to turnover that relates to our and.

The marketing side as an example, we had a substantial call center credit.

Q3 of last year. So if you went looked at Q3 numbers for Opex last year marketing was down about 21%.

There's a big increase this year. So you have to kind of look at it over a period of time, but to address your specific questions around labor I mean to give you some sense for us as an example on the payroll side and we're starting to see some efficiency there year to date were up 270 basis points on payroll about 140 basis points of that just relates to.

You know benefits and workers comp and things like that that are very lumpy in terms of claims activity and things like that versus 130 basis points, it's really the sort of organic underlying growth related to the associates in the field and if you consider that wage growth picked the sources.

Running anywhere from.

3% up to four types of folks see if you look at ATP data, maybe even more so it's pretty constrained labor costs rose on a year over year basis. So we've been able to mainly through leveraging on the office side. Some of the operating model work that we're doing some innovation work that we're doing.

Yes tickets and lefties out of the system on the office side, so far to help contain that which is good because the merit pool for our associates is still in the 3% to 4% range on a year over year basis for our population.

One other thing that I would comment on is there is some pressure on certain markets as it relates to minimum wage regulation things without sort, that's putting pressure on the maintenance labor side for outsourced services. So even though turnover was down as an example, labor rates and some of the market seen in Northern California, as an example, Seattle.

Et cetera labor rates are up so the labor component of some of those.

Those vendors is up more so than.

Then you might you might like we have to try to be as efficient as we can and thats one of the reasons, we're investing in the maintenance initiative.

Is to make sure that were being as efficient as we can not only for their own labor, but with systems of procurement for the outsourced labor as well.

So hopefully that addresses a number of here or topics there.

Yep, that's great color. Thank you Sean.

Yep.

Well said original with Morgan Stanley .

Hey, good morning, guys. A couple of things are getting back to rent regulation, we've heard some mixed commentary.

On with some of your peers. So I was wondering if maybe you could think about the impact on revenue breaking down, California, and New York City or if it's too early to sort of thanks for that detail.

Hi, Rich this is Sean and then when you say break down the what do you look of our just kind of what the expected impact this year or next year.

Well really next yeah. So so I thought that the the color and.

In new pitch book Post earnings was really helpful, where there was an offset so that was helpful to understand I'm trying to understand do you think California or New York is more onerous, we sort of look at New York City as being more onerous and obviously you've talked about decreasing your exposure to that market.

Yeah, I think the market was thinking California at.

But 5% plus installation wasn't that big of a deal it sounds like it's having some headwind so I'm just trying to quantify.

That that offset and how much of its driven by California versus New York.

Okay. So yes, I don't let me give it just a brief summary on each one to give you some perspective, so what we talked about on the last quarter call as it relates to New York.

Is that we expected the same store impact in the second half of 2019 to be about a million bucks and about 80% of that is derived from lost about fee income that we can generate.

Perhaps location fees and things of that sword as you may recall.

So it will reduce the growth rate in the New York, New Jersey region by about 25 basis points for the full year and the growth for the full year and the same store portfolio is really about six or seven basis points.

But since this all concentrated in the second half the impact is about 10 or 11 basis points. So for New York That's for the second half of this year, we would expect a similar empaque roughly in the first half of next year until you get to the second half of 2020, where you have year over year comps that are a little more stable.

Because you have an impact second half a 19 the impact of the in place second half 2020.

So then projecting that beyond that you know, it's a little bit of a mathematical jigsaw puzzle in terms of different things that you expect where you are in terms of.

Legal rent today across your portfolio et cetera, So I do think you're going to get different answers from each of the read owner operators as it relates to their assets and the potential impact so not surprise this year and different things about that but.

That's sort of how it looks in New York and keep in mind for us.

As it relates to the rent stabilization component of it as opposed to the fee component, which is statewide the stabilization side impacts about 2100 units and for US about 10 years from now those for 21 day programs burned off and that we'd be free of that so that's how to think about it for our portfolio in New York in terms of Avi 14.

In 82 in California. It has a couple of different ways to look at it.

First is yet we went back and sort of back tested our portfolio in 2018 in 2019 and said if 14 82 had been adopted in either one of those years, what would the impacts have been.

And if you back to us it that way.

For us it would've been about a 20 basis point impact for each of northern and Southern California, Yeah, that's about 40% of our portfolio. So call. It eight basis points roughly for the full year and then probably the other relevant question is you know given the reset on January one January one 2020, how does that.

Impact your embedded growth rate for 2020.

And what we've done today as we basically said look if it went into effect October 1st and we had to reset leases back to.

Q1 of 2019, which is the regulation. It has about a five basis point drag on our embedded growth. So it's not that's on the same store pool overall, so it's not terribly meaningful, but it's going to look certainly a little bit more meaningful in those markets and then beyond that it's really a function of the market environment, whether you're hitting the caps or.

But the piece that tends to come into play that people don't always think about is.

Not just the Cpis piece, but there are short term lease extensions month to month leases various things like that that have kept our ability to generate more premium revenue and so I'm not sure if everybody is.

Recognizing that at this point, but it tends to be a material empaque and we mentioned that this year as an example of the impact some of the run caps in L.A. because of the fire was about a million bucks.

Yes, good into those short term leases very profitably. So you have to look at all those different components, that's a lot of detail.

Maybe more I think you need, but that's kind of how we're looking at it right now.

No that that that's I think the transparency that I was certainly looking for so thank you for that one quick follow up question I apologize. If you mentioned this on prepared remarks, maybe I missed it and I recognize you don't give quarterly guidance, but it looks like the.

Full year guide implies some.

Some pretty healthy growth in EFO year over year in for Q1 9 is there anything specific driving that that we should think about.

Hey, Rich this is Kevin O'shea.

