Oct 26, 2015
Executives
Marty McKenna - IR David Neithercut - President and CEO David Santee - EVP and COO Mark Parrell - EVP and CFO
Analysts
Dave Bragg - Green Street Advisors Michael Bilerman - Citigroup Nick Joseph - Citigroup Ross Nussbaum - UBS Nick Yulico - UBS Steve Sakwa - Evercore ISI Jana Galan - Bank of America Merrill Lynch Tony Paolone - JPMorgan Alexander Goldfarb - Sandler O'Neill Rob Stevenson - Janney Montgomery Scott Vincent Chao - Deutsche Bank Dan Oppenheim - Zelman & Associates Rich Anderson - Mizuho Securities Tom Lesnick - Capital One Securities Wes Golladay - RBC Capital Markets Tayo Okusanya - Jefferies Drew Babin - Robert W. Baird Aaron Hecht - JMP Securities
Operator
Good day and welcome to the Equity Residential Third Quarter 2015 Earnings Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to today's speakers. Please go ahead.
Marty McKenna
Thanks, Joe. Good morning and thank you for joining us to discuss Equity Residential's third quarter 2015 results and our asset sale to Starwood.
David Neithercut, our President and CEO will be our featured speaker this morning. David Santee, our Chief Operating Officer, and Mark Parrell, our CFO, are here for the Q&A.
Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities law. These forward-looking statements are subject to certain economic risks and uncertainties.
The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn the call over to David Neithercut.
David Neithercut
Thank you, Marty and good morning everyone. And thank you all for joining us on such short notice.
Because of the additional news we released this morning, we're going to break from our normal earnings call routine where we would go through prepared remarks on our markets, quarterly acquisitions, disposition and development activity. As a lot of comments on any capital market, balance sheet and liquidity topics.
Instead I'm just going to make a few brief comments about first about the earnings release and then about the portfolio sale with Starwood and as Marty mentioned after that, we'll open it up for questions where Mark Parrell, David Santee will also be able to jump in with their insights. So, first as to our third quarter earnings release, in the last 20 years we've had only four years in which same-store revenue growth was 5% or better.
And three of these have been in the last five years including 2015. And we've had only five instances in the last 20 years when annual same-store NOI growth was 6% or better and three of these have occurred in the last five years again including this year.
And our current outlook for 2016 in which we've given an initial range of same-store revenue growth with a mid-point of nearly 4.9%. So, just the 2016 is expected to be yet another of extremely strong growth.
And you’ve heard us say numerous times since the recovery that we felt and were looking at an extended runway of above the trend performance and that continues to be the case. It’s no secret the fundamentals remain very good, the demographic picture is incredibly favourable, the economy continues to improve, perhaps not at the rate many would like but improve nonetheless which is generating job growth again less than some might hope for, but the employment rate has continued to drop, which creates new households and millennials and have a high propensity to rent housing, many of which, which do so in 24/7 cities across the country that have very high cost of single-family home ownership.
And this time we'll continue because even with the improvement in jobs and the growth in new households there still remain an elevated level of these young adults continuing to live at home with their parents. And I know, because I've got one of them myself and we're quite confident and in my case quite hopeful that they will some time, some day leave home and even create even more new households and those few households will be renters.
If we see here today, occupancy has withheld strong and we're at 96.3%. Achieved renewal rates averaged 7% in the third quarter with October, November and December at 6.7, 6.1and 6.3 respectively.
We're very excited about delivering 5.2% same-store revenue growth this year and same-store NOI growth of 6.2%. In addition, we currently expect normalized FFO to grow nearly 9% this year over last year.
So, like every call we had with you over the last several years, we're pleased to tell you it remains really very good time to be in the multifamily business and we think we are extraordinarily well positioned to benefit from the continued strength and demand for high quality rental housing in a high-density urban coastal markets. And that leads me to the other release we put out this morning, regarding the sale of 23,000 units to Starwood for $5.365 billion.
The decision to sell these assets was the result of a process we began late last spring as we were looking at a stock price that was trading at a meaningful discount to NAV. And we were assessing the best course of action.
We thought about selling core assets, we thought about bringing some JV partners into some core assets. We kept coming back and kept asking ourselves about what to do with assets in those markets that we did not consider long-term core markets, and assets in core markets that might not fit our longer term strategic vision for the company.
These assets would generally be described as older, mostly suburban in nature with limited access to public transportation services. The majority of which are surface parked, two to four storey walk-up garden properties not the high-density urban assets, but high walk scores that we've been focused in the past 10 years or so.
And while we have historically considered all of these assets as warehouses of capital that could at some time or another be sold and reinvested into core assets. Overtime we became more and more concerned that recycling $6 billion of capital is going to be a real challenge going forward.
Because of the strong institutional demand for core assets in gateway coastal cities and the competitive pricing that is a result of that demand causing very dilutive trade between what we wanted to sell and that which we'd like to buy. Yet we thought that absolute valuations of the assets we knew were not long-term pulls were quite good and if those valuations might be at risk by any upward movement in interest rates, as well as of any future changes in liquidity provided the multifamily space by Fannie and Freddie.
So, we began to think that may be the best thing to do would be to monetize the value we have in these assets today and do a special dividend. And the more we thought about that the more we became convinced that it was the best capital allocation decision that we could make for our shareholders which kind of ironically is also very similar to what we’ve seen take place in our space several times recently, associated states, home properties and campus communities kind of a partial go private for cash deal.
