Good day, and welcome to the Equity Residential 4Q 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.
Good morning,
and thanks for joining us to discuss Equity Residential's 4th Quarter and Full Year 2019 Results and Outlook for 2020. Our featured speakers today are Mark Parrell, our President and CEO Michael Manelis, our Chief Operating Officer and Bob Garcona, our Chief Financial Officer.
Please be advised that certain matters discussed during this conference call
may constitute forward looking statements within the meaning of the federal securities laws. These forward looking statements are subject to certain economic risks and uncertainties. Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Corral.
Thank you, Marty. Good morning, and thank you for joining us today. I'm going to start by giving a
quick overview of our business and investment activities, and
then I will turn the call over Michael Monellis, our Chief Operating Officer, for a discussion of our 2019 operating results and 2020 revenue guidance as well as giving you some detail on the exciting operational initiatives that we are pursuing. Then we'll pass the call over to Bob Garachana, our Chief Financial Officer, We'll give you color on 2020 expense and normalized funds from operations guidance and a bit about our balance sheet activities. 2019 was a very good year for Equity Residential. We saw continued strong demand to live in our well located urban and dense suburban properties in the 9 metros in which we do business. And our excellent customer service led to record levels of customer satisfaction and resident retention.
A big thank you to all my colleagues at Equity Residential for delighting our customers every day and for working together as one team. As we predicted, the Q4 of 2019 reverted to the normal lower seasonal demand that is common at the end of each year. Slightly weaker conditions than projected led us to slightly underperform on same store revenue versus our October guidance, but still perform at the top end of our expectations from the beginning of 2019. And we saw normalized funds from operations increase in 2019 by an impressive 7.4 percent, exceeding our expectations as we continue to produce strong, reliable growth. 2020 looks to us to be more of the same, a slow but consistently growing economy and continuing positive demographics leading to good demand and to steady revenue growth, albeit at a somewhat lower overall level than in 2019.
We expect the East Coast markets to continue to improve on a relative basis. And overall, we expect the average revenue performance difference between the East Coast and West Coast markets to be only about 25 basis points in 2020. Except for New York, we see supply Similar to or slightly higher in our markets in 2020 versus 2019, in New York, supply across the area in which we operate has been declining the last 2 years, and we expect it to fall by a further 40% in 2020. In fact, In Manhattan, where we have 70% of our New York Metro revenue, we see fewer than 1,000 market rate units being delivered in 2020. Also, as we've discussed on prior calls, we will be facing a headwind of 20 basis points or so from New Rent Control Regulations in California
and in New York.
On the innovation front, we're very excited about the benefits to revenue and expense as well as the customer satisfaction that can be gained from the continued rollout of the various initiatives that Michael will discuss. These benefits will be modest in 2020, but we believe will accelerate and compound over time. Switching to investments, we had a busy 2019. As we have stated previously, increased demand for apartment assets has led to cap rate compression between newer and older properties. This led us in turn to accelerate the sale of some of our older lower return properties and to reinvest that capital in newer properties that we think will provide considerably better long term returns.
We were particularly successful at doing this in 2019. We have reallocated $1,100,000,000 of capital from assets that were on average 35 years old to assets that were on average 2 years old and incurred no cap rate dilution in doing so. We think owning these newer, higher growth assets will benefit our NFFO growth. And because we expect much lower capital spending at these newer assets, the level of our capitalized expenditures, which is already much lower as a The 4th quarter was a microcosm of this as we sold 2 older suburban Washington, D. C.
Assets that averaged 41 years old for total proceeds of $374,000,000 at a 4.8 percent cap rate and acquired $370,000,000 of newer assets, 1 in Central Seattle, 1 in Suburban Seattle and 1 in Suburban Washington, D. C. That were on average 1 year old at a 4.8% cap Great. We also acquired more than we sold in 2019
and have guided for the
same outcome in 2020. While cap rates and IRRs are certainly lower than historical averages, so is our cost of capital. The spread between the unlevered IRR we achieve our new deals we see for sale versus our weighted average cost of capital is relatively high. We intend to finance increase in our assets with a combination of new debt and net cash flow. Our strong balance sheet gives us ample capacity to do so, and as always, we'll be prudent in managing our balance sheet.