You know, we typically do see a ramp in core AFFO as you progress through the year because of our development focus specifically as it relates to the ramp from Threeq to 19 to Fourq you think 19.

The sequential growth and expect to core FFO is being primarily driven by seasonally lower operating expenses.

And by development into why families and communities. So those are the two main drivers of the increase.

Got you got it. Thank you guys. That's it from me.

Well go to Jeff Spector with Bank of America.

Good morning. Thank you had a follow up question on supply you mentioned.

New York City next year I think in your for your exposure down 50%.

Can you put some numbers around some of the.

The West Coast markets, you discussed that you said.

You mentioned some.

Yes.

I will tell you typically.

Some comments around supply, but do you have any stats.

Yeah sure Jeff This is Sean happy to do that so on the West coast markets specifically.

We are expecting basically flat deliveries in Seattle, but in terms of northern California, I mentioned supply deliveries across all the market it's about 1000.

And as more in San Francisco about 1800, and East Bay about 15 honor in San Jose and then I'll lay it's about 2800 units yeah, a lot of that concentrated in and around downtown Koreatown.

Hollywood West Hollywood open on the West side.

And any other markets happy to go through some of the Submarkets with you offline. If that's helpful. But those are real kind of that really the big chunks.

That's helpful. Thanks and.

We've seen slippage your each year for the last few years.

Is there a chance to any of that slips into 21 or is this is the supply more front loaded first half 20.

No it's pretty yeah, it's it's spread relatively evenly across the quarters. So to your point based on what we've seen historically, we would expect some of that this left absolutely.

Our real it has been summer on the 10% to 15% range.

Based on what we've seen sort of historical experience. So give you some perspective and I'd say more delays in kind of the urban high rise product more so than the suburban wood frame.

Thanks, and then just one follow up on demand I know you talked about.

Obviously unemployment.

Is low and and so job growth has slowed but wage growth for your rent there has been strong.

So how are you thinking about that.

In terms of pushing rents.

I don't know if you can give any comments and maybe what you're putting out for renewals over the next 30 60 days out.

Yeah. This is Sean happy to jump on that and timber others can can chime in but yeah. Historically when we look at a wage growth is most highly correlated with a rent growth job growth is sort of the number two variable in that in that and that equation.

And so we are seeing people come in with healthy.

You know wage gains, but we tend to look at is.

For the people that move into our apartment communities you know January of 2019.

With their income level is relative to those that will move into January 2020, and how much is it moving as an example, that's kind of how we measure it build necessarily get income levels from every renewal, but people are seeing healthy wage growth is certainly in line with what were.

Seeing as in the raw data, whether it's the BLS data or the ATP data. It got referenced kinda, 3.5% earlier, when we're talking about wage growth, but in ATP data you know professional services financial services et cetera.

That those numbers on paper are closer to six 7% wage growth or that may or may not include some of the stock option income things that thats sort, but.

We're seeing healthy wage growth and certainly that influences, how we think about it but you got to the extent to supply in a market you know they have choices. So it really comes down to how we think that demand supply environment looks.

Right now.

<unk> renewal offers though to answer the specific question you know we're talking about stuff in the mid high to five high 5% range mid to high 5% range for November and December .

In terms of where renewal offers are going out and renewals have been relatively flat all your kind of in the mid to high 4% range and I would expect that to be the cases, we continue to move through the fourth quarter as well.

Hey, Jeff Tim just maybe one thing to add.

I think you're right in terms of our population.

The congrats been quite quite decent relative to maybe the three 3.5% for the overall population I think one of the thing that considers what's happening on the on the for sale side.

Affordability has it has becoming become more challenging is.

Up until the last the last quarter to.

Were.

The case shiller been outpacing had been outpacing right. So I think that that's helped it's helped rental demand.

Some of the margin you're now seeing I think case show how to print. This morning, right around 2%, you're now seeing sort of.

For sale.

Inflation housing inflation start to fall more in line with with rent growth. So overall I think our outlook is it's a pretty much housing market not just not just across each of the geographic markets, but between for sale it for rental you're starting to see.

Relatively.

Flattish.

Movement, and homeownership rates might be up one quarter down the next quarter.

So it's a it really is remarkable just in terms of overall housing market just kind of how an equilibrium. It is right now maybe it maybe that shouldn't be surprised sort of 10 years into into an expansion, but it's a it's about is it's about a stable as I as much as I can remember, saying it.

Thank you.

[noise] Austin Wurschmidt with Keybanc capital markets is next.

Hi, good morning, everyone.

You guys have spent some time talking about the convergence and like term rent change.

Across kind of the east coast in West coast, but but this was really the first quarter. This year that we've seen.

That like term effective rent change be below where it was at this time last year.

And I wouldn't think some of the headwinds you've talked about.

Same store revenue growth.

Good to other incomes that necessarily show up in that figure. So I'm, just curious what's driving that moderation and how should we think about that moving forward.

Yeah I thought this is Tim I think it's just demands overall I mean, you've seen them economy sort of down shift from 3% growth to roughly currently 2% growth.

John gross more in the one of the half percent range now running about 2 million jobs.

Versus we were in the we're in the mid twos before so your household formation has been pretty good.

But but I think it's just the overall economic activity being down a little bit because supply as John mentioned has been relatively stable.

Obviously, there is theres shifts from market to market, but overall across our market footprint has been relatively stable I think just economic activity in job growth down a little bit that's probably that's probably what what's impacting at the margin most.

And to achieve to assume that's mostly on the new lease side, because you've talked about kind of that mid to high 4% range for renewals being fairly stable. So just traffic overall.

Is down a bit.

Yeah. This is Sean I mean.

I wouldn't take too much about traffic because traffic is something that we can either engineer up or down depending on how much you spend a things like that.