So we talked to a handful of folks to be able to acquire a portfolio of this size and work with Starwood over the last few weeks to put a deal together that accomplishes several things for us. First, we realized a very good pricing on assets in markets not considered poor for us and on assets in our core markets that do not fit our long-term strategic vision.
And the second thing we accomplished is that we can now focus solely on our strategy of owning, building and operating assets in higher density urban locations with close proximity to public transportation, job centers and other amenity subsidies have to offer. In the investor presentation circulated last night, you can see that our urban concentration increases 13% to a total of 78% as a result of these transactions, that our NOI for mid and high-rise properties increased 21% to a total of 69% and that our total walk score increased 9% to a score of 75%.
And each of these another metrics, we clearly lead the multifamily space and our belief is that long-term risk adjusted returns in the urban core will exceed those in other markets. So in summary, fundamentals continue to be very strong and should remain strong for quite some time.
We feel very good about how we are positioned going into 2016 and beyond. We are also very pleased to be able to monetize our interest in a large portfolio of assets that don’t fit our longer term strategic vision of the Company in a single transaction and believe that returning this capital to our shareholders and delivering unleveraged internal rate of return of 11.1% is a good capital allocation decision, and by doing so in a leveraged neutral way, we retain a lot of balance sheet flexibility going forward.
So with all that said, Joe we will be happy to open the call to questions.
Operator
Certainly. [Operator Instructions] We will take our first question from Dave Bragg with Green Street Advisors.
Dave Bragg
The first question relates to the 5.5 cap rate, can you just confirm is that a forward nominal cap rate or something else?
David Neithercut
That’s our sort of forward 12 with about $300 replacement reserve Dave.
Dave Bragg
And can you share a little bit more about the process itself including how big was the bidding tent for portfolio of this size?
David Neithercut
Well again as I noted Dave we just talked to a handful of players that we thought demonstrate the ability to do a deal of this magnitude as well as the ability to move quickly on a deal of this magnitude and after a short period of time we decided to move forward with Starwood.
Dave Bragg
And a question for Mark, can you just address the 2016 debt maturities?
Mark Parrell
Sure, hi Dave. So the thought process is that let’s say which is our name for this process will generate give or take $2 billion of cash that we will use to repay debt.
So we may end up repaying the vast majority and probably will of our 2016 maturities. But we are going to undertake a liability management discussion and process and it may end up that we also do some later maturities as well and retire some of that debt.
Operator
And our next question comes from Nick Joseph with Citigroup.
Michael Bilerman
Yes, good morning. It’s Michael Bilerman here with Nick.
David I was wondering if you can talk a little bit about use of proceeds in the decision on the special. I think back to last summer when Taubman did their big fail, actually to Starwood as well and they sort of left the door open a little bit to potential acquisitions which they said were going to be very unlikely as given the marketplace but also the share buybacks and then ultimately to a special dividend which is what they ended up doing.
We have seen a lot of volatility just this year in revaluations and I am just curious are you completely vetted to doing the whole $9 to $11 special or would you consider potentially one if an acquisition came up, doing an acquisition, or two, buying back stock?
Mark Parrell
Hi Michael it is Mark Parrell I will start and I am sure we will get some supplement from David Neithercut as well. So as you know we bought back material amounts of stock before and we would do so again but this particular transaction had a huge amount of embedded gain in it and in order to keep the balance sheet by there any tax embedded gain and to do just a leverage neutral transaction really requires us for every dollar of sales to put about $0.35 towards our debt maturities.
Our gain percentage here approaches 75%. So as you can see there really wasn’t any room to capably or easily do a stock buyback with the excess proceeds.
That said there is flexibility on the margin we certainly could do 10.31 transactions and tax free exchanges if we wanted to and if the opportunity presented itself.
Michael Bilerman
And just out of curiosity did you look at stay count at all the number sort of shape up pretty well from a $5.3 billion perspective?
Mark Parrell
We did not, no, not this time nor the last time, the first time I guess I should say.
Nick Joseph
Thanks. And then this is Nick here.
For the 2016 same-store revenue growth guidance that you gave does that exclude the assets in the markets that you are selling?
David Santee
I think -- this is David Santee yes it's, the guidance should based upon [indiscernible] 240 units for next year which really isn’t that just similar than what we're doing this year.
Nick Joseph
Okay, so if so if you stripped out the assets that you are planning on selling what would same-store revenue guidance for 2015 be?
David Santee
It would be about 10 basis points less.
Nick Joseph
Okay, so it’s like deceleration from call it 51249 roughly as what's assumed?
David Santee
Roughly yes.
Nick Joseph
And then just in terms of the market commentary are you able to go into expectations but do you see North California kind of the six core markets for 2016?
David Santee
Sure. I can go around the whole in pretty quick let’s start with Boston I think if you look at our Boston results I was a little bit bearish on our ability to achieve the three but I think if Boston had a great lease up I think a lot of the head-to-head competition has been leased up and so I'm a little more bullish definitely more bullish on this year and going into next year.
New York I think is just New York, Manhattan specifically is going to be stable again this year it's our lead submarket I think 4.8 for the quarter then you jump over to Jersey City it's a 3.8 and then everything else is a 2.8 so Manhattan continues to be a strong steady market for us and we wouldn’t expect anything different next year. Washington DC is still I would say bouncing along the bottom we are going to produce positive revenue growth we have in our guidance we factored in some modest improvement call it 100 to 150 basis points for next year.
But really it's just about were the new product is how and what proximity is to current assets but DC we see deliveries are going to be 10 or less next year and with a lot of the chatter in the government sector yes it seems like DC has turned the corner and the largest sector of job growth best sector of job growth is professional services which bodes well for our portfolio. Seattle.
Seattle we are expecting another strong year still a lot of companies regional headquarters moving to Downtown with Amazon continuing to produce profitability that bodes well for the urban core, Boeing is doing great, backlogs so we don’t really see any change for Seattle next year and kind of expect very similar growth to what we have seen this year. San Francisco we are always -- we keep moderating with it's probably going to be less next year but we've been around the last four year so we are backing off a little bit in San Francisco, but certainly deliveries are not going to be an issue a lot of these deliveries are downtown so we kind of expect more the same out of San Francisco and then all of the total really is just been is going to be a plus five if not better market all three of those submarkets continue to just deliver solid steady growth there might be a little pressure in Downtown with the new deliveries, but that will be more than made up by the coastal communities like Marina Del Rey so to summarize it Washington DC would be in its own bucket next year, Seattle all the west coast markets will be in the plus five bucket and then New York and Boston will be in that 3% to 5% bucket.
Operator
And we will move forward to our next question. This one comes from Nick Yulico with UBS.
Ross Nussbaum
Hi. This is Ross Nussbaum here with Nick.
David when you answer the process specially the assets. Did you also entertain selling the whole company or were you exclusively focused just on this portfolio?
David Neithercut
This process was focused strictly on this portfolio Ross.
Ross Nussbaum
Did any of the people you are talking to you try to make an offer or you just didn’t go to tell them?
David Neithercut
Conversation never came up.
Ross Nussbaum
Okay. As I'm sure you might imagine some folks this morning are drawing some parallels to when Sam accepted the god father offer back in ’07 for equity office.
It seems pretty clear what you are doing here to focus on your urban CBD high rise assets. Is there a message that you want to deliver on Sam's behalf that you know should people be reading in somehow that is Sam going to call the market top the market twice in a row?
David Neithercut
Well I don’t speak for Sam but I think that in my opening remarks I think pretty much described what the process does and in my conversations for Sam on the matter. It was -- we achieved a couple of things we thought were very important here I think suggesting that this is Sam calling any kind of market call is sort of friendly because we are really not selling the company, we are selling a portfolio of assets and we remain you know firmly committed to what we are doing in the identity urban core market, so I think that’s a little of a stretch.
And I think this was just kind of a smart portfolio move and a smart capital allocation -- execution.
Ross Nussbaum
Okay I think Nick’s got a question as well.
Nick Yulico
Just a question in terms of next year are you using a sort of tax playing strategy, pulling forward income from future year to -- that’s going to affect your special dividend payment in relation fee sales?
Mark Parrell
Hi Nick, it's Mark Parrell, we are going to pull forward somewhere between call it $300 million to $500 million of 2017 dividend into 2016 is what our base case model implies right now, as we get closer and get in the next year we will give you more details on that. But if you recall my prior comment in this call when I said $0.35 plus $0.75 well that gets you more that a $1 of sales proceeds and by pulling those dividends from ’17 to ’16, we balance the transaction out slightly lower the dividend and give ourselves enough cash to keep our debt metrics even.
Nick Yulico
Okay and so the extent that you sale more, your net sale are more on top of what you have announced today, it would likely require more special dividends next year?
Mark Parrell
I should be careful there. The thought process, the $3.8 billion projected dividend and the $2 billion projected debt pay down encompass all of the sales.
The sale to Starwood today for a 5.365 billion as well as the additional 700 million and the reconciling item is wholesome costs which are actually relatively low sale cost and also $200 million to $300 million of 10.31 exchanges that we must do in 2016 due to obligations we have the various OP unitholders.
Operator
And we will move forward to our next question from Steve Sakwa of Evercore ISI.
Steve Sakwa
A lot of my questions have been answered but I guess two to David just in terms of kind of shrieking the footprint, this does do anything to kind of G&A should we be thinking about any kind of cost savings? And then secondly just where is your that process on development today, as we get later in the cycle and how do you think about maybe purchasing land today?
David Neithercut
As to your first question Steve, yes we lose a little bit of efficiency both in property management and G&A as a result of this. We are able to scale up very easily very efficiently and sort of work sequentially when you go backwards but we think it's an outcome that is satisfactory just given the execution that we think we are getting.
And then we talk a lot about development over the last few earnings calls and we sort of have begun to back away from really chasing land at current pricing, we did announce the acquisition of a couple of sites that will be assembled with the third cycle we had acquired previously this year, so we have done a little bit the land acquisition in San Francisco but generally we have talked about we have been adding land to our inventory at a much slower rate than what we have been putting into under construction and what we are completing. So after elevated levels of new development starts last year, in this year you could begin to see that reduce going forward.
Operator
And we will move forward to our next question from [indiscernible].
Unidentified Analyst
Some of them have been answered already. I have got one or two here in addition.
I’d like to start on I guess the question on the portfolio of assets that you are selling and maybe some potential readers. As you mentioned in your comments, you have been conspiring to sell these assets for over a year going back to last spring, so I am trying to figure out if you are trying to tell us anything on what the market on either secondary market or suburban asset value set by selling these assets today, do you think that suburban or secondary asset values have peaked or at least the cap rates have stopped compressing?
And then maybe some color on the differential between the IR for what you are selling versus the retained core portfolio?
David Neithercut
Well I guess last spring was not a year ago, we are talking about more of a six month process, as opposed to a 12 month process.
Unidentified Analyst
I think that’s spring...
David Neithercut
But I guess I know this is just a reaction to a recognition as I said in my remarks that we owned assets that we didn’t think were long-term core assets, we were looking at a challenging market in which to redeploy that capital going forward as well as what we thought was a pretty descent bid, to own those assets today and so rather than treat these assets like we have in the past, where they were reservoirs of capital that we used to sell assets and redeploy that in our core markets we just didn’t feel that might be a successful going forward and in fact the matter is that we are now very much firmly in each of our core markets and have got good portfolios and have got that good allocations in those markets and didn't have the need to take that capital and put in a market so as to achieve some kind of total. So whether or not we are $40 billion company with capital deployed across these sort of six coastal markets or a $35 billion of capital deployed across some six markets we didn't really map and so as we were seeing what we thought would be the private equity bid for these sort of assets, we thought that they tend to go ahead and see what we could achieve from that segment and if it meant a special dividend we thought that was okay.
Unidentified Analyst
Okay, I appreciate that and then a follow up on the process itself, you mentioned that there is descent interest, you focused on a proven better to you felt with more certain to close and quickly close, curious if there was any negotiation back and forth on the price given perhaps some more limited group of buyers you're discussing and the size of the deal itself?
David Neithercut
I mean, it was sufficient negotiation for us to get a price those acceptable to us at terms that were satisfactory to us and again it came together very quickly.
Unidentified Analyst
Okay but to be clear, was there you need to have discounts given here to what you were expecting or the pricing came in spot on to what you were underwriting?
David Neithercut
Again we're very pleased with the pricing that we achieved in the transaction and in the entire process.
Operator
And we'll move forward to our next question coming from Ian Weissman from Credit Suisse.
Unidentified Analyst
Hi guys. This is Chris for Ian.
I was just wondering if you could walk through each of the disposition markets and can you talk a little bit about the pricing and potentially cap rates on how they rolled up to the 5.5% overall cap rate?
David Neithercut
Well I guess that the level of detail that I'm not quite sure that we're prepared to go into we've really looked to this as a portfolio. I am not sure this is a wide range of cap rate spread between the individual markets but we've really looked at this not as a collective individual assets at one large portfolio.
Unidentified Analyst
When we look at the overall portfolio Orange County and San Diego kind of stick out as the submarket assets but are less than other suburban in Sydney asset plus and the company, did you have any thoughts of selling or downsizing those markets and I guess secondly, was there any other assets that you're trying to -- when you're negotiating on the sale that you would like to have included in the disposition?
David Neithercut
Southern California is sort of buyers nature mostly suburban I mean, all of California of our assets, are really we have got some Downtown San Francisco, we have got some Downtown LA but generally if you look at the difference between what I've said, with our urban concentration and what was that, it is not high rise or mid rise that's really a lot of California. So no, we did not consider selling anything more in any of those markets.
And we sold everything in this portfolio that we wanted to, the only things we did not included in this portfolio, those assets that we've indicated in the release this morning that we intend to sale during the balance of 2016 which we thought weren’t necessarily additive to this portfolio but would be a better execution in a one-off small portfolio like execution throughout 2016.
Operator
And we'll move forward to our next question from Jana Galan with Bank of America Merrill Lynch.
Jana Galan
David, maybe following up on those comments, I'm curious whether you would think the private market is giving portfolios at premiums or discount and maybe why you chose to earmark those assets for a portfolio and versus the 26 assets were you looking to do individual or small portfolio sales?
David Neithercut
Well I guess, I want to tell you, that we are obviously satisfied with the execution of this pricing and we had an expectation that we get good pricing just because of the activity we've seen in the marketplace and we did want to go through a lengthy process of trying to sell these on a one-off sort of basis. I mean, this makes sense in a one big portfolio that we can than think about a onetime special dividend and just have the whole thing sort of makes sense, this would have been a very difficult process to achieve any other manner and we do not believe, we had to get anything on pricing in order to get it done in one fell swoop and we're getting a -- very satisfied with the overall pricing.
Unidentified Analyst
And David, this is Jeff, just one quick question. A key focus for us has been the rise of secondary cities and I'm just curious, if EQR is messaging here making a statement that EQR does not really believe in the longevity of the rise of the secondary cities, let's called them the coming 24/7 although realistically, there is not that many 24/7 cities in the world but I understand your strategy and it's consistent what you've said, just on these other markets is it just not something you believe in long-term?
David Neithercut
What I think all these markets are really good apartment markets Jeff. We really do, we think Denver is a good apartment market and we think Sao Paolo is a good apartment market.
What we've been unable to sort of see our way into owning these sort of higher density kind of assets in those markets and believe that the suburban garden likes product that we're selling to Starwood are better owned by people that have a different capital structure than we do and then our focus has been toward owning what we consider to be more forever like assets in the high density urban core are better assets in our capital structure. So, I think that these are terrific markets.
They've been doing very well. I think they are a little more susceptible to supply over the longer term and we think that within our capital structure the launch from this adjusted returns will be better in the urban core than in a suburban product.
Operator
And we'll move forward to our next question from Tony Paolone with JPMorgan.