Switching the new development, the equity capital availability story since early 2019 has somewhat improved for large established developers, while smaller local and regional developers continue to work hard to put their equity capital stacks together. We have been pursuing a few of these opportunities with smaller developers as joint ventures and believe that investing our capital in shovel ready deals with sound deal structures that provides some protection to our capital is a good way to source new properties while managing the risk inherent in development. You should expect us to announce new joint venture development activity in 2020 as well as new wholly owned development deals, including some lucrative density plays, where we are taking down a low density portion of an existing property and replacing it with higher density housing. We expect 2020 development starts of $500,000,000 $650,000,000 depending on construction timing and Development Spending in 2020 of about $300,000,000 We continue to believe that development makes sense in selective locations in our markets where acquiring new properties is difficult and where existing properties trade materially over replacement costs. We have no imperative to Certain amount of development per year, and we will always compare development opportunities to the market to acquire existing assets and look for the best risk adjusted return opportunity for our capital.
We will also seek to keep
the amount of capital we expect to spend on development in any one year Roughly Equal TO Our Annual Net Cash Flow and Expected New Debt Capacity. Finally, let me finish by talking about our dividend. We believe one good way to use our growing cash flow to reward our shareholders. In 2020, we plan to increase our common share dividend by 6.2%. Now I hand the call over to Michael Manaus.
Thanks, Mark. So today, I'm going to provide a quick recap of 2019 performance, Rating Initiative. Let me start by acknowledging the dedication and hard work of our employees in 2019. For the full year, we reported 3.2% Same Store Revenue Growth. Highlights for the year include 96.4 percent occupancy, which was 20 basis points higher than 2018.
Every market except for San Francisco was able to grow occupancy on a year over year basis. Strong achieved renewal rate increases of 4.9 for the year, which was the same as 2018. Turnover declined by nearly 200 basis points to 49.5 percent for the year, which is the lowest full year reported turnover in the history of our company. Strong absorption of elevated supply in many of our markets delivered slightly more pricing power than we originally expected at the beginning of 2019 and resulted in 0.3% new lease change for the year, which was a 50 basis point improvement from 2018. And finally, in addition to the areas just mentioned, the company continued its trend of record breaking customer satisfaction and online reputation scores.
This strong positive feedback from our customer and the progress being made on innovation we shared in the release demonstrates that we have some of the best employees in the industry Q4 of 2019 reflected a return to seasonal softness, which in some markets was greater than expected, And this was very different than the upward acceleration felt in the Q4 of 2018. The good news is that the portfolio demonstrated resilience, and we are starting 2020 well positioned to achieve our revenue expectation. Moving into 2020, our same store revenue growth guidance range is between 2.3% and 3.3%. At the midpoint of 2.8%, we are 40 basis points lower than our 2019 actual results. This guidance assumes a similar occupancy of 96.4 percent, an improvement in new lease change of 30 basis points to a positive 0.6% for the year and anticipated renewal rates achieved at 4.7%, which is 20 basis points less than 2019.
Recall that these renewal rates will be impacted by recent rent regulations that we have discussed on prior calls. In 2020 supply will be down considerably in New York, up in Boston and LA and mostly comparable in our other markets year over year. We expect consistent demand that should aid in the absorption of this new supply. By market, New York, D. C.
And Seattle are expected to deliver better revenue growth this year, while Boston, San Francisco and Southern California markets will be worse. Let me take a minute to reconcile the 40 basis point decline at the midpoint in the expected same store revenue growth for 2020. As stated on our last call, rent control in both the California and New York markets is expected to negatively impact our overall same store revenue result by approximately 20 basis points this year. The remaining 20 basis points comes mostly from the incremental impact from competitive supply in our market and a view that it will be difficult in 2020 to replicate the occupancy gains we had in 2019, given the current high occupancy of the portfolio. Attaining the upper end of our guidance range of 3.3% will be mostly dependent on rate, meaning that in order to achieve this outcome, we will need to have strong pricing power on new leases early in the year and through the lease increase.
The bottom end of our revenue guidance range of 2.3% would likely result from declines in occupancy due to softening in overall demand. Sitting here today, the portfolio is 96.3 percent occupied, the same as what it was at this time last year. Achieve renewal increases for January February are expected to be around 4.2%. So now let's move on to the individual markets beginning with Boston. Boston continues to be a power center of the knowledge economy.
Overall demand drivers are strong and the long term outlook for this market remains positive. Our 2019 results of 4.0 percent revenue growth includes gains in occupancy of 30 basis points and strong growth from other income, mainly parking, that will be difficult to repeat this year. Boston is expected to deliver more units as we are tracking close to 6,000 new units in 2020 compared to 1700 in 2019. These new units will be concentrated in the CBD and Seaport and are likely to have more of a direct impact on our portfolio performance. Our expectations for the market is about 3% revenue growth and assumes occupancy remains flat at 96.2%.
We anticipate less growth from renewals and new leases given the increased levels of competitive new supply, and we expect the first half performance to be stronger than the second half, given the strong embedded growth that we have entering the year. New York had a busy year end with plenty of press surrounding growing tech expansion in the market and significant office leasing. This activity is fueling continued diversification of the local economy, which we view as a long term positive. As 2019 progressed, Operating fundamentals continued to improve in this market. We finished the 4th quarter with seasonal softness that resulted in a concessionary environment that was greater than we expected.
However, during the month of January, operating fundamentals have improved each consecutive week, reducing concession use and improving occupancy. For 2020, we are forecasting better revenue growth, which should be a little north of 2.5%. Our guidance assumes slight improvements in occupancy and renewal rates achieved, but the majority of growth is expected to come from gains in new leases As pricing power returns to the market, given the almost complete lack of new supply that Mark mentioned earlier. Overall demand for our product remains strong with foot traffic or tours in January being up year over year. The portfolio is 96.7 percent occupied today and we are well positioned to see improving market condition.
Washington, D. C. Continued to demonstrate strength in operating performance despite the 12,000 plus deliveries that we have become accustomed to in this market. Last year at this time, we were discussing the longest government shutdown on record. But today, both Congress and the President have signed a spending bill, which includes over $50,000,000,000 of new spending.
This budget clarity and increased spending is expected to positively impact the region and continue to aid the absorption of 12,000 plus additional units expected in 2020. Northern Virginia continues Economic Driver for the region, having captured 7 out of every 10 jobs created in the last 12 months in the area. Our portfolio results in DC validate this as same store revenue growth in the district, which was near 1%, While the Northern Virginia submarkets with approximately 50% of our revenue averaged above 3% growth in the year. Overall, the market delivered 2.3 percent revenue growth in 2019. Our forecast for 2020 is a little better than 2.5% revenue growth with improved results mostly driven by stronger embedded growth starting the year as operating assumptions for occupancy, New lease change and Achieve renewal increases are expected to be relatively flat year over year.
Moving over to the West Coast, Seattle finished 2019 strong with 3.4% full year revenue growth driven by 70 basis point gain in occupancy and consistent improvement in pricing power and revenue results throughout the year. We did experience concentrated supply pressure on the east side that we expect to continue into the first half of this year. Supply in the CBD, which was not particularly impactful in 2019, will return in 2020 during the back half of the year. This provides an opportunity to establish rate growth early in the year and through the peak leasing season. It's also possible that some of these units get pushed into 2021.
If this were to happen, it could strengthen our anticipated results this year. Overall, we expect 2020 to deliver better revenue growth of around 4% with similar occupancy, slight improvements to achieve renewal rates and the majority of growth coming from gains in new leases as we capitalize on the current and near term pricing power in the portfolio. San Francisco delivered 3.7% revenue growth in 2019, which was driven by gains made earlier in the year, offset by declining occupancy in the second half of the year that resulted in a full year occupancy of 95.9%. As we discussed on the last call, we saw deceleration in this market as the year progressed and that trend continued through the Q4. The East Bay was approximately 40% of our 2019 new supply and approximately 20% of our San Francisco revenue with our lowest performing submarket in both the quarter and full year with revenue growth below 2%.
All of our other submarkets produced growth above 3% for both the quarter and full year. New supply in 2020 will be relatively flat year over year with the concentration of competitive supply impacting the Downtown San Francisco SoMa and South Bay Sun markets the most. Overall, we expect 2020 to have lower revenue growth of around 3% as we continue to work through the impact of supply and the impact of new rent regulation. Our guidance begins with around 50 basis points of lower embedded growth than last year, occupancy at 96.4%, which is a 50 basis point improvement over 2019, similar new lease change and a decline in the achieved renewal increase. As we sit here today, leasing velocity in San Francisco is good.
Rates are growing, book traffic is up and occupancy has recovered to 96.4 segment, which is the same place we were at last year at this time. This market has the critical mass of tech talent. And while we expect some softness in supply is concentrated around us, the long term drivers for this market remain very strong. Los Angeles finished the year with 3.7 percent revenue growth, which was driven by strong performance in the first half of the year. As noted on our prior call, deceleration occurred in the second half of the year as deliveries came online and put pricing pressure on a number of our core submarkets.
For 2020, we expect Los Angeles to be our most challenged market as we continue to deal with the elevated new supply, implementations of new rent regulation and restrictions on short term lease pricing put in place as a result of the wildfires. We expect to deliver lower same store revenue growth in 2020 of around 2.5% with slightly lower occupancy, modest gains and new lease change that are back half loaded and a decline in achieved renewal rate growth. As we sit here Today, we are 96.2 percent occupied in LA. And while our foot traffic is on par with last year, we feel pricing pressure. One of the bright spots continues to be West LA, which is home to the changing dynamics of Los Angeles as Silicon Beach flourishes and online media content takes hold in the entertainment sector, leading to good absorption of the new product in this submarket.
Our other Southern California markets, both Orange County and San Diego, are expected to deliver strong but lower same store revenue growth in 2020, Averaging around 3%, with similar occupancy, slight gains and new lease change that are back half loaded given the anticipated pricing pressure early in the year and a decline in overall renewal rate growth based on the impact of new rent regulation. In both Irvine and Downtown San Diego, we expect to feel the impact from new supply delivered in areas that will be very competitive to our community. With both markets sitting at 97% occupancy, we are well positioned heading into a competitive environment.
Moving on to operating initiatives.
As you know, we have long been focused on running a best in class operating platform, which included development of some of the original pricing, renewal and online leasing tool widely used in the business today. As our industry undergoes another phase of significant change, We continue to identify opportunities to utilize new technology that will shape how we interact with our customers and manage our day to day operations going forward. Our focus is to harvest technology that best serves our customers, provides enhanced career opportunities for our employees and creates efficiencies in our platform. We are currently in the process of executing a number of initiatives that fall into 3 primary areas: Smart Home Technology, Sales Focused Improvement and Service Enhancement. And while there are many opportunities in the industry to roll out new systems, we are taking the methodical approach to implement only The tools and processes that we believe will create the best long term benefit and value in our portfolio.
So let's review some of the initiatives in these three areas. So first, smart home technology. We have already installed over 2,100 units and thus far have had success in generating a rent premium of $30 per month on these units. During 2020, we plan to install smart home technology and an additional 10,000 apartment units at an average cost of approximately $1,000 per unit. We are focusing on properties where we think this technology will yield the greatest immediate result.
This technology includes smart lock, a thermostat, a light switch, Water Leak Sensors and a Hub that Connects It All. Moving to sales, our focus continues to be on improving the customer experience by leveraging technology, automation and centralization to meet their ever changing needs. We currently have deployed Ella, our AI enabled sales tool over 200 community and we will be fully deployed by the end of March. We have over 60 communities offering self guided tours and have been receiving very positive feedback from both our customers and our employees on this new process. During 2020, we will continue to roll out the self guided tour option for the majority of our communities and we will be Finally, on the service side of the business, we are now fully deployed on our new mobile service platform, which means our service teams now use a mobile app to manage all of their work in real time.
This allows us to use shared resources across assets and improve service personnel utilization by having specialists become focused on being subject matter expert. This will deliver operating expense savings less on overtime and contractor use as well as improve the customer experience through real time notification and resolution of maintenance requests. Overall, the impact of these initiatives are expected to deliver approximately $15,000,000 in annual NOI contribution once fully deployed. It will take into 2021 to fully realize that contribution, but we have included approximately $5,000,000 of net NOI benefit in our 2020 guidance. We believe these early stage initiatives will provide a foundation upon which to continue to build our platform.
Thank you. I will now turn the call over to Bob Carachana, our Chief Financial Officer.
Thanks, Michael. This morning, I'll discuss our 2020 guidance assumptions for same store expenses and normalized FFO, along with a couple of brief remarks on our balance sheet and capital market Equity. First, a couple of quick highlights on 2019. Our same store revenue grew 3.2%, expenses grew 3.7 percent and NOI grew 3%, which is mostly in line with our expectations from the Q3 call. For normalized FFO, we delivered $0.91 per share in the quarter, which is $0.03 higher than the midpoint of our expectation.
This outperformance was primarily driven by higher than anticipated NOI from higher than expected acquisition activity during the quarter, lower than anticipated overhead stemming from lower than expected employee benefit costs that also impacted same store payroll expenses described on Page 16 of the release and Better Than Forecasted Interest Expense. Michael provided color on 2019 same store revenues, so let me briefly touch on 2019 same store expenses. Full year same store expenses grew 3.7% in 2019 compared to our forecast of 3.8%. Notably, real estate taxes ended the year higher than anticipated at 4.3% as we had fewer successful appeals conclude during the Q4 and we had expected. This was offset by lower anticipated payroll expense, which grew only 80 basis points for the full year.
This outperformance was due to the significant improvements in employee benefit costs like the ones impacting overhead that I just discussed. Now moving to 2020 guidance.
For the
full year 2020, we expect same store expense growth between 3% 4%. This forecast incorporates anticipated 2020 savings from the initiatives that Michael outlined earlier. Let me walk you through the major categories and drivers of our forecasted growth. At a little over 40% of overall same store expenses, property taxes drive a significant portion of expense growth. We currently anticipate growth between 3.75 4.75 percent driven by the continued burn off of the 421a tax abatements in some of our New York properties, A slight decline is forecasted year over year appeals activity and a relatively healthy increase anticipated in Seattle.
For the full year 2019, same store property taxes declined in Seattle as the state legislature took on more of the educational funding burden from local municipal housing. We've not incorporated this recurring in 2020 for our guidance. In on-site payroll, our next largest category, we anticipate Growth Between 2.25 Percent 3.25 percent for 2020. This expense really consists of 2 key drivers, Direct salary, bonus and commissions for our on-site staff and employee benefit costs like medical insurance. We expect to see a benefit in this first driver from the operating efficiencies that Michael and his team are working on.
This will mute total payroll growth for the year. As a result, nearly all of the 2.75 percent expected growth in payroll is coming from anticipated increases in medical insurance and other employee benefits. Finally, our last two major categories, utilities and repairs and maintenance. Each of these line items individually contributes about 13% to total expense. Each is also expected to grow between 2.5% and 3.5% in 2020.
Drivers of utility growth are expected to remain the same in 2020 as they were in 2019. While we continue to benefit From relatively low commodity prices and efficient usage given our sustainability investments, we see price pressure in the service related categories like trash and sewer, particularly on
the West Coast, which we expect to continue.
On repairs and maintenance, we expect to see another relatively modest growth year. This line item has seen significant pressure from increases in minimum wages across nearly all the states we operate in, driving up costs for contract labor. However, improvements in the utilization of our workforce stemming from service mobility and other initiatives Michael discussed are offsetting this growth. Our guidance range for normalized FFO in 2020 is $3.69 per share to $3.69 per share. Major drivers for this change between our 2019 normalized FFO of $3.49 per share and the midpoint of $3.64 from our 2020 guidance include an $0.11 contribution from same store NOI and our same store properties based on the revenue and expense assumptions that Michael and I just outlined.
A $0.01 year over year contribution from lease up NOI with our lease up properties generating $10,000,000 in NOI for 2020 A $0.07 contribution from lower anticipated interest expense predominantly driven by the favorable refinancing activity we undertook in 2019 that I'll discuss in a moment, Offset by $0.01 per share related to higher anticipated overhead, which we define as G and A and property management expense. And finally, an additional $0.03 offset related to other items net, which mostly consists of other individually immaterial items like interest and other income. A final note on the balance sheet. Our financial position remains the strongest in the company's history and one of the strongest in the REIT industry. 2019 was a busy year on the balance sheet front, having issued nearly $1,500,000,000 in debt, including the lowest yielding 10 year bond in REIT's history.
Upsized and extended our revolving credit facility with incredible support from our banking partners and with market leading terms. And finally increased the size of our commercial paper program to $1,000,000,000 We also paid off approximately $1,800,000,000 in debt during the year, including the early redemption of the 2020 maturity described in last night's release. These favorable financing activities are the drivers in year over year interest Savings I discussed earlier. For 2020, we anticipate issuing between $600,000,000 $1,000,000,000 in debt capital, Firming out debt that is currently on our commercial paper program or revolving line of credit. These outstandings are mostly the result of our net investment activity in 2019 and our early retirement of 2020 maturity.
We have very manageable development spend and we would anticipate being funded from free cash flow. With that, I'll turn it back to the operator for the Q and A.
Thank Please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Jeff Spector with Bank of America.
Good morning. Congratulations on a great 2019. Just one or two questions on 2020 comments.
Can you talk about the latest
concession environment, I guess, in markets like San Francisco or other markets where you described There's some heavier supply in the first half of the year because I'm trying to connect I heard a comment that the first half Should be better than the second half, but I didn't know if that was just in general. But it seems like at the same time, there were some comments that Supply is currently pressuring, but there's some heavy supply pressure in select markets within the first half.
Yes, sure. Jeff, good morning. This is Michael.
So I guess first I'll just say at the top of the house, so concessions for us in our portfolio. We tend to be more of a net effective shop. So even though I described the concessionary environment and it did cause us to use a little bit more concessions than we expected. On the quarter, we were talking about $500,000 $600,000 in total concession use across the portfolio with a large majority of that kind of still centered in the New York market. So I think when we think about markets like San Francisco or anywhere that we have this concentration of new supply.
We expect to see concessions in the new supply, typically offering between anywhere between 4 6 weeks, And we monitor those concessions that they're offering in the marketplace as an indicator of their own velocity. So when we see concessions and new supply In San Francisco start picking up to 8 weeks or they start going longer, that's an indication that overall their velocity is kind of feeling some pressure. And that's what we're kind of responding to in the Q4. As I think about the first half of the year, what we've seen is a lot of the concession that we saw in pockets of New York and some pockets of San Francisco on the East Bay start to abate, meaning it's still present at those lease up properties, but the stabilized assets around them are starting to use less and less concessions. And I've seen this now for the last 4 weeks.
We've been monitoring this as we progress through 2020. So I think what you're going to see As demand continues to grow throughout the year like it normally does in a seasonal year, you should expect to see less and less concessions. And our portfolio for the full year, we would expect concession use to be very comparable to 2019. And I think just given what we just saw in 4th quarter, Probably will be more front half loaded than back half loaded.
Okay, great. That's helpful. It sounds like some positive news on the concessions, At least so far this year. Can we talk you talked about strength in foot traffic, demand remains strong. Can you Talk a little bit more about move outs and anything new move outs to home buying?
Sure. So I guess I would say with turnover being down almost 200 basis points for the year, the absolute number of move outs is less on a year over year basis. But when we start to look at those that did move out and the reasons they cite for move out, we really saw no change across our across any of the reasons. Homebuying run roughly about 12.5% of the reasons cited for those people that are moving out to buy homes, And we saw no change across any of the markets that we're operating in.
Okay, great. Thanks. Because we noticed that some of the homebuilders have cited success with entry level homes and just confirm if you're seeing any change, it sounds like not. Great. Thanks for your comments today.
Thank you.
Our next question comes from Nick Joseph with Citigroup.
Thanks. How does the $5,000,000 benefit same store NOI in 2020 from the operating initiatives breakdown between the revenue benefit and the expense savings. And then what's the impact on both same store growth rates this year?
So I guess I would tell you, it's about probably a fifty-fifty split when you look at the $5,000,000 between revenue and expense. And on the revenue side, it's probably going to equate to roughly 10 basis points of improvement across the various markets that we're doing those operating initiatives in.
Thanks. And Mark, you talked about the cap rate compression between older and younger assets. What percentage of your Portfolio or GAV would you consider older and that you could ultimately trade for newer assets if the opportunity exists? Yes. Hey, Nick.
Thanks for that question. We don't have any more in the portfolio a lot of must sell, if any, must sell assets. And some of the older assets are some of our best assets in places like New York and Boston. So it isn't always age, but I did use that in my remarks as a indicator of quality to some extent. I don't think there's a grand reservoir we have of capital.
There are a few assets in every market when you have a $40,000,000,000 portfolio that have become less competitive and we'll look to sell those especially when cap rates are this close between value add and brand new product, we'll look to trade out to the new product. So I don't have an exact percentage, but it's a low single digit sort of number. And then it's for us, it's just opportunistic. When we see cap rates like this so close together, we're going to take advantage. Thanks, Jeff.
Thank you.
Thank you.
Our next question comes from Nick Yulico with Scotiabank.
Thanks. So just going back to the guidance, I appreciate all the building blocks you gave on to explain why there's a modest slowdown in Revenue Growth. I think you said you're assuming better new lease pricing and stable occupancy. So to me that seems like A kind of bullish indicator for the business that would suggest you guys could even push pricing even more. So I guess what I'm wondering is, are you just being and how you're forecasting your pricing this year or is there something else that's creating this dynamic That's not allowing you to push pricing even more.
Well, I guess this is Michael. So I guess I would just start by saying, I think the 30 basis point expectation and growth and the lease change is demonstrating that we experiencing or we expect to experience growth. It's really just cutting off of the deceleration in the back half of twenty nineteen and the fact that now we're expecting kind of to recover and looking at where The supply is on us. We think some of that recovery is going to be more back half loaded. So I think when
you think about our guidance, you got to
look at the full range that we have out there and understand that. Sure, in markets like New York, if we continue to see pricing power return to us quickly And in front of the leasing season, we'll outperform that expectation. But I don't think it's prudent for us to sit here and think about all of the markets with all of the supply that we have coming out of to think that we're going to outperform those expectations early in the year.
Okay. So I guess just following up on that. I mean, if I look at the track record of the company in the last 3 years, you gave initial guidance on same store revenue that you ended up hitting pretty much close to the top end for 3 years in a row. And so I guess I'm wondering is What dynamic is different this year as we think about the starting point versus prior years? I think last year you got you and a lot of the industry had an occupancy benefit.
This year, it sounds like it's more of a better pricing dynamic. And I guess I'm just wondering what's is one more difficult than the other to achieve? Well, Nick, it's Mark. Each year, it's kind of a different year and stands alone. I mean, our process this year in 2020 wasn't very different than 2019 or 2018.
We Ask the field for specific feedback on what they see. Maybe there's a lease up right next door or they have renovations in the property and get a little boost there. We also look at the top and think about macroeconomic conditions. As Michael said, this year, again, we feel well positioned going into the year. We worry about the supply, particularly in some of our bigger markets.
We did see some weakness, as we've said, in New York late in 2019. So that positions us where we ended up going out with guidance. Could we do better? We certainly hope so. But looking at it, we try Balance things out and don't assume that everything will go perfectly well.
All right. Thanks, Mark.
Thanks Nick.
Our next question comes from John Pawlowski with Green Street Advisors.
Thank you. Maybe just a
quick follow-up to the first question. Michael, did I hear it right that concessions in the Bay Area on lease outs Pushed to 8 weeks free in the 4th quarter. I'm curious if they've gotten any better or worse in January.
Yes. So I mean, I think they've stayed pretty consistent and stable. When I
say weeks, that's on longer term leases. So we saw them kind of move around with the 4 to 6 on just conventional terms and then they started offering some longer terms and kind of we're just monitoring that. I mean primarily now you got Oakland Where you got more assets coming online. So it's a great kind of pocket of assets for us to watch the concessionary environment. And it's been fairly stable.
They have not been volatile in what they've been doing, but they clearly started going along and offering a little bit higher concession rates for those longer term leases and that's what we've been watching.
Okay. And then turning to New York, curious from your lens How the kind of organic operating backdrop is going to be different these next few years after the rent control package was implemented and the rent control laws changed and curious if you're seeing anything right now in terms of market turnover, Your game plan on marketing expenses, kind of vