Essex Property Trust's (ESS) CEO Michael Schall on Q1 2016 Results - Earnings Call Transcript

| About: Essex Property (ESS)

Essex Property Trust Inc (NYSE:ESS)

Q1 2016 Results Earnings Conference Call

April 29, 2016, 2:00 pm ET

Executives

Michael Schall - President, Chief Executive Officer, Director

John Burkart - Senior Executive Vice President of Asset Management

Angela Kleiman - Chief Financial Officer, Executive Vice President

John Eudy - Executive Vice President of Development

Analysts

Austin Wurschmidt - KeyBanc Capital Markets

Nick Yulico - UBS

Nick Joseph - Citigroup

Rob Stevenson - Janney

John Kim - BMO Capital Markets

Ivy Zelman - Zelman & Associates

Tom Lesnick - Capital One

Alexander Goldfarb - Sandler O'Neill

Wes Golladay - RBC Capital Markets

Drew Babin - Robert W. Baird

Tayo Okusanya - Jefferies

Rich Anderson - Mizuho Securities

Kris Trafton - Credit Suisse

Conor Wagner - Green Street Advisors

Karin Ford - MUFG

Operator

Good day and welcome to the Essex Property Trust first quarter 2016 earnings conference call. As a reminder, today's conference call is being recorded.

Statements made on 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.

When we get to the question and answer portion, management asks that you be respectful of everyone's time and limit yourself to one question and one follow-up question.

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.

Michael Schall

Thank you for joining us today and welcome to our first quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments and John Eudy is here for Q&A.

I will cover the following topics on the call. First, comments on Q4 and market conditions. Second, investment activities. And finally, an update on rent control proposals

Yesterday, we were pleased to report continued strong operating results for the first quarter of 2016. For the past several years, one of our primary operating goals has been to grow core FFO per share. I congratulate the Essex team for accomplishing that goal with over 100% increase in core FFO per share since Q1 2011.

Generally speaking, the West Coast economy continues to perform well and we are on track to achieve our 2016 market rent forecast shown on page S16 of the supplement. Recent job reports have generally equaled or exceeded our expectations. In Southern California, we have modestly increased our market rent growth expectations from 5.2% to 5.5%, again mostly related to better-than-expected jobs representing more evidence that our thesis for slow and steady growth continues.

For Northern California, we are lowering our economic rent growth forecast from 7.5% to 6.5%. As noted on our last call, supply deliveries during the typically weak fourth quarter caused lower rent growth in Northern California. Mostly focused on three submarkets, Dalston market in San Francisco, the Peninsula South of San Francisco and North San Jose, which combined account for approximately 7% of our same-store NOI.

As reflected in our Q1 results, we experienced a choppy but nicely down from Q4. March and April have bought renewed pricing pressure focused on these three submarkets in the form of greater concessions, often equal to six to eight weeks of rent as newly delivered apartments push rapid absorption in a competitive market. The greater concessions provide enough incentive to draw people out of nearby properties pressuring price for stabilized communities. Apartment supply deliveries and hiring are inherently lumpy and much like Q4 2015 and the past couple of months, conditions can change quickly. John Burkart will elaborate further in his comments.

Turning to Seattle. We have significantly increased the economic rent forecast for Seattle from 4.9% to 6.1% as its great job growth and strong economy has provided the demand to absorb Seattle's significant new apartment pipeline at higher than expected rents.

On to the second topic, investments. During the quarter, we originated a preferred equity investment on an apartment development consisting of 494 apartment homes located in Glendale, California. The investment provides a 12% preferred return on outstanding principal with a total commitment of $47 million. We are working on other preferred equity transactions as developers are finding themselves in need of additional equity given construction cost increases, more conservative construction lending standards and more challenging and expensive entitlement processes.

Market clearing cap rates for development deals typically generate around a 4.5% to 4.75% untrended cap rate, which is below our yield threshold. We continue to look for development opportunities that meet our underwriting criteria and we are not likely to lower our target in the near term. There has been widespread discussion of increasing cap rates in the West Coast markets. Two of our recent acquisitions, Mio and Enso, both in San Jose, were cited by brokers as examples of cap rates that are higher than comparable properties trading a few months earlier.

We take this as a compliment that we acquired property at a better than market cap rate. However, in our valuation, many deals that we have recently underwritten, the value of Mio and Enso did not change materially in the past several quarters. In our experience cap rates change slowly primarily because buyers and sellers don't change their pricing expectations quickly or easily, rather buyers and sellers need to be convinced that market conditions have permanently changed.

Financial distress often shortens this process for changing cap rate, but currently there is almost no distress in well located apartments. To the contrary, the amount of positive leverage available to buyers at existing cap rates represents a compelling opportunity in this yield starved environment. During the quarter and as outlined in the press release, we acquired two properties to facilitate 1031 exchanges and sold two properties as part of a portfolio culling process.

Similar to last quarter, A-quality property and locations traded around a 4.25% cap rate using the Essex methodology, but from time to time more aggressive buyers will pay sub-poor cap rates. B-quality properties and locations typically have cap rates 25 to 50 basis points higher than A-quality property.

Now on to my third topic, which is rent control. There have been several new developments with respect to rent control in various California cities, mostly in Northern California. Most notable, the City Council in San Jose has amended the existing rent stabilization ordinance to lower the maximum rent increase on renewals to 5% from 8% previously. The amended San Jose ordinance also contains a provision to bank or accumulate up to 8% of potential rent increases to be used during period that market rent increases are below the 5% maximum. Finally, the San Jose ordinance is applicable only to properties built before 1979.