I think you know if you look at really what's happened with rent change where you're seeing lift. Its you have the lift is in the mid Atlantic and as I mentioned, you know job growth has been about the same but there has been a substantial increase in procurement or from the government and that brings in a lot of contractors that gives you a little bit better lift than we might have anticipated but.

Where it down and northern and Southern California is more just a function of the demand because of supply is pretty much what we expected and if you see where it is pretty widespread. So you can't just point to one particular market or Submarket and say it that's kind of drive and it's pretty broad, which generally is more Mac.

Our economic oriented.

Okay I appreciate the thoughts and then just second one for me is.

You provided a good bit of detail on on kind of the limited spend you've got within the development pipeline here, but I'm curious what does that figure.

The remaining spend looked like once you commenced the remaining starts you've targeted for 2019 and I think you've got north of $1 billion being completed in 2020. So can you factor all of that in what's kind of that future spend looked like.

Yeah, I'll speak to that quickly and then I don't know if Kevin wants to add anything obviously, we haven't provided any guidance in terms of what our starts might be next year. I think this year were expected to start four or 500 million additional here in the fourth quarter.

So some of which has been spent already but most of which has not so I guess, if you projected out to year end you'd probably add that and then you take out spend that we would incur over this quarter on the stuff Thats currently underway. So it might pick up a little bit but as I mentioned, we also have not only kind of sales but pending despite.

Efficient asset sales proceeds coming in the first quarter as well that that aren't even in those numbers I mean Austin This is Kevin.

One way to think about our businesses that were kind of starting somewhere up close to $1 billion year in development spending about 100 $150 million for so redevelopment spending about $100 million in the investment side of the has every every month. So it's certainly moves around a little bit, but if we just trying to get at a general sense of kind of what that flow of investment activity.

Slide for us, it's probably a ballpark numbers somewhere in the hundred million dollars a month in terms of investments but.

That's that's helpful. Thanks, guys.

Nexis, Nick Yulico with Scotiabank.

Hi, Good morning, this trend on with Nick.

Matt going back to the park Logix condos, you mentioned the average sales price so far as a little lower than the average targeted sales price for the building. So perhaps some higher priced units still left to go and some softness in the higher priced market, what kind of sales trajectory or do you anticipate whether on a monthly or quarterly basis.

Yes sure trend yeah. So first of all it's going great over the past six months.

We've been running 27 visits a week, a corporate sunshine's marketing them for us their average across all the deals their marketing in Manhattan is seven because it's a week. So we're getting a lot of traffic.

It really helps that the product is there and people can actually see it and.

Close to being able to.

People buy and settle so they're not buying off of plans are not buying and and particularly going into next year, not going to be buying and having to wait a significant amount of time so.

Yeah, I mean, you know I think when we when we launched we said we figure the average price across the whole building was roughly 3 million a unit the ones we sold so far our 2.75 so.

You're right I mean that that averages skewed a little bit by some superpremium units at the very top of the building.

And you know those will sell when they sell so you know it's hard to predict or project.

When you know those mitel and they will move the needle a little bit so what we sold so far on average there's been a nice balance across the building, but a little bit more kind of at the bottom of the building and the top so far yeah, we hope to be able to continue a reasonable pace. We think we've got a compelling value proposition to the market I'm, obviously, we'll have to well have to.

How it goes.

Yeah, right now where we stand is.

We are any day now we expect a plan to be declared effective by the attorney General which is a process that frankly, we thought would take two or three weeks, it's probably more like five or six a and then we have to go to getting the tax loss recorded by the city Assessors office and that process is taking a little longer than we had originally anticipated so.

You know the market response, and everything has been as we expected a kind of even as of the beginning of the year. It's just taking us a little longer to get to the legal place, where we can start settlements because of that two step process of the AG and then the city assessors office and and Theres I guess, there's a backup in the city Assessors office.

So that's taking just a little longer than we had thought a projected going in but again, we're well on track for settlements first quarter and we continue to make sales at that pace of roughly four to six month than we've seen that we haven't seen any slowdown yet our sales pace even here through October .

That's that's very good detail. Thank you, maybe just sticking with that a little bit on the on the retail space looks like you're making progress on that as well can you talk about the new tenants being added or maybe how you're viewing the overall mix and what you're targeting on the remaining available space.

A little bit sure I mean, we have target as I mentioned I think should be opening any day now.

Our tenant on the second part first hand on the second floor financial services, I think they're getting ready to open here before the end of the year as well.

We have one of the additional ground floor space, that's leased to a high quality credit tenant that should start their build out here probably in January and we've got a couple of tenants were talking to actually in pretty far advanced negotiations about the remaining space on the second floor different use groups.

One is that kind of a restaurant use group. Another is more of a fitness use group. So we have some interesting options. There and then we'll see about the remainder of the ground floor space. You know we continue to get interest from various folks. So you know it's kind of an interesting mix.

Ah different.

Different tendencies, we do think target will attract you know further interest just because they're going to drive a lot of traffic now obviously that location gets a tremendous amount of street.

Pedestrian traffic anyway, but so yeah again things things are proceeding nicely, we are getting nice interest and.

The end of life from that is going to take a couple of years to phase in as that those final spaces get leased.

Okay, and maybe just one more if I may with a the development rates increasing to over 4.2 billion.

How are you did I.

I guess viewing that development pipeline if that pilot initiative, you mentioned about an amenity light community if that's successful.

Does that change, how you're looking at where to develop or how to develop but maybe some color on that would be helpful.

Yeah. You know this is Matt again, it's probably a little too early to say.

Uh huh.

We do have one community under construction, that's kind of our pilot test case for it and we're going to see what the market responses were going to validate I'm kind of what those margins look like Ah. So the way I would think batteries. It's another tool in the tool kit, we haven't really underwritten any of the deals in the pipeline to that model, but I think you know could improve or party.

Equally on larger sites, where we might have multiple phases. It gives us the opportunity to segment the market a little more and provide.

You know kind of different price points in different service offerings, which can help on the development economics and if if its validated it could open up other sites for us over time.

Great appreciate the color thanks for the time.

Well go to John Kim with BMO capital markets.

Thank you.

Your expected development yield on your development pipeline has been trending down below 6%.

During it this is a reflection of higher costs the mix of the projects or have you.

One of your rental.

Sure. John This is Matt I mean, it is a reflection of the basket that's under construction at any given point in time, some of which is products graphic mix. So you know that will tend to move around a little bit overtime. It is in some respects reflection of you know we are 10 years into the cycle.

Oh, and certainly a as we've said for a while construction costs have been growing faster than rent. So it is getting harder to find deals and deals on balance might be a little tighter.

Although there is still very strong value creation in the stuff that we're leading as weve talked about.

And by the way our cost of capital is down quite a bit over the last two or three quarters as well.

Got it Okay, and then a follow up on the limited service offering that Youre testing out how do you think this will impact returns.

Do you foresee this being a lower growth product with a higher exit cap rate.

Offset by lower costs or do you think I'm basically tires will be pretty similar to your two years.

It's really too early to tell John I mean.

Again, we view it as there was a customer segment out there that's probably being under served today because you know 99% of the new product. It's built is being heavily amenitized and the concept is to provide the same apartment itself you know high end finishes and strong laughs, but just less of the.

Hi, there trappings of bells, and whistles that our research would suggest there's lots of customers that want to nice apartment, but don't necessarily value all those other things, which have a lot of first cost and a lot of hidden costs over time, as well, which may be are under appreciated by the market.

So it's hard to say how that might impact valuation or cap rates I don't see any reason why its rent growth would be.

Significantly different than the rest of the market.

And it does seem like you know asset valuation is primarily just driven by the cash flow can generate so I'm not sure I would expect anything significantly different there, but time will tell.

Is there another developer developers out there where you are waiting for that product or are you.

But having a leader.

Yeah, I mean, it does require some upfront investment in technology to enable it and some back of House service. So for example, one of the reasons. We think we can do this profitably as because it really leverages our call center down in Virginia Beach. So we may not have an onsite presence for leasing some of that tech enabled that some of that's also the taking.

Call, the CCC, a and interact with somebody that way.

So I'm not I'm not familiar with others that are trying this yes, hey, John I guess this is Tim I guess, what does that mean, so most of the production is coming from merchant builders that tend to be a little more risk averse and and.

If they've got they've got a customer institutional buyer, who is a custom to buy a highly amenitized building there are less likely to sort of take that risk in terms of.

Terms or doing something doing something different but as Matt mentioned, we are on customer research. We have plenty of customers that are paying more today and our existing assets and sort of thing we value. Because there then that's not necessarily using all the amenities are all the services that were providing and we've done enough research to know that they would like.

Something less but they want the they don't want to compromise say on the the quality of their unit in the.

The the quality of the finishes so.

So it's really just even taking the existing customer base, we have today and I continue to segment it and provide them something we think that's a better match for what what what they value.

It is also one of the advantage as we've talked about about being such an active developers we do have the ability to create the product that maybe more in tune with what certain segments in the market will value as opposed to just a being limited to buy what somebody else's Bill.

Thanks for the color.

[noise], what kind of John Guinee with Stifel. Please go ahead.

Great. Thank you.

Quick question. If you look at your retail I think you said, maybe at 10 million stabilized NOI.

And your cap that at 5%. So you say that's worth 200 million.

It looks like your basis in the multifamily now condos is about 426 million, our two and a half million that unit is it safe to say that you breakeven on this one this all said and Don if you if you value the retail at 200 million.

No no.

John This is Tim I think our expectation I think we've shared before is that.

Yeah, we thought there was between 100 hundred 50 million of incremental value here. So now we do expect too.

We do expect to make money.

If the right if the retail revalued at the 200 million Yeah, Matt mentioned the average the average unit that sold today is about 2.75, but that's not that's not where the average unit. This price today. So based upon based upon current pricing. There is there is incremental prop profit over above a breakeven scenario.

Great. Okay, and then a follow up on on your furnished units are you going from zero to 5% in.

Couple of years and whats the big change of heart to decide that tarnish units.

Have merit.

Yes, John this is Sean.

I mean, a couple of things one is in terms of white has merit.

I mentioned in my prepared remarks, we do a fair amount of consumer research and we identified about 10% of the market actually that has some level of interest in a furnished apartment home either expressed interest or would consider it.

And so you know and we've just anecdotally we've had the people come in looking for furniture department. So it but we have tested that the last 18 months across a sample of communities in our portfolio. We are seeing some pretty steady demand and therefore, we do think it's a profitable opportunities so to be able to scale. It.

We'll have a team together here to do that.

And getting to that 5% Mark could take yet two or three years, depending on the pace at which we decided to go so as we scale. It from where we are today, which is you know call. It 300, 300 400 units type of thing to something that be more substantial you probably won't grow in a linear fashion or probably gets about a thousand.

We would go a much faster.

So John maybe just to add a couple of I think there's a couple of other things that worked in one just changing consumer preference, particularly among those under 35, we just don't want to own as much stuff has or don't need zone as much stuff is perhaps of as a generations pass. So I think thats piece, but I think I think another piece of it is there just aren't that many company.

These that have the scale that we do that can actually make a business out of the so if you're a.

Sure a fund that owns 5000 has 10000 units are probably not going to make a big investment into this business versus somebody at owns 80 or 100000, yet. So I think it's kind of a combination of those two things it's great to greater than what we think is is appealing business opportunity.

Great. Thank you.

Well go to John Polasky with Green Street Advisors.

Thanks, Sean on page five no like term effective rent change if you swapped out east coast versus West Coast, and just showed urban versus suburban what does that 2019 recent trajectory look like if resumed and on that.

Yes, if you're looking just for our portfolio, John as compared to the market overall.

Just avalonbay suburban versus urban portfolio.

Yeah, so suburban versus urban they basically were flat on a year over year basis at 2.7%.

When you look at it from that perspective.

And that that has changed.

And that doesn't include all the assets because there are classified different ways. There's infill suburban suburban. So this is true definition of strictly urban strictly suburban and throw it out to you at the and all those kinds of things. So it's not going to line up with the three two for the full quarter, but if you look at the pure or been impure purpose the way we would differ.

Got it.

There are similar none of the past obviously, that's been very different over the last four quarters, but it has convert as well so as Tim indicated whether you're looking at AB you're looking at urban or suburban.

Are you looking across the different markets, just sort of similar pattern of conversion across all those variables.

Okay.

And Tim curious to get your thoughts on how you're thinking about the trajectory of starts moving forward.

The way to tug of war between improved cost of capital that Matt alluded to and then perhaps and flashing yellow lights in the economy, and just which to those variables are weighing out in your mind right now.

Well, John I mean, it's one of the reasons why we do match fund.

So to the extent to extend your match funding in some ways. It's not that different tenure then your stabilized portfolio.

Yes, you got the risk right of the assets such as that shows up 80000 apartments, such that you're already going on but those are those are completely funded to finance, but the same is pretty much true you know everything that we start from developed standpoint, So if anything I think it as you get live in cycle is just puts it just puts us more position.

What we've talked about in the past just be flexible try to have as many option contracts as you can to give yourself flexibility potentially to either to drop a deal or to renegotiate a deal or to push it out.

And we don't have any land inventory to speak of so we could always if we had to sort of by land that sit on it.

But yes, but right now when you're talking about 6% projected yields against the yes, where our incremental marginal cost of capital as we think it's still we think it's still makes sense in the that.

Asset values are still well above replacement cost and the and most of our market. So it's a it's more than it's been more the opportunity set we've been adding about a billion a year and new development rights and we've been starting about a about a billion and I, probably would probably would focus on that probably as much as anything when when that pipeline starts up.

Maybe start to dry up because we were just not seeing seeing value in the and I'll end markets.

Okay. Thank you.

Hard to call with Goldman and associates in snacks.

Hey, guys. How are you. Thanks for taking my question I've just got to for you.

Matt you Ben.

About a lot of multifamily development for long time, and just wanted to get your thoughts on.

How you see the regulatory environment today versus maybe 510, maybe even 15 years ago across all markets, not just California, and maybe talk about which markets.

Greatest barriers.

On a regulation standpoint versus which ones are the best.

Sure I know, there's some interesting crosscurrents there.

And you see it obviously in the and the other side, which is just the rent control.

And in many ways. It's a it's the regulations that have created in many of our markets part of the environment that this provided for the supply constraints and in turn.

I have driven rent growth to be well in excess of inflation over a sustained period of time.

You know the barriers to entry are still very very high in California.

The secret process, particularly if you're starting something from scratch the amount of money you have to having a project, but by the time you get it through you know if anything.

The dollar investment has gone up which in turn makes it very difficult for merchant builders to hang in there through that time period.

The legal challenges that we see so.

The barriers in California, I think are as high as ever yeah. They may be higher in L.A. now with with J.J.J., passing a couple of years ago and some of the labor requirements that have been put on top of that.

You know if you think about like around here in the mid Atlantic I'd say the barriers this cycle and lower than prior cycles and some of that frankly is better less planning as some of the local jurisdictions here have really focused on transit oriented development and frankly from a public policy point of view one of the benefits from say less rent growth. This cycle had been great as a land.

But maybe it improves the economic competitiveness of the regional long term. So you know some cross currents there.

Then in some of our very constrained markets in the northeast.

They just different cross currents both directions in New Jersey, there's kind of a one time once every 20 year opportunity to get a little more supply in the suburbs inland suburbs because of some affordable housing.

Five litigation and regulation, which is having some teeth and we've been able to take advantage of that and get a bunch of sites in some submarkets that haven't seen much supply for a generation. So you may see a little bit more there over the next five or 10 years or Conversely in Boston suburban Boston, where we've had success for a lot of years.

With what they call chapter 40 be there, which is a similar provision that force is a small towns in jurisdictions to take a certain amount of affordable housing, which we then integrate into our market rate communities.

40 be a lot of the suburban Boston jurisdictions have met their obligation now so if anything we've seen.

We saw more supply there over the prior couple cycles than we may see over the next cycle because of that so yeah. It really does vary from region to region. It's just I guess my one thing to add and maybe it's implied and matts comments. The regulatory barriers are just higher in the suburbs then the urban areas made with the exception of.

As Matt mentioned certainly true in the northeast certainly true certainly true in California. What has been remarkable. This cycle is you don't urban markets has generally been an economic barrier financial bear not not a regulatory Barry and that's that's certainly been the case and one of the reasons why you've seen what we've seen elevated supply in our markets.

This cycle versus a versus prior cycles, because it's made financial sense and oftentimes, it's been highest and best use relative to relative to condominium relative to office relative to hotel I think this this cycle condos of only they've only a accounted for about 5% of multifamily supply in prior cycles has been.

As much closer to a quarter of a new supply. So I think there's been a.

A few things that are a bit more unique about the cycle, but I think it's still could potentially be largely the the suburban northeast, California markets that are theyre toughest to penetrate from regulatory standpoint.

Thanks, guys. That's probably the best response I received for that question. So thank you for that and just my second one is pretty easy just splitting out the blended lease over lease rent by new and renewal and maybe talking about pricing power in the fourth quarter, realizing but at a low leasing volume quarter.

Yeah in terms of Q3, specifically in terms of the breakout as I mentioned it was a blended three to four six on renewals and per my comment earlier, you know it's been pretty stable all year, we expected to be also relatively stable in the fourth quarter.

And then on move ins it was one seven.

During the quarter and that typically is the metric that from a seasonal basis tends to drift down as you move through Q4 and Q1.

And peaks as you get into kind of late Q2 early Q3, and we don't see any reason for that pattern to be.

Any different going forward over the next few quarters.

Got it thank you.

Drew babin with Baird is snacks.

Good morning, how does Alex on for drew just one quick modeling question for us it looked like a pretty sizable quarter. When it came to asset preservation Capex, if I run rate the current year to date pace. It looks like your growth could be over 18%, obviously rising cost and some seasonality that play here, but I was just curious what's driving that growth and if you have any color you could provide us.

That's a trend in Fourq you in into 20.

Yeah. Alex this is Sean a similar to what I talked about on maintenance projects. You know there tends to be seasonality of the capex as well the wed probably I think about it from a modeling perspective is that 2019 maintenance capex is probably going to be in a range of 5% to 6% event on why.

There was a piece of that that we call remerchandising that is sort of a refresh of amenities spaces and such that you could probably say has some returned to it although hard to quantify but views that 5% to 6% of at a why is sort of a run rate that's about right it'll be a little bit lumpy from year to year, but thats sort out we're looking at it.

That's helpful. Thanks.

Yep.

Well go to Alexander Goldfarb with Sandler Oneill.

Hey, good afternoon. Thank you for for taking the questions I'd just two quick ones for me first upfront I Didnt hear or maybe it got lost your opex for the year your guidance as to one to two seven you're trending to wait for the year. So what are what are the items in the fourth quarter.

They get it bring it down or is the trend sort of what it is but within your overall FFO guidance.

You are able to manage the higher opex.

Yeah, Alex as Sean.

We haven't changed our guidance.

And so you know as I mentioned earlier every quarter is a little bit lumpy Q3 was lumpy for the number of reasons related to our an m. projects that are done in certain seasons of the year I.

I mentioned marketing was up dramatically because of a substantial credit we received last year when marketing was down 21%.

Insurance renewal bleed through you know payroll, we continue to see could reductions that have to ease as a result to the initiatives I mentioned so.

Okay. At this point, we're pretty comfortable with where we are.

Oh, Okay, Kevin just Omar thing to think about as you as you evaluate sort of.

The year over year growth rates in Opex is obviously any new look at what happened prior year last year in the fourth quarter.

18, we had a pretty tough comp with year over year growth Opex at 50 basis points to then that's probably a key driver the 4.2%. This year. So I think there's the lumpiness that John alluded to not only in terms of what we said, it's what would happen in the prior year.

Corporate that into model.

Okay. That's helpful. And then second is just going back to the New initiative you are trying on the sort of amended the light and people light properties.

I understand the point about amenities you walk the buildings and certainly theres a lot of space. It doesn't get used but I would think that part of what makes the reach different from others, especially you guys to be able to charge premium rents sort of that in person customer service. So in your testing is there no diminishment of what the tenants will pay relative to.

Not having that people around them that they feel they are being cater to or how do you make that trade off between the premium brands versus giving people that experience that they are absolutely being cater to if they have a maintenance request or have a you know a package request or anything like that.

Yeah, no Alex so I'll respond to that one than anyone else can chime in if they like but yeah. We did a fair bit of work on this in terms of similar research both through.

Surveys focus groups Shadows, you know a lot of different things.

We engaged some consultants to work with us on this and.

What you'd find might be a little surprising which is if you think about kind of consumerism today, what people experience whether its buying a car today, whether its shopping through Amazon, but there was lot of other things the kind of want to be able to do things when they want to do it on their own as opposed to being dependent upon someone else holding their hand, all the way it.

Through.

And for the most part they actually don't want that analysts they specifically needed for a purpose and so all of our consumer research is that like from a leasing standpoint.

Do they want to come in and meet a salesperson spend an hour touring the community with a salesperson in you know kind of selling them along the way for the most part the answer is no.

Yeah, I want to see everything they can online and if they want to schedule a tour. They want to go there when they want to go there regardless of the office hours. They really don't want someone to show us or show them around except for one segment kind of a mature social segment.

So that fits and then of the maintenance and service side, it's more what's the right level of service you're absolutely correct at some segments wants to 24 hour response in the White Glove service, but there is a decent chunk of the market that doesn't necessarily values that and they'd be perfectly fine with that.

Ill.

Pick something is the dishwasher isn't working today.

I'll Cook a lot they're fine if it's 24 to 48 hours service as long as you give them the option to tell you how important is to them to have that thing fixed and never responsive to their demand.

The networks just fine so I think it's just segmenting the market anymore, you know more find way so that the people that really do value those things are paying for it and the people that don't value those things aren't paying for it and as I mentioned in my prepared remarks absent the amenity space, which not only has capital costs, but pretty heavy.

Recurring cost for Opex and Capex.

And sort of the on demand service as oppose the continuous services highly responsive.

I can see rent us, 10% to 20% lower than a brand new building down the street and there's definitely a segment of the market that would prefer that option. So.

Tim you and I know I think you hit it at the end when I was going to jump in I mean, it lower rent is part of the value proposition here and I don't think necessarily low touch, especially is.

As necessarily means.

Yeah, well levels service I think you're going to have high level service with high tech in sort of a low touch kind of kind of offering. So I think it depends on the issue Alex but part of the value proposition is absolutely that they would pay a lower prices on a comparable community that would have more be more amenitized and more fully staffed.

Okay. Thank you.

We'll go to lend to say with Jefferies.

Hi, Thanks for taking my question, the technologically driven efficiencies, you're driving and leasing maintenance apologies. This as discussed previously is this cross the entire portfolio or just a question Im just wondering how much opportunity exists to reduce expenses further through these types of initiatives.

Yeah. Linda this is Sean I'm the expectation is that we would deployed across the portfolio it might have slightly different nuances.

Across certain buildings depended on the customer segment. That's in that building. So as we were just talking about the limited service ramp would probably be a one extreme.

I would be another building, maybe as a high touch very high rent building that could be at the other extreme but we expect to deploy a lot of it across the you know 95% of our portfolio where people have the option to self serve that's sort of the default, but if they would like a tour or they can schedule one at a time this convenia.

For them and things like that so we're taking advantage of the opportunity across the entire portfolio and we made you see differ usage of certain services or needs for leasing et cetera based on the customer profile at each one.

Thanks for that clarification, and then on the part close yet could you talk about the different how different the retail rents are between the four levels shown on slide 13, and then what's the average term for the leases signed.

Yes, Hi, Linda this is Matt.

The rents are very different between the four levels I think we provided some high level.

Thoughts about that maybe a year or so ago on a call, but you know you're talking about if the highest rents are on the ground floor with the Broadway frontage you know the second floor might be.

40% to 50% of that rent and then the basement in sub basement would be you know maybe the basements little bit less than that and this is the sub basement, you know quite a bit less than that so it really does vary based on the specific space.

The lease term are generally a long term leases I think one of our our anchor lease. The first two leases were I I don't remember exactly I think they were probably 20 year terms or I think.

With some extension options beyond that probably I, probably can't get into terms for specific leases, but generally speaking they've been relatively long term.

Thanks for that and then just a final one the demand for fully furnished apartments can use or can we assume the economics are more attractive for leasing. These units. If there are fewer of these units available across the market.

Oh, yes, there's less supply of those units. It certainly would be you know a premium associated with the.

Furnished products of course.

Okay. Thanks.

And as a reminder, if you would like to ask a question. Please press star one on your Touchtone phone.

We'll now go to Haendel St Juste with Ms. Sheila. Please go ahead.

Hey, good morning, or good afternoon, I just wanted to follow up on Linda's question can you talk about the premium you're you're looking for here, maybe give us some sense of required ROI, we're talking about a lot of furniture here and also curious if you're thinking.

So should we expect that to be Expensed capitalized.

Thanks.

Oh, yes, and so this is Sean so just a couple of things we've been testing a variety of different premiums.

What I could tell you that's out there is if you went through a third party operator.

Marriott has a product some others do.

Typically what you'd find is a the rent for furnishing a relative to the based friends of typical again it.

Thats comparable would be about double.

That's company that is.

Taking inventory risk and.

So many different leases and things of that are we already own inventory risk.

So, we probably think about a little bit differently, but I wouldn't be surprised if we said we could generate say, 50% premiums above the base rent for a unit up to that customer to include the various services, maybe some both utilities and.

You know with cord cutting may not need to provide cable that in some cases you do.

And then as it relates to your specific question around the furniture.

That would be capitalized, but then.

Depreciated over probably of five to seven year period.

At this point, where depreciated over five we think thats, a reasonable proxy, we've been talking to others, including some of the.

Student housing rates in terms of what to expect in that area. It seems to be five to seven as sort of the expected range for useful lives. So it's going to come back at you as a percent of years. So you handle Tim here, just just to just be clear in terms of the premium if you get a 50%, bringing some of that would be for the furniture you have a b, but premium basically for short term nature of these leases tend not to be.

On average they tend to be less than a year or 24 months, which our average residents days I got to Dave it's been closer to six or seven months. Sean. So there is there is a return sort of that additional vacancy exposure, that's factored into that 50% premium as well.

Helpful. Thank because I was thinking or some of those numbers sounded more like shorter term corporate units, but appreciate the color.

I think that's why I think some of the premiums when you hear like twice to acts a lot of times that is a very very short term yeah. That's certainly party operator that might be taken a 12 month lease, but theyre leasing good.

30 days at a time type of thing.

We would certainly have some of that business, but just we want to manage that exposure appropriately from lease expiration profile standpoint, and so far we've been serving customers that are interested in something that's slightly longer.

Got it got okay. Thank you appreciate that and then I wanted to go back to somebody earlier.

Comments on supply first in L.A. seems like much supply coming online is more focused a downtown so curious what you're thinking about and thinking about that you're more suburban or so cal portfolio, you're a bit more in the Pasadena Burbank Orange County, So I'm curious, how you're thinking about the performance of your more suburban.

Probably versus say downtown La and then maybe some similar commentary on Boston, where again your portfolio is a bit more suburban versus urban core there where the supply seem to become a lot more thanks.

Yes, sure happy to talk about that briefly maybe starting in reverse order in Boston correct. Most of the increase in supply will be concentrated in and around call. It the core urban submarkets.

The majority of our portfolio the suburban in Boston we.

We continue to develop a number of suburban communities that are performing quite well so in that environment, we would expect to our portfolio to hold up relatively well.

Given most of that's flies concentrated downtown.

In terms of L.A. and your specific comments about L.A., yeah, I mean, the supply is immense heaviest and koreatown, but then a woodland Hills Warner Center.

Kind of Hollywood and that will share south central there's a little bit actually than southern copper sitting down by the along the coast as I mentioned, so in terms of our portfolio a little bit of exposure in Hollywood, we don't have anything.

Central or Koreatown, we have two three assets and woodland Hills Warner Center, but you know if that market has seen submarket of seeing a fair amount of supply over the last decade as done relatively well most of the assets. We have there are more affordable price points.

Which tend to perform quite well in the face of new supplies. So in terms of L.A. I think we're positioned pretty well give them where the supply will be delivered in 2012.

Thank you.

Yep.

Got it Nick Joseph with Citi.

It's Michael Bilerman, that's had a few follow ups the persistence back the retail at the park Lucia I'm out of that 10 million of forecasted at a why how much is represented by the 45000 square feet of leasing so effectively how much of the $10 million have you secured.

Hi, Michael It's Matt I think it probably roughly half or maybe a little bit more than half. It based on what we had about a million dollars in our third quarter numbers really yeah that didnt include one tenant.

Yeah, and it's a little bit early to kind of give guidance in terms of what will feather in through calendar 2020, but most of it.

You know a lot of authority.

Right arguably the I mean that you went through the rent differential between second floor and basement and so while you are to turn sleep clearly it's at lower overall rents relative to the street, where are you still have.

9000 that your marketing.

That's why I was just track record a picture of brecher, yet Michael that.

Michael correct, I mean, the lease rates as Matt mentioned before oral over the map depending on what's going on but I think the ranges to below $100 a foot.

Well over 400 of literature on the parts of the ground floor. So it's I don't think that's what we have pro forma then for the balance of what's on the first floor.

Because some of the better better parts of the first we're already taken but.

There is more high value space left to be lease in the building right and that's where I was trying to get to the cash flow impact.

What's been done and what's to come so I ticket, 60% say reasonable number into huge.

And then part of that is you have intentions to.

I mean, originally this was supposed to be JV on the retail or even though a sale now that you do Lynn selling at the condos above where is your mindset on selling or changing the retail portion because arguably would not be core anymore to the company.

Yeah, Michael I think at some point, we would likely sell this.

Yeah, It's really just a question when we how to optimize the the value and when we've actually sort of pull the trigger on that so.

And then there's a there is a tax issue just in terms of.

Balancing it versus the any profit so we might have on the condo proceeds.

And just to the given that this is now a taxable transaction, we'll try to manage it to to minimize taxes.

And then if you think about somebody asked earlier about development funding as you go into.

2020 in terms of capital that you will need you've you've squared away all of this year.

You also have the equity forward that you put in place.

Well.

I guess, how should we earmarked.

Arguably said capital now sitting in the building upon which you'll start selling the condos.

Are you going to you remark that next year and I guess, how should we think about that capital coming back fuel to fund.

Development you tend to hold.

Sure. So Michael this is Kevin you're right I mean, we do anticipate receiving next year.

C until condos that will be an important component of.

Called our equity need for next year's funding activity.

There may or may not be additional asset sales disposition activity beyond that and.

Beyond refinancing debt, we're likely to look to the debt markets as well.

As you know from our leverage profile today in our target leverage we typically target five to six turns of leverage below that now 4.7 turns so kind of when we put our budget together for next year, but certainly I think it's fair to assume that we've got some scope to increase in leverage a little bit given how attractive debt capital markets are today.

And then on the I initiatives on slide eight in Sydney really responding quickly to People's request.

Yeah.

Yeah, you kind of program that's a what you desire so it can be instant or it can be as long as you want.

Typically incentives and good in terms of the feeling people get so it's typically within that about a minute Michael.

Last one as you made the decision earlier this year to stop the quarterly guidance.

Effectively focus people in the long term because you were in a long term business.

I would say that the reactions to the <unk> quarterly results. Since then in the first second and now in the third quarter.

I have been more volatile in terms of your stock price performance relative to the index.

Now I know, it's hard to separate out the.

Results themselves from a from things because there is on the factors at play.

But.

Help us understand I mean are you going to reconsider just a one year trial and I guess, how do you think about the short term volatility that may be created with less information on a quarterly basis versus the long term.

Yeah, Michael Sam here I thought our expectation that we change our practice at this point.

I hear what you're saying, there's maybe a little bit more volatility because because.

Peoples projections, but maybe a little bit more of a.

Just a wider bigger beta just around to around different sell side. The projections on this but again, we're trying to focus and we really do manage the business for the.

For the longer term and we really think about more annual plan. It's how we talk at the board. It's how we talk amongst ourselves as a as leaders in the company and.

And that's our intent to continue going forward just to add one thing Michael I mean, I understand we're not providing the quarterly.

Hello, and at the phone numbers anymore, but.

To your comment about providing this information heart from that we still provide as you can tell from even this call just a robust level detailed information on the business and every six months. We go through very detailed we forecast which is it can do what we do internally here.

Mansion business.

Ourselves and communicating to our board. So there is still chest awful lot information that we try to provide transparency to to investors, but we're not doing is providing the specific earnings number on a quarterly basis and but we do think we get more than enough information for investors to derive their own estimates they do.

Yeah, no and I would concur with that comment your transparency in the time that you spend I mean, we're already in an hour and a half on this earnings call.

Very much appreciated and I think differentiates the company over the long term.

I was just making a note.

Since you've changed the quarterly policy your stock has reacted a lot more volatile relative to the index. Unfortunately last two quarters, it's been much more negative.

Just to think about.

Whether you're achieving.

On the right output with the change on on quarterly numbers that's all.

Fair enough. Thank you Michael.

Thank you.

[noise] enter another question, so I would like to turn it back to Tim Naughton for any additional or closing remarks.

Well, thanks, everybody as Michael It was not sure about an hour to happen to this call. So a will give you a quick goodbye and we'll look forward to see a.

With a they read here and just about two or three weeks time.

Thank you very much that does conclude our conference for today I'd like to thank everyone for your participation and you may now disconnect.