Tony Paolone
Can you talk a little bit about what you think the longer-term delta is between the NOI growth in your six key markets versus say these assets that you're shedding here? Just seems like in the short run it's not that appreciably different, wondering longer term what you think?
A - David Neithercut
Yes and look as David indicated I have been selling these assets would actually be dilutive to 2015 same-store revenue growth but if we think about total return over an extended time period and if you think about what are real cash and cash return of these assets would be as opposed to just kind of a cap rate, it's less than this level. And we also think that the -- there's more width to value of these assets as I said during my opening remarks with respect to rising interest rates or any change in liquidity that Fannie and Freddie provide.
So, this is like simply a call about long-term revenue growth although I do believe that history will prove out that the urban core has over an extended time period done better in longer term top-line and probably bottom-line growth but it's also just I think a little bit a hedge about potential valuations and we just think is the right longer term per se.
Tony Paolone
And, Mark, I think you went through this and I'm probably going to make you repeat this for a second. But the 2 billion in cash available to repay debt next year, that's inclusive of the Northeast assets that you intend to sell?
Mark Parrell
Yes Sir.
Tony Paolone
So, we should think about is like 6.1 billion producing the 2 billion of cash roughly?
Mark Parrell
Yes, so just reconstruct that for you, the sources and uses so call it about 6.1 billion of sales proceeds call it around 300 million that we have to reinvestment in assets, we have to do tax free exchanges for us so that reach a 5.8 billion. When you try and solve backwards to keep your credit metrics about constant than needs up that 5.8, 2 billion will be used to repay debt and about 3.8 billion will remain for the special dividend, there're some immaterial costs and rounding in there as well, but it's not significant though.
Tony Paolone
And then last question on the 4.5 to 5.25 revenue guide for '16. Can you put some just maybe broader economic brackets around that in terms of what kind of job growth do we need to see to kind of come in at the higher end or lower end of that range?
And perhaps maybe what's in the bag at this point from the earn in just trying to understand the sensitivity around that right now?
Mark Parrell
So, we kind of think about it in very simple terms. So we have about 2.3% embedded growth in our rent roll and we think just like this year that the new portfolio will see rent growth in the call it 5.5 you need to figure that the easy math as you get about 45% of that which is 2.5, two or three quarters and so 2.3 embedded, 2.5 to 2 and 3 quarters gets you to 495.
We're not underwriting any additional pickups in occupancy although that certainly could be the case if the markets continue to tighten but as far as forecast for the next year, we're just kind of holding occupancy flat.
Tony Paolone
And so, does that imply to that job growth in your six key markets needs to equate something fairly comparable to '15 to kind of hit that similar top-line number is that fair or is...?
Mark Parrell
I would say as long as we hover around 175 to 200 jobs that we'll be just fine.
Operator
And we will move forward to Alexander Goldfarb with Sandler O'Neill.
Alexander Goldfarb
So quick questions here, Mark, the common dividend, should we anticipate that getting resized or you guys will maintain it?
Mark Parrell
As we said in the release just to be clear the dividend that we are going to pay in January that will be declared in December won’t be affected by this transaction, whatever the trustees’ do for that but it won’t be affected by this transaction. I would expect this resize the annual run rate dividend that would be then payable in April of 2016.
Alexander Goldfarb
Okay. And then you guys in the market with one year apartment towers here in New York to a condo converter.
Are your thoughts to contemplate other condo conversion sales?
David Neithercut
So we are offering for sale a property in the East side of Manhattan which we think is one that I would lend itself better to condominium type ownership and this is the kind of activity I think you will see us more do going forward Alex and we are now focused solely on our core markets and here is an opportunity we think to monetize hopefully good value in this asset and redeploy that into something that might be a better longer term rental play. So I mean if possible we will see what happens.
If we don’t get a number, we realize we won’t play, if we do it will be because we think it’s a good price a good value relative to how we think we can redeploy that capital into another asset either in New York or in one of our other core markets.
Alexander Goldfarb
Okay. And just finally, the military assets it seems like that one would be sort of next for this division but don’t know if there is anything contractual or tax or anything like that, that would make it stay within EQR, so future of the military assets?
David Neithercut
Well we have no contractual obligations to continue to do that to sell those require some approvals, from lenders and the army. So if and when that happens, it would be subject to their approval.
We have no contractual obligation to continue for any length of time, of our management and ownership of that asset.
Operator
And we will move forward to Rob Stevenson with Janney.
Rob Stevenson
Mark, I know you used 300 of CapEx in the cap rate calculation. But on a real dollar basis, what’s the maintenance CapEx per unit on the sales portfolio versus EQR as a whole for ’15?
Mark Parrell
We don’t have that level of detail right here in front of us I don’t think.
David Neithercut
So I can tell you though that on a forward sort of run rate the 5.5 cap rate of this portfolio we think after CapEx is more like a 5.3 so on a real sort of AFFO basis Rob.
Rob Stevenson
And then is there anything that you are sitting here today that you guys see hitting same-store expenses materially over the next five quarters other than the typical property tax and wage growth that’s going to drive you much above the sort of 3, 3.25 run rate on the same-store expenses that you guys have been averaging recently?
David Santee
This is Dave Santee. Here is how we think about 2016 taxes.
We know that -- I am sorry expenses. We know that 2016 real estate taxes are going to have a 5 handle primarily because of the step up in the 421(a) tax abatements.
We know that payroll should probably come in 3% or less. We know that we’ve already locked in material discounts and some commodity costs for next year.
So those three categories make up 70% of our total expense. So when if you do the math on that there is no reason why 2016 shouldn’t look very similar to 2015.
Rob Stevenson
Okay. And then last question, you talked a little bit about development earlier on but when you are in terms of the shadow development pipeline the stuff that’s not ready to start yet.
I mean how big is that today that you can envision starting over the ’16, ’17 period?
David Neithercut
As you know it’s not as big as what we’ve done in the past several years Rob. In ’16 we start call it $500 million or $600 million I suppose, and I think that’s a pretty good run rate for us going forward.
Operator
And we will move forward Vincent Chao with Deutsche Bank.
Vincent Chao
Just a quick question going back to the assets that is for sale in New York that’s above and beyond the set of 100 that’s contemplated in ’16 I believe just curious given all the commentary about how difficult it is to deploy, what would be the most likely use of proceeds there and for any other sort of condo type conversion or other asset sales similar to that and what do you think that the best use of capital is today it sounds like starts are coming down so I mean developments will be part of that but I'm not sure if that's really will be able to absorb all of that?
David Neithercut
While the difficulty to redeploy the capital I was really relative to the yields that we would realize on those assets we want to sell and so this is the 5.5 cap rate transactions deal with Starwood difficult to think that we could redeploy that at a reasonable relative cap rate seeing it how assets is our core markets today generally trading with a three handle if we are successful upon getting the bid that we hope we could keyed out of the market on a deal New York we may actually be able to redeploy that asset accretively in one of our core markets. So our expectation of current time is that that is what would happen with the proceeds if we are successful selling this particular property in the New York City.
Vincent Chao
And then just going back to the 700 million of dispositions six in a quarter cap rate on those relative to the 5.5 for the Starwood portfolio assuming that's just general geographies that you are selling being different as well as some asset quality but curious is there any embedded assumption of just general cap rate increases in that 6 to 6.25 given some of the about the noncore nonurban assets you mentioned being more a price sensitive?
David Neithercut
Now so to this end this difference shows cap rate has nothing to do with an expectation of a changing cap rates between now and then it's just simply a recognition or it is different type of property that would likely trade in a slightly wider cap rate.
Operator
And will move forward to our next question from Dan Oppenheim with Zelman & Associates.
Dan Oppenheim
I was wondering if you can just talk about the your view in terms of volatility as you now focused on to fewer and fewer market probably and it's more volatility into the results but I guess as specially in terms of this area here in terms of North how you think about that in terms of the exposure going up we have seen extremely strong rent growth as it's been you are delivering couple of more projects and here plus buying more land sounds that you are more bullish although the comments were about thinking of it as going to moderate a little bit here how do you think about the market overall?
David Neithercut
Yes. We don’t suggest for a minute Dan that San Francisco does not have its ups and downs and in fact it’s probably had perhaps more downs than other markets but we do recognize that it is a marketplace that has always come back and come back fairly quickly and established sort of new so when we look at the assets where we own there and look at the asset that we are building and the prices per foot per pound that we are building those units we ask ourselves not how do we feel about this asset assuming these trees continue to go to the sky or how do we feel about owning these assets at these levels for the next 25 or 30 years and with that perspective we are quite comfortable with what we own and comfortable with what we have underway as a present time and again this was not mean that things can't stop from that marketplace we've not underwritten them again with these kinds of year-over-year revenue growth that we've seen over the past half a dozen years.
And we just think that over the longer term it's -- these will be good assets to own. And I just so to mentioned that when we build the tower in Brooklyn half of dozen or so years ago when that deal was delivered it was maybe worth what it cost to good but we knew on firm was the great asset we are located and we do very well with anyone when the market stabilized we do work very well with it and it is worth a considerable premium today if were to cost build on I think we can take the same approach on really on anything that we build we look at the location, look at the quality of product what we are basis per unit per square foot in and ask ourselves how do we feel about being in this product over an extended time period not just are we going to ramp merchant builders right we are just not worried about what the spread is 24 months after delivery but it is the right asset for us and for our shareholders over an extended time period.
Operator
And will move forward to our next question from Rich Anderson with Mizuho Securities.
Rich Anderson
Mark Parrell you said 300 million you are obligated to sell or buy through 1031 exchange what are the tax protections are lingering in the remainco portfolio after the sell if any?
Mark Parrell
Yes. I should have been a little more precise Rich with that.
We are obligated we’re inclined to 1031 that $300 million just because of the implications it has to us in our OP unit program we don’t have to. We have relatively few assets that are covered and I think that would probably be something between around 30 after this transaction and might have some sort of obligation maybe a little bit less of one kind or another where you would need to do some sort of tax free exchange or you would have some amount you owe to your partner.
David Neithercut
Let me follow-up on that just a little more Rich. I do want to make it clear that these are unrelated unaffiliated OP unitholders but would have taxes in the 100% very significant tax and we feel that inclined as Mark said to the limited amount of this particularly relation to the size of this transaction to try at 1031 those vehicles and we are quite confident that we will be able to do so in assets that we will be really delighted own over the long term.
Mark Parrell
And just to finish the thought I mean we think that protects the OP unit currency, if you are able to take care of these partners even when you don’t have to we think as we go out and trying do more and more deals that you have OP unit components because we do think it's attractive to do that certain place in the cycle that that will be appreciated by the market and by our sellers.
Rich Anderson
And so David another you mentioned these are markets not necessarily grow to your markets over the long term that you are holding but just better from a perspective of 25 years, so you were saying like as the environment changes, interest rates go up these coastal barrier markets you just think will perform better or what is the reason that it's not about growth?
David Neithercut
I wasn’t clear I guess then, and while I was thinking about in terms of absolute value with respect to interest rate.
Rich Anderson
Okay.
David Neithercut
You said in our in the materials that we sent out as part of the press release, that there is a good bid for these assets today from leverage buyers taking advantage of lower interest rate, so I think that these assets as I have mentioned earlier are better owned I think by a leverage buyer and as favorable debt today at favourable rates and should that change we think we’d see a bigger impact on value here, but if you would if any in the higher density core markets we have had the most for capital in investment today.
Rich Anderson
Did any REITs get involved in the process for the asset sale?
David Neithercut
We did not have any conversations with any other REITs.
Rich Anderson
Okay and last question, you mentioned the 700 million to go will be kind of one offish or a smaller portfolio, is any chance of that could actually give more sense to a single buyer situation?
David Neithercut
I suppose it's possible, we’d probably be delighted if that were to occur, but just given the nature of these assets and for those of you who have been around the blog for a while, these are a primarily assets and we acquired in a growth transactions so there are a lot sort of smaller assets or smaller unit out, smaller price points that we think that we might achieve maximum operable pricing and on one off sort of basis, but if there were someone who are interested in meeting our expectations on a one off deal we would be go delighted for that to happen.
Operator
And we will take our next question from Tom Lesnick with Capital One Securities.
Tom Lesnick
So on the 700 million, knowing when the portfolio for next year, I think like you guys are pretty confident on pricing and have a pretty type band there on cap rates, I was just wondering how far along you were in the market process for that and if you could offer any commentary on timing for next year whether it is probably more weighted towards the first half or second half or whatever?
David Neithercut
I guess, we had several of these assets sort out in the marketplace before we really got on the way with this larger process but we have a good sense of pricing. And then also just sort of to tell you that we are acted in the markets, following deals and so we just a kind of very good handle on what we think valuations are, I’ll remind you that when we announced the Archstone transaction, we have given our Boards the guidance just to we thought, we’d achieve and selling the $4.5 billion of assets and we used during the 1031 trade in Archstone we sold those at something like 99.7% of our expectation, so we have got a terrific team out there that are in these markets every day, taking care of these assets trying to understand them and understand the marketplace and we just have a high regard for the intelligence that these guys give us and expectations to what we will be able to achieve on this portfolio.
Tom Lesnick
And then on the land acquisitions in San Francisco, just curious if you could shed some color on where in the city those are exactly and when you might expect commencing of those development starts?
David Neithercut
Well, this two sites have been assemble with a third site and we have clearly that we acquired earlier in the year and are adjacent to our SoMa Square in the SoMa sort of submarket on San Francisco. The expectation there is that we can begin to start in maybe in the first quarter of 2017 that will be $170 million project.
We love Downtown in San Francisco, we think it will be very well with that transaction.
Tom Lesnick
And then most of my questions on the Starwood transaction have been answered at this point but just a housekeeping question. Looking back at your 2Q supplement the asset count and unit count is slightly different than what's presented in the transaction said actually in the market, I think you guys had 19 assets in Denver and 35 assets in South Florida, I just want to what the couple of assets there were that were the difference?
David Neithercut
Yes well following up on Rich Anderson's question I answered a moment ago, there are few assets that are tax protected or are JV assets in Denver and in South Florida and that’s the difference in the count and those will be sold or dealt with separately over the course of 2016.
Operator
And we'll move forward to our next question from Wes Golladay with RBC Capital Markets.
Wes Golladay
Congratulations on the transaction and thanks for providing individual look in 2016 and when you look at 2016, which markets were the hardest to forecast?
David Neithercut
Well, I guess by default Washington DC. We were starting off the year with pretty much flat embedded growth so anything we achieved will have to earn next year either through rate or occupancy.
Wes Golladay
Okay and then for the transaction the asset dispositions, is there any deferred CapEx associated with that transaction price?
David Neithercut
No.
Operator
And we'll move forward to our next question from Tayo Okusanya with Jefferies.
Tayo Okusanya
Just along those same lines with the 2016 same store revenue guidance. Could you just talk a little bit about market where you actually think you should see better same store revenue growth in '16 versus '15 and markets where you actually expected to slow which I mean where you kind of rule everything else becomes the slight slowdown versus overall 2015?
David Neithercut
Well so the markets that we think, we'll do better would be Orange County, potentially LA and Boston and potentially New York and DC. Seattle, I think is not less but closer to the same and then San Francisco, we hope that will do the same but we're just cautious about forecasting any gains over this year in the next year.
Operator
We have another question from Drew Babin with Robert W. Baird.
Drew Babin
I was hoping you could in more detail for example what you're seeing on the supply side in the markets that you're exiting on '16 deliveries across the board higher than they're in '15 or is it more of a long term issue?
David Neithercut
And those that we're exiting?
Drew Babin
Correct.
David Santee
Well this is David Santee. Denver is delivering over 12,000 units this year and I would tell you that we would expect a good portion of that to bleed into next year with a lot of concentration in the downtown area.
Then for 2016, as of today our forecast already gross down to 6,500 units but when you're talking about garden communities, there is no lot of barriers temporary in Denver and the 6,500 number could grow to 7,500 or 8,000 very easily. South Florida really is almost the same picture, 10,000 plus units being delivered again in 2015.
I think what is different in South Florida is that a lot of these new deliveries are pretty much all along I-95, if not all east of I-95 stretching from Miami all the way from West Palm Beach and then very similar to Denver, we dropped down to 5,500 for 2016 but again with the lower barriers to entry permitting what have you to scrape and build two storey, three storey garden walk up can be done very quickly in those markets.
Drew Babin
And secondly, you're just talking about kind of this is the broader cycle, I was wondering if you could highlight the key differences between now time period versus going back to 2005, 2006 and cap rates seem to be kind of in the same place or even lower than they were at that point in time, what are the key differences that you're seeing sort of on the supply side or relationship versus that cost things like that?
David Santee
That cost are about the same, there continues to be a great deal of equity, chasing deals, it might be less absolute leverage available but there is still a lot of them at that very attractive rates.
Operator
And we have another question from Aaron Hecht with JMP Securities.
Aaron Hecht
I was just wondering if you could outline your NOI exposure by market following these dispositions?
David Santee
NOI exposures [indiscernible] we're digging for that but hold on just a second.
Aaron Hecht
No Problem.
David Santee
And this is after all the expected dispositions.
David Neithercut
Completing the Starwood transaction and the 700 that will occur later in the year.
David Santee
So, we expect and I would say these are all kind of grounded numbers around New York to be around 20% of NOI, maybe a bit more, Washington DC to be in the 19%, San Francisco to be about 18%, LA about 15%, Boston give or take 11, Seattle about 8 and then the rest really San Diego and Orange County each 4% and that's just about it. Little bit less than Inland Empire that are likely be included the next time we report next year in our Los Angeles country that is around the far west and really are driven by West co -- by Orange County or LA more so than the Inland Empire.
Aaron Hecht
And then just, we all saw the article in the Wall Street Journal about the partial volumes increasing based on Web services and there are some quotes from you guys in that but just wondering what you're take is on how that's impacting expenses in NOI? Does this become a bigger issue now with the dispositions given the higher exposure to mid and high rise buildings?
David Santee
This is David Santee certainly, there is a much bigger burden on garden communities, because they don't have doormen, they don't have concierges what have you so, I mean we evolved in working my partner at hand and we've been at conversations with UPS and FedEx and what have you but we've had a very -- we build a proprietary package notification system probably four or five years ago. Is it a burden on some of the properties?
Yes. We have tried several pieces of technology which are only real partial answers to the problem, but I think over the next year or so we will be close to providing 100% solution in buildings where we don't have concierges or doormen but we do believe that if you live in a doormen building or concierges building that accepting packages is a basic expectation of our resident.
Aaron Hecht
And is there a solution in those other buildings electronic lockers is that what you're trying to?
David Santee
No, I think I don't want to think we've ruled the lockers out but there is a lot of nuances with the lockers. When someone orders four tyres they don't fit in one of those lockers.
And remember it's all these unique jockeying between the kinds of postal person FedEx and UPS guys or whoever may jockey for last position for so and hoping that the lockers are filled so that they can just dump the packages. So, it's a very interesting subject that, that we hope to solve over the course of the next year or so.
Operator
And we have a follow-up question from Nick Joseph with Citigroup.
Michael Bilerman
Yes, it's Michael Bilerman, just a quick follow-up. Obviously, as a seller you are most concerned with the buyer's ability to close and fund the transaction.
I'm just curious as I assume this is going to be a leveraged transaction. How much have you already been working with Starwood in terms of the debt financing and what can you tell us about that today?
David Neithercut
Yes, all I can tell you Michael is that we've done the appropriate diligence that we would need to do on a transaction with this magnitude with respect to equity sources and debt sources to give us great comfort that they will perform as expected which would be very similarly to the way they've performed over the last several weeks between the time we sort of agreed on doing this deal and today announced. So, they have done everything they've said they would do and we've done our diligence to get us comfortable, we're able to continue to do that and close on time as we expect.
Michael Bilerman
Is there any financing contingency at all in the transaction?
David Neithercut
No, sir.
Michael Bilerman
And then I noticed there was -- the deal was on a ten separate person and sale agreements and the closing is in seven different buckets. Can you just talk about what the rationale or is it are they slitting it up to multiple equity partners and their different leverage profiles and their different buckets, is it timing in terms of getting it that package, what drove that?
David Neithercut
Mostly it is because of some properties that we acquire, some consents and approvals, there are some rights of first offer that some county has, there's also our desire, the properties that Mark suggested, that that we would want to temporarily want to have ourselves gated and we’d get a little bit of extra time that need be. So, a little bit -- the lion’s share of this will happen in one fell suit and then there will just be and even in those multiple buckets could be at the same time but we just a way to sort of facilitate the overall transaction and allow for some of these other consents and approvals to be able to see.
Michael Bilerman
And is there any G&A savings at all even few million dollars that we should be thinking about as we are modelling through what the company is post the $6 billion of asset sale?
Mark Parrell
It’s Mark Parrell Michael. At this point what I would tell you is we run a pretty tight ship already and I think Dave Neithercut spoke to the scaling comment it was relatively easy for us to scale up to Archstone which does imply it’s really relatively difficult for us to just suddenly scale down.
So at this point wouldn’t have you project anything meaningful.
Operator
And at this time, we have no further questions in the queue.
David Neithercut
All right, thank you all again for your time today and look forward to seeing many of you in Las Vegas in just a few weeks. Have a great day.