Oakland, which also has been existing rent stabilization ordinance, recently passed an emergency 90-day moratorium on rent increases applicable only to properties built before 1983. In addition to the specific actions in San Jose and Oakland, we believe that tenants rights groups will attempt to win for vote of approval of referendums that will impose rent control in several cities. It is important to note that all local ordinances including the activity just described must comply with state law which mandates, among other things, that vacant apartments are prohibited from rent control and rent control can only be applied to property built before 1996.

We believe that these various ordinances will have limited impact on Essex, primarily because the vast majority of our properties are newer than the rent control cutoff date from the various stabilization ordinances. In addition, because rent control limits renewal rent increases, residents stay longer, which reduces turnover at tent control property. Reduced turnover means that fewer apartments are available to rent for people moving into the area, which likely pushes rents upward on the available apartment inventory.

Thus renewals will often occur at below market rates, but this impact is partially mitigated by higher rents on new leases reflecting the unintended secondary effect of rent control. I am incredibly grateful for John Eudy and many Essex team members for attending and advocating on behalf of the company and the industry at several city council meetings. The meetings contain a lot of emotions and often end well past midnight.

That concludes my comments. Thank you for joining the call today. I will now turn the call over to John Burkart.

John Burkart

Thank you, Mike. We had a good quarter delivering total same-store revenue growth of 7.3% and NOI growth of 8.8%. Our renovation team got off to a great start in 2016. We increased the number of units renovated in the same-store portfolio 229% from 247 units in the first quarter of 2015 to 813 in the first quarter of 2016. The increased unit turns negatively impacted our vacancy rate by about five basis points for the quarter in the same-store portfolio compared to the prior year.

Now I will share some highlights for each region. Strong demand in the Seattle market fueled by employment growth of 3.3% in March, which was above our expectations, enabled the market to absorb the new supply and continue to grow revenue. Our Seattle portfolio grew revenues 7% in the first quarter of 2016 compared to the first quarter of 2015. We made a strategic decision due to the market strength in the first quarter to emphasize achieved rental rate over occupancy and we will continue to do so as we enter the spring leasing season. That decision is paying off well with better-than-expected performance and it will position us well going forward.

The submarkets performed similar to last year with CBD growing rental revenue about 4% in the first quarter of 2016 compared to the comparable quarter and the East, North Seaside, North and South submarkets are all growing between 7.5% and 9% for the first quarter of 2016 compared to the comparable quarter.

In the Bay Area, as I mentioned previously, our expectations for the first quarter was that the market would be choppy and then it will be followed by the normal seasonal pattern. However, the market is currently softer than expected. Our same-store achieved rent in March 2016 was about 6% over achieved rent in March 2015 and the achieved rent in April of 2015 are roughly 4% over the comparable month, due to the difficult comps.

The BLS survey continues to show strong employment growth in the Bay Area. Industry survey reported March 2016 employment growth rate of 4%, 2.4% and 3.8% for San Francisco, Oakland and San Jose MDs, respectively, which are above our expectations. The household survey reported unemployment declined at average of 50 basis points in each MD year-over-year, which is consistent with strong job growth. Both reports indicates strong employment market, which should be able to absorb the total supply of multifamily and single family units and continue to grow rent.

It appears that in addition to the lumpiness of the multifamily supply deliveries during the low demand period, other factors are currently impacting the demand in the Bay Area market such as doubling up increase in renters to the single-family homes, which enables more roommates to share the rent, onetime impact of the crackdown of student Visa program which has reduced demand for outside the country and an increase in the flexible work arrangements enabling employees to telecommute from outside the normal commute zone.

We have noted a slight change in the geographic location of the open positions listed by the major tech companies with a sight increase in total open positions between Washington and California. However, California open positions have declined slightly while the Washington open positions have increased slightly. This shift maybe the product of a tight labor market and housing market that we have in the Bay Area.

Southern California region continues to perform driven by strong job growth exceeding our expectations. As expected, the momentum we saw in 2015 continued into 2016, enabling us to achieve a revenue growth of 6.1% in the first quarter of 2016 compared to the comparable quarter. In the LA MSA, LA CBD, which is impacted by popular supply, grew rental revenue 4.9% in the first quarter of 2016 compared to the first quarter of 2015. And the Woodland Hills submarket, which had the greatest positive impact from Porter Ranch Relocation performed at the top of the MSA with an increase in rental revenue of 8.6% for first quarter of 2016 compared to the comparable quarter.

We estimate that the increased demand for short-term rentals related to the Porter Ranch leases increased the year-over-year growth rate for the LA MSA portfolio by about 30 basis points during the first quarter of 2016. Currently our portfolio occupancy is at 95.8% and our availability 30 days out is at 5.4%. Considering the underperformance in the Northern California portfolio, we are cautiously optimistic about the spring leasing season.

Thank you. And I will now turn the call over to Angela Kleiman.

Angela Kleiman

Thanks John. I will start with our first quarter results and then provide an update on recent capital markets activity. I am pleased to report that our core FFO for the first quarter exceeded the midpoint of our guidance by $0.08 per share. Although $0.04 was related to timing of expense, the remaining $0.04 was primarily driven by stronger than anticipated operations, which led to another quarter of solid operating results. Also in the first quarter, we declared a quarterly common dividend of $1.60 per share, which is 11% year-over-year increase and represents our 20th year of consecutive dividend growth.

Moving on to recent capital markets activities. In April, we issued $450 million of 10-year senior unsecured notes at the rate of 3.375% per annum. The net proceeds from the offering were used to pay off the balance on our line of credit, redeem the Series H Preferred Stock and fund other corporate activities. While there is a temporary mismatch on the timing of the use for some portion of the proceeds, we believe it was an opportune time to enter the debt market.

Only remaining maturity this year is $200 million term loan which comes due in November. With zero outstanding on our $1 billion line of credit and limited near-term debt maturities, our balance sheet is well-positioned to be opportunistic as we evaluate future investments and refinancing alternatives. For the full-year, we are reaffirming our guidance for same property revenue, expenses and NOI growth and the midpoint of our core FFO per share of $10.92.

Lastly, I would like to highlight a new page S12.1 in our supplemental which provides additional disclosures on our revenue-generating and non-revenue generating CapEx spending. We hope these enhanced disclosures will be beneficial to the investment community.

I will now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Jordan Saddler from KeyBanc Capital Markets. Please proceed with your question, sir.

Austin Wurschmidt

Hi guys. It's Austin Wurschmidt for Jordan. On the preferred equity deals, I was just wondering if you could give us a sense of the number of deals you are looking at and the potential magnitude of transactions?

Michael Schall

Sure. This is Mike Schall. We are looking at several deals. So somewhere between around five deals going forward. Previously, we have established an overall cap on what we would consider at 5% enterprise value. I think at the end of last quarter we were somewhere around 140 million funded on the preferred equity investments. And so we have quite a ways to go. I don't think we will get anywhere close to the cap.

Austin Wurschmidt

Okay. That's helpful. Thanks for the detail. And then just on the affordable housing, do you think at any point that it spurs, I guess, loosening and permitting or zoning for multifamily housing in the Bay Area?

Michael Schall

Again it's Mike Schall. And John Eudy is here and he may have a comment on this as well. It seems like all the forces are working against that. Number one, the entitlement process is just very challenging. If anything, there are some cities like San Francisco that would like to bump up the number of units that are dedicated to below market rate units. And construction costs are going up at double-digit rate. So it would be difficult to see, especially with rents moderating, a lot of momentum toward more apartment development going forward, at this point in time.

Austin Wurschmidt

Thanks for taking the questions.

Michael Schall

Thank you.

Operator

And our next question comes from the line of Nick Yulico with UBS. Please proceed with your question.

Nick Yulico

Well, thanks. I just want to go back to the comment John made about, I was a bit confused about, April. I think, you said something about 4% year-over-year rents. Was that for the entire San Francisco Bay area?

John Burkart

This is John speaking. That was for Northern California. So effectively, what happened is rents between March and April were basically flat on a year-over-year comparison because last year normally seasonally rents move up in April. That means that our comparison went from 6% to 4%. And so that flatness is what I was commenting on which is unique in the context of the season. So it's a short window, but that's what we are at right now.

Nick Yulico

And that's your blended new and renewal rent growth?

John Burkart

No. That's new only. Our renewals are in the 6.5% zone in Northern California at this time.

Nick Yulico

Okay. Just wanted to clear on that. And then can you just remind us seen in the entire shore of Northern California region, where are your rents in place today are versus market?

Michael Schall

Do you mean loss off-lease?

Nick Yulico

Yes, right.

Michael Schall

I have that number. This is Mike Schall. Northern California loss to lease, so the difference between scheduled and market rent is 4.8%. A year ago, it was 8.1%.

Nick Yulico

Okay. Great. Thanks, Mike.

Michael Schall

Thank you.

Operator

Our next question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Nick Joseph

Thanks. One question on guidance. I think for the last two years after the first quarter, you would beat in the first quarter and you raise for the full year 2016. I recognize that part of the beat in this first quarter was timing, what are your thoughts not revisiting overall 2016 guidance at this point?

Michael Schall

Hi. It's Mike Schall. I think John Burkart's comments cover that to some extent. It was that slowdown, from month-to-month actually through the first quarter and into April that was concerning and there was a couple of other pieces too. One is that our evaluation of apartment supply indicates further lumpiness in Q2 and Q3. So roughly in the San Francisco MSA, 3,600 units get delivered in Q2 and 2,700 in Q3. So roughly 70% of the expected annual deliveries will happen in Q2 or Q3. So we are concerned about that and the significance since we renew or turn around 50% of the leases in these next several months, that has a pretty significant impact on the overall result.

So I guess perhaps we are being overly cautious but those were the factors that led us to do that. And actually, let me add one more factor and that is overall supply and demand, as you look at the numbers, appears to be disconnecting in some way. As an example or to go through the numbers, the Bay Area is expected to produce about 93,000 jobs in 2016. That would ordinarily add a 2:1 looking at all housing, not just apartments, would give you 46,000 units of demand against about 20,000 apartments and homes being delivered into the marketplace. So about a 2.1 relationship.

So there should be sufficient demand to absorb the supply if it comes onboard yet what we are seen in the marketplace is that there is more concessions and the supply is not being absorbed as easily as we otherwise would expect. So that supply demand disconnect is of concern to us. It could be indicative of perhaps employment is slowing, but it hasn't really hit the numbers yet. And the last many years that I have been here, it seems that sometimes we see changes in the marketplace before they actually get reported in the numbers. So those would be the little bit of background on why we decided not to change guidance.

Nick Joseph

Thanks. I appreciate the color. And then the spread in terms of same-store revenue growth between Northern California and Southern California continues to contract for the reasons you have discussed. Do you expect at any point this year for Southern California to actually outperform Northern California?

John Burkart

Yes. This is John. It's hard to tell, right. We right now are expecting that the NorCal will follow seasonal patterns. As Mike laid out, there is a lot of strength if you look at the jobs versus the supply. But honestly it's not necessarily working out that way. So yes, there is a year that it happens. This year is Southern Cal is stronger than expected and is doing very well. It might happen somewhere down the line this year or into 2017.

Nick Joseph

Thanks.

Michael Schall

Thank you.

Operator

And our next question comes from the line of Rob Stevenson from Janney. Please proceed with your question.

Rob Stevenson

Hi. Good afternoon guys. Can you talk a little bit about LA County results? Was it strong across the board? Or were there pockets of relative strength, relative weakness in the quarter? Obviously 7% plus relative weakness in probably a strong statement, but where within the portfolio was the best performance in LA County? And was it noticeable between some of the submarkets?

Michael Schall

Yes. Overall the submarket were fairly consistent. However, if we are really breaking it down, clearly the Woodland Hills area got some benefits from Porter Ranch. And so that moved it up. It doesn't really move the needle so much as it relates to Essex. But that enabled that submarket to move up a little bit. You might see it some of the AXIO numbers. And then of course the downtown area is a little bit on the low side, again we have supply going in, in that market, but still doing strong. Overall SoCal, as a big picture, is doing well as is LA County. Really, it is interesting. There wasn't a lot of changes. And if you look at the Bay Area, it's a little different. In the Bay Area, you clearly have San Francisco is underperforming and then you have other market, other submarkets in the Bay Area doing stronger. SoCal was much more consistent.

Rob Stevenson

Okay. And then in terms of the shadow development pipeline, how many units are you sort of working through entitlement process through that could start the next year, year-and-a-half or so out there versus basically exhausting your land supply at this point?

Michael Schall

Yes. This is Mike. And again. John Eudy may want to add to this. Our view is that we are more aggressive on development at the bottom of the cycle and we scale office, we go to the top of the cycle. And so we do not have a significant land inventory or land bank at this point in time. In terms of deal making, I know John is looking at deals that are fully entitled, ready to go, we are not taking any cost risk because again construction cost are moving so rapidly that we are concerned about committing and being naked with respect to when we commit to a deal and when it starts. So we have turned to become more conservative and again that really provides the opportunity within or for the preferred equity transactions where we can come in between somewhere sum around the 60% loan to cost to about 85% loan to cost and earn a 12% return there. We fundamentally like that business and we think it's a great time to do that relative to the opportunity in the marketplace.

Rob Stevenson

Are you looking at that business as a path to ownership? Or just basically a 12% investment at this point?

Michael Schall

Well, we would love to negotiate an option to buy at the end of that, but we have not really been able to do that. We could do it if we were willing to give up a significant amount of current return. We haven't made that choice at this point in time. So at this point in time, we are happy to earn that fixed return and get repaid and if there are some bumps down the road somewhere, perhaps we are in a position to buy out our partner.

Rob Stevenson

Okay. Thanks guys.

Michael Schall

Thank you.

Operator

Our next question comes from the line of John Kim from BMO Capital Markets. Please proceed with your question.

John Kim

My questions have been asked. Thank you.

Michael Schall

Thanks.

Operator

And our next question comes from the line of Ivy Zelman from Zelman & Associates. Please proceed with your question.

Ivy Zelman

Thank you. Good afternoon guys. Can you talk a little bit about refinancing environment with respect to availability of financing for construction lending and just land development? And if anything, if we should be modeling more conservatively if the cost is increasing given some less desire from the banks? Or are you guys not seeing that?

Michael Schall

No. That's exactly what we are seeing. A number of our preferred equity transactions over the last several months have really come together because a construction lender is cutting back their construction loan commitment and becoming more conservative. In one case, the construction lender was at the 65% to 68% loan to cost, they cut it back to about 60% and actually in that deal, we went from essentially, there wasn't a place for us in the transaction, they could finance it themselves to creating this the tranche that we ultimately invest in between the 60th and 85th percentile loan to cost. So we have seen a pretty significant change, not just in one or two lenders but really across the board as construction lenders have become more conservative.

Ivy Zelman

Got it. Well, that's helpful. And then just secondly, I think you or Mike Schall was citing some numbers on expected deliveries and I really compliment you guys on being conservative with respect to the outlook. I think that's prudent. When you talk about those deliveries in 2Q and 3Q, Mike were you talking about deliveries in the Bay Area for all of multifamily or was it just the rental portion?

Michael Schall

Yes. Ivy, there are a couple of nuances there. We do not include student housing and we essentially ignore under 100 units and that's part of it. And I was referring to San Francisco directly when I gave out those numbers. So San Francisco, we have again 3,600 units in Q2 and 2,700 units in Q3. San Jose also has pretty significant deliveries in Q2 and Q3 as is Los Angeles. So again, relative to the total, we see Q2 and Q3 is creating potentially more lumpiness similar to what we saw in the fourth quarter and again in March, April.

Ivy Zelman

And just then keeping with the prudent more conservative guide, when you think about deliveries that are coming from condos and recognizing that many of those condos are being bought by investors that might want to cash flow and rent out those units, is there potential risks that could put more pressure relative to market because we are hearing about that, Equity Residential mentioned, they had someone come in below market against their rent by like $800 more than the cash flow. So how do you guys think about that as a rift to your guidance?

Michael Schall

Yes. In terms of how we approach it, we try to lump all housing together because we know that people move out of apartments and buy condos or homes and some will actually go the other direction as well. So our basic analysis is to look at all the jobs, try to determine what the total households are and really not distinguish between what's a rental home and what is a for-sale home. Having said that, the other thing that we pay attention to is affordability of rentals versus homeownership and in every one of our markets and Ivy, you know this better than anyone, the cost of these homes is pretty significant. I think the median priced home in San Francisco is over $1 million and so that transition from a renter to homeowner is really important to us and it's obviously very difficult in this marketplace. But in order to avoid this issue of, okay, how many of these demand units are going to go to for-sale versus for rent, we just look at the whole thing.

Ivy Zelman

No. And I appreciate that. I am sorry. I may have miss communicated the question, right. What we are hearing is that the condos that are being delivered, those that have already been purchased, has a for-sale unit, they may be an investor whether they are from outside the U.S. foreign buyer that wants to now rent it out. Is that a risk that you have incorporated into your outlook that they may be competitive now in the rental and I guess you are saying you just look at it overall and shelter and every delivery you view as a competitive risk?

Michael Schall

Exactly. It's a household. And so we don't care. Well, I mean we care but it should not effect us.

Ivy Zelman

Okay. No, that's great. Well, I got it. Great. That's really helpful and very conservative. Thank you. Good luck.

Michael Schall

Thank you.

Operator

Our next question comes from the line of Tom Lesnick with Capital One. Please proceed with your question.

Tom Lesnick

Hi. Thanks for taking my questions. Just a couple ones on development. I saw your new start this quarter went into the consolidated bucket of 100% ownership. Can you talk a little bit about how you make the risk allocation decision between placing development into a JV or keeping it on balance sheet?

John Eudy

This is John Eudy. That was a deal that we basically bought out of bankruptcy about four years ago. As you know, it was an operating property, took it through entitlement and have a substantial low land base of the little over 30,000 a door. We were able to get the entitlements without any increased exactions or inclusionary requirements. So the yield is very attractive and not replaceable in today's market which, the short story is, we are probably leave that on the balance sheet.

Tom Lesnick

Got it. I appreciate that color. And then one other quick one. Obviously with the Agora close to initial occupancy and not being a condo finished project, are you guys contemplating any other condo finished development at this point in time?

John Eudy

We map everything we can, just so you know, which is a majority of our deals. But by your question, it sounds like, do we plan on going to a condo program in it out of the shoe? No.

Tom Lesnick

All right. Great. Thanks guys.

Michael Schall

Thank you.

Operator

And our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please proceed with your question.

Alexander Goldfarb

Hi and good morning out there. Just a few quick questions for you guys. There was a lot in upfront about, I guess increase in rental homes and people doubling up in the Bay Area. So two part on that. One, are you seeing any dynamic at the super, I guess where are these people coming from? Are they like super high-end renters who just got tired of it and said it's cheaper to rent otherwise? Or these are entry level people who just can't make anything else work and therefore they are defaulting to do this? So one, are you seeing more pressure at the high-end rental or at the low end price point? And then I will ask a follow-up after that.

John Burkart

Let me answer a little bit broad here, Alex. First off,, with the supply coming in and they are trying to get the units absorbed, they are naturally offering concessions and those have been increased and they are in at the start of the process as it relates to some of the concessionary activity and then of course others with the consumer, the empowered consumer and with the information age you have some concession jumpers. And so people are moving around and that causes some pressure then on the next level of the apartment.

As it relates to the doubling up, it's really happening at varies levels within apartment zone and you have people that are doubling up into twos, people are doubling up into one, just various things going on and it's all incremental, right. But that incremental takes the hair off the demand that's out there and again ultimately reduce this demand. And so you see it all over. The feedback that we get anecdotally is that the single-family market is very, very high occupancy right now and that again would have taken up some of the demand.

And it makes sense if you think about it, the larger unit in effect and you can put a couple of or two, three, four people in income earners and have a nice space. So I think people are finding ways to deal with the higher rent and some of those again means doubling up.

Alexander Goldfarb

So is it fair to say that, the high price point rents aren't the issue. It's more the lower price point renter is more the pressure point, not the high end renter?

John Burkart

It's across the whole zone.

Alexander Goldfarb

Okay. And then, Mike Schall, you had mentioned previously that Seattle and San Francisco coexist on the tech side and that you don't have a disconnect. Do you think that that still holds true? Or do you think that may be the affordability issues in San Francisco coupled with that supply means that the two markets could disconnect on the fundamental side?

Michael Schall

Yes, Alex. Just to be clear, those comments, I think I made in connection with Q4 and the point I was trying to make is that it did not appear to be a tech hiring issue. It appeared to be a supply issue, a supply lumpiness issue. I think I commented that around 40% plus of the supply in Northern California hit the fourth quarter during the seasonally weakest time. But again to the point, it appears that Seattle and San Francisco, i.e., both being tech markets are performing very well on the job side and therefore if we look at the supply side, the lumpiness of supply is being a contributing factor or a driver of this disconnect.

As we go forward, it's going to be interesting to see because again if you look at the overall numbers going from jobs and job growth to household formation to supply, it would not indicate that we should have weakness in the apartment area and the concessions seem to be going from roughly a month to six to eight weeks that would not be indicated, given the overall supply demand numbers. But yet here we are and so we are trying to make sense out of why that is occurring. We do not have any at this point.

Alexander Goldfarb

Okay. And then just finally, you made some comments in the opening MD&A about cap rate maybe softening a bit. Was that normal cap rate volatility? Or were you indicating that cap rates are in fact backing up on the West Coast?

Michael Schall

Yes, Alex. The comment I made was that there were comments in the marketplace from brokers. There was a couple of articles that I read where brokers in the marketplace were suggesting that cap rates were increasing. We have not seen that and the point I was trying to make is, we underwrite a lot of deals and we are always in the market, so we have a very good sense of what's happening in the marketplace. And so we disagree with those brokers. So if that didn't come clear, I apologize.

Alexander Goldfarb

No. Look, it's been a long week. So I appreciate it. Thanks Mike.

Michael Schall

Thank you.

Operator

And our next question comes from the line of Wes Golladay from RBC Capital Markets. Please proceed with your question.

Wes Golladay

Yes. Hello everyone. Thanks for taking the questions. So looking at this dynamic of what appears to be still a favorable supply and demand market, yet you have a flood of supply in terms of submarkets. Is that what it is weighing on it and wants to be get through this flood and then we could get the more normal pattern up in rental growth?

Michael Schall

Hi Wes, it's Mike and John may have comments on this as well. Again, we are not quite sure. If you look at these overall supply demand ratios up and down the Coast, it would indicate that we would continue to have pricing power. And again we are seeing concessions on the newly delivered product increasing from a month to six to eight weeks. And I think it's lumpiness but we are going to let this next quarter go by and then we will reevaluate guidance and results at that point in time. So essentially we didn't, as a general rule, revising guidance at the end of the first quarter. It's something that is generally not what you want to do because it's only quarter. So we would rather be a little bit cautious and hopefully we blow right through this period and absorb begins and we are back into a very strong pricing power type of mode come at the end of summer. But we will have to wait and see.

Wes Golladay

Okay. So is that like the velocity is actually going pretty nicely on those new units. So it's just a matter of getting them through out of a little bit lower price point?

Michael Schall

Yes. But keep in mind that an extra month of concession is an 8% reduction in price and when you look at it that way people that otherwise wouldn't move might say, oh gee, at that price I am willing to make a change and move to a brand new apartment unit. And so that's the effect of concessions and it seems to me that concessions are prevalent in the marketplace and they have increased. And again, that's what's causing the softness. Again I believe that the concession can abate much like they did in January and February quickly, but we just don't know exactly how that's going to happen. It's a function of how many units do you have, how aggressive the owners are.

Obviously if you deliver new building, you have zero dollars coming in on your vacant unit. So you are highly motivated to rent them. And many of those owners are saying, hey, rather than leaving it vacant, I will try to hit really high absorption numbers and increase my cash flow. Again, they are incented, they have a different financial objective or a different financial view relative to stabilized apartments. But they have a dramatic effect on the stabilized apartment. So that process is going to play out and so we are going to be clearly under a bit more pressure than we have over the last couple of years and we will have to see how that ultimately turns out.

Wes Golladay

Okay. And just a quick follow-up. So is the concession enough to pull people in from maybe from the East Bay into the SoMa market? Or do you think people will still stay in their own submarket?

Michael Schall

No. I think everything will happen. People are looking for opportunity, I have been in this business a long time, as you know, Wes and people are smart. They figure out the opportunities in the marketplace and they go after them. Many of the renters just don't have that much furniture and so moving is not that big a deal. And so if you give them another 8% off their rent in the form of a concession, they are all over it. And so it's a very fluid marketplace and what I suspect will happen is we will go through this period of time and we will absorb the unit. We will get back in Q4 in San Francisco where we think roughly 1,300 units will be delivered and we will have much more pricing power. So it will be a temporary dislocation in the market, is what I suspect.

Wes Golladay

Okay. Thanks for clarity.

Michael Schall

Thanks.

Operator

And our next question comes from the line of Drew Babin from Robert W. Baird. Please proceed with your question.

Drew Babin

Good afternoon. Just wanted to ask about the three submarkets you mentioned, the SoMa, Peninsula, North San Jose and what the supply outlook looks like in those markets for next year, once you deal with concession and everything going on now when it might be more sustained just drop off in new supply deliveries?

Michael Schall

That's a good question. I don't have that information with me. I think it will be slightly lower in 2017 relative to 2016, but I just don't have enough focus on those numbers at this point in time.

Drew Babin

Okay.

Michael Schall

Again, the dynamics, let me go back to the dynamics. With construction costs increasing, lender issues, et cetera, it seems like we are at the point where going to start seeing slower development deliveries going forward, just as a general rule.

Drew Babin

Okay. And then one question, going back to a topic that was frequently visited on the last quarter's call, prospects for share repurchase. Do you expect you are able to sell property at cap rates below the implied cap rate on your stock? Has anything changed in the market over the past few months that would maybe cause you view doing something like that differently?

Michael Schall

Yes. Our thoughts have evolved in that area and for background, we have a $250 million share repurchase program out there. Last quarter, we were trying to not use the balance sheet. We were trying to align sales proceeds from properties such as, I think I mention that roughly a third of the Sharon Green sale, we wanted to use for share repurchase. And when the stock price recovered and we were trading at a discount to NAV, we decided to just go ahead and redeploy that with a 1031 exchange. So the evolution of our thought process on that is to go ahead and use the balance sheet because it seems like the dislocations in the stock market.

And we had one in the first quarter, those dislocations are relatively temporary in nature and so I don't want to give you exact targets, but of the $250 million program, we have decided to take some balance sheet risk to the extent that the stock trades at a significant discount to NAV. And again, I am not going to share with you our targets and how that works, but practically if it's not 10% to 15% type of discount, it probably doesn't make much of a difference. So we will use some balance sheet and we will look for significant discounts and we will be ready within a relatively short period of time given dislocation in stock price.

Angela Kleiman

So as long as it is after that, as far as using the balance sheet, that will just be a temporary bridge because then we will look to sell assets in arbitrage, public and private market pricing. So ultimately, the goal was to just have it to be a balance sheet neutral transaction.

Michael Schall

Thank you. Yes.

Drew Babin

Understood. Thank you very much.

Operator

Our next question comes from the line of Tayo Okusanya from Jefferies. Please proceed with your question.

Tayo Okusanya

Yes. A very good afternoon everyone. Just in light of some of the commentary you have made about lumpy new supply going forward and some of the market dynamics, does that change how you think about disposition activity especially if, based on your commentary, cap rates really haven't moved at this point?

Michael Schall

Yes. Tayo, this is Mike Schall. At this point, to the extent that we believe it's temporary in nature and again lumpy supply, I don't think it has a significant impact on how we allocate capital. However, if that changed, if we saw job growth dynamics change for example, I think that would be more fundamental in nature and that would change our thinking about how we want to allocate the portfolio.

So again, we have these exceptional job growth numbers that have continued in Q1, San Francisco at 4.1%, Seattle at 3.2% et cetera. That's a trailing three-month number. Those numbers are incredibly powerful when it comes to owning apartments. And so as long as those numbers remain as strong as they are and not to mention the amount of wealth that's being created within the technology area, I think we estimated that 10 top tech companies have produced about $1.8 trillion in wealth and obviously some of that is not of the West Coast, but a lot of it is here. Those dynamics keep us excited about earning properties in Northern California despite the lumpiness with the supply.

Tayo Okusanya

Got it. And then just my second question. Again you guys are well known in this space for being data junkies and I know you are kind of doing a lot of analysis suggesting rents should still be strong, occupancies could still be strong. And at least I hear from your tune, you are kind of scratching your head a little bit wondering what's going on, why is this really going on? And I guess the question is, if we all don't know but you had to at least make one or two educated guesses, what will they be? What does that tell you about if that continues going forward or if truly this might be temporary?

Michael Schall

Well, John Burkart and I looking at each other. I hope we can come to the same answer to this one. But clearly the impact of affordability is one that concerns us and generally speaking we think affordability is a constraint not a driver, in some markets it's a driver, but not in our markets. And so anything that affects affordability and John mentioned doubling up, longer commutes, working from home, those types of things would be concerns us and we are back here data junky point, we are trying to find ways to measure them and we have some data on them.

And we do have some information about the level of double up, but it's not perfect at this point in time. But clearly, we are trying to become more refined in how we look at this and where we have a disconnect, we are trying to explain it to ourselves so that we can obviously use it proactively to manage the portfolio to do a better job of capital allocation.

Tayo Okusanya

Thank you.

Michael Schall

Okay. Thank you.

Operator

Our next question comes from line of Rich Anderson from Mizuho Securities. Please proceed with your question.

Rich Anderson

Thanks. Good afternoon. I am sorry to keep it going here, but just a couple of quick ones. Getting back to the rent control issue, while you made the point that it doesn't hit you because of your newer assets and all the rest, but is there an indirect effect, do you think, that is playing a role in some of the "choppiness" that you are seeing in the Bay Area? Is there any way to see that?

Michael Schall

I don't think so, Rich, because I would say the opposite, to the extent that people that were forced out of the marketplace can now stay there longer and turnover rates are going to be reduced. The number of units that's actually coming to market therefore is reduced and therefore you should have better pricing power. So on our portfolio, it's probably a net positive just because we don't have that many units, again, subject to what might happen in these referendums because we don't know what cities they are going to be effecting at this point in time. But based on San Jose and Oakland , for example, we think we have probably a positive effect not a negative effect.

Rich Anderson

Because of the turnover factor?

Michael Schall

Because more people, there is going to be fewer units vacating. The turnover goes down with rent control, right. It will go portfolio wide. It will go from 50% to 30% turnover. So you are going to turn only 30% of your unit therefore your units available for leasing to people moving into the area, you are going to have fewer units available to lease to the same number of people and therefore it's going to put more pressure on price as to the units that are turning. So again because we don't have that much rent control product, it probably has a favorable effect on us.

Rich Anderson

Got it. And then some have been alluding to why you haven't addressed guidance this quarter and I understand all of the answers, but to me, I am wondering if the guidance direction should be up or down? I think most people are indicating that maybe you should have raised guidance because you beat numbers in the first quarter. But is it as clear cut as your bias is upward? Or does the lumpiness in the Bay Area put at least them into the possibility list that guidance could weaken in the future?

Michael Schall

I think when you raise guidance in the first quarter, you better be really sure about what you are doing, otherwise why do. We just gave you guidance a couple of months ago. So that's kind of the basic premise of the whole thing. Obviously we are going to push to make the year and next quarter as good as it possibly can be and to react appropriately to changing market conditions. But I just don't see a lot of motivation. I am probably one of the ones that prevented the guidance increase of the group here. And that's the basic background. It's really uncertainty and the feeling that raising guidance after a quarter just doesn't make a lot of sense to me.

Rich Anderson

Okay. But at least the conversation was up not down?

Michael Schall

Well, we have had other conversation. We have lots of conversations. And most of the pressure was on up not down, yes.

Rich Anderson

Okay. That makes sense. And then lastly, you talked about some of these supply numbers in the second and third quarter. What are you guys seeing beyond that? Is there a notable reduction that you could speak to for fourth quarter of this year and beyond?

Michael Schall

Yes, there is. However the comment I made on in the fourth quarter on the fourth quarter call about transactions deliver when they deliver. We may schedule them to happen in, I bet a lot of the transactions that hit in the fourth quarter last year were scheduled for delivery in the second and third quarter, but they got delayed to the fourth quarter. My point is they deliver when they deliver. And we don't have, we actually have our people go around and look at buildings and try to see exactly what is being delivered. But having said that, you don't have great certainty with respect to exactly when it's going to be delivered. And it can easily slide a quarter.

Rich Anderson

Okay. Thank you.

Operator

Our next question comes from the line of Kris Trafton from Credit Suisse. Please proceed with your question.

Kris Trafton

Hi guys. Just wanted to circle back on the preferred equity. Obviously, there's a lot of demand for this capital, but could you speak to a little bit about the supply of preferred capital? And maybe the other players involved that are offering it? And then maybe how you are mitigating it in terms of risk?

Michael Schall

Yes. It's Mike Schall. I think there are several people that are active in that area, different types of specialty finance organization. So we have plenty of competition there and much like acquisitions, we don't win nearly all of the business and part of the reason for that and it goes through your risk mitigation point, is we only want to originate preferred equity on apartments that we would like to own. So it has to meet our locational and other criteria and again, if everything goes great, then it's a good piece of capital for the developer. If things don't go great, we want to position to step in at what would be an attractive price to us. So that's how we think we have the best of both worlds. We have high-yielding vehicle and we also have something that is synergistic with our portfolio if things don't go well.

Kris Trafton

That makes a lot of sense. Okay. Second question, when you are looking within a market and you are looking at cap rates that they are trading at, do you see a difference, obviously adjusting for properties that are just above or just below the year where you can do rent control in California?

Michael Schall

I haven't looked at it really that closely, but let's see, I just look at Oakland and San Jose and then again the statewide law, Costa-Hawkins, has a pre-1996 date and so we have obviously more properties that are within the Costa-Hawkins realm that's pre-1996. But with respect to the cities that already have rent control ordinances like the ones in Oakland and San Jose, that were pre-existing, the nice thing about them is they can't bump their prior date or effective date or cut-off date, they can't move it to 1995, at least at this point in time, because that was prohibited by Costa-Hawkins as well. So again I think our overall exposure to rent control is actually not that substantial, as I look at the portfolio.

Kris Trafton

All right. Okay. And then just one last quick one. I think your original guidance was to have three now developments in 2016 at $230 million at share and you just started one here at $230 million. Is that incremental to the other three? Or was that originally going to be a JV? Or can you just talk to what's updated there for development start guidance?

Michael Schall

The one that we announced is one of the three. So it's not incremental.

Kris Trafton

Okay. So that was originally going to be at 50% or something?

Michael Schall

No. That was always going to be at 100%. I am sorry. I didn't answer that piece of your question.

Kris Trafton

Okay. I thought the original guidance was $230 million for three properties?

Angela Kleiman

No. It was $220 million for the year.

Kris Trafton

That's a spend, not starts?

Angela Kleiman

That's the spend, correct.

Kris Trafton

Got it. Okay. Thank you very much.

Michael Schall

Thank you.

Operator

And our next question comes from the line of Conor Wagner from Green Street Advisors. Please proceed with your question.

Conor Wagner

Good afternoon. Have you seen fewer properties come to market in the Bay Area in recent months?

Michael Schall

Come to market, you mean sale?

Conor Wagner

Yes. In the transaction market.

Michael Schall

No. Actually, there is a pretty decent deal flow out there. And we are looking at quite a few properties. As I would say, activity has generally picked up a bit.

Conor Wagner

And from your earlier comments, I gather that sellers haven't reset their expectations?

Michael Schall

Yes. Again, this is our experience and we underwrite lots of transactions and I can think of a deal in Fremont that we recently underwrote and we got handily beat and on that transaction specifically, that was, I don't actually think that it's closed yet even. So I think it just has been awarded. Again as we look at the transactions out there, we don't see a lot of evidence that cap rates have changed. And again we win some, we loose some, but we underwrite a lot and from our view things have really hung in there, which is what we expect by the way.

Conor Wagner

Okay. And then I just wanted to confirm, earlier you said that traffic at your properties has not slowed down and I know you have indicated before that you think that's a leading indicator of job growth. But is that correct that actual traffic at properties has not slowed?

John Burkart

Well, this John Burkart. I don't think we spoke about traffic earlier, but as it relates to traffic, it's actually up year-over-year really across the whole portfolio. But traffic is a challenging number sometimes. It can be driven, of course by better marketing and a variety of other items. But it is up. It's very strong.

Conor Wagner

Do you guys get the sense then that perhaps renters in the Bay Area because they read the headlines about slowdowns in tech and job growth, that perhaps they become more cautious on what they are willing to spend or their willingness to trade up?

Michael Schall

We are not seeing that in sense of anecdotal hearing about that. I mean, obviously people make comments about everything else, but obviously as been said a little bit earlier in the call, we are trying to reconcile the supply demand equation with the reality in parts of Northern California and I don't have the answer to that, what's exactly causing that to not fall in line exactly as we have expected other than some lumpiness in supply and possible doubling up.

Conor Wagner

Okay. Thank you very much.

Michael Schall

Thanks Conor.

Operator

And our final question comes from the line of Karin Ford from MUFG. Please proceed with your question.

Karin Ford

Hi. Good afternoon. Just wanted to go back to the divergent trends between some of the markets in Northern Cal and Seattle, given similar job trends. On the affordability side, do you guys track rent to incomes in each of those markets? And do you think there is a big difference between the metrics in those two?

Michael Schall

We do definitely track them on an ongoing basis. And yes, there is very significant differences. So Seattle which has much more affordability, obviously, the rent to income is around 19.6%. And so less than 20% in Northern California, those numbers are in the 25% to 27% range. So definitely affordability is much, much different in Seattle and San Francisco and that would drive what John Burkart was talking about with respect to double ups, the more affordability is in the equation, the more doubling up you would expect to happen. So clearly Seattle, if you look at median income levels are high, about $84,000, which is less than San Francisco and San Jose, they are both over $100,000 but nonetheless, when you look at that relationship between average rent, which are about $1,400 in Seattle on average, this is the whole marketplace, there is a high level of affordability in Seattle. There is not in Northern California.

Karin Ford

Thanks. So just to round that out, where is Southern Cal on that metric?

Michael Schall

Southern Cal on that metric is in the 21% to 24% range. So it is between the two.

Karin Ford

Between the two.

Michael Schall

Yes.

Karin Ford

Got it. Great. Thanks very much.

Michael Schall

Thank you Karen.

Operator

Ladies and gentlemen, there are no further questions at this time. I would like to turn the conference back over to Mr. Schall for any closing remarks.

Michael Schall

Thank you very much. Hey, we really appreciate your participation on the call and obviously we are pleased with the results and we look forward to seeing many of you at NAREIT next month to continue the discussion. Have a great day. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your time and participation. You may disconnect your lines at this time and have a wonderful rest of your day.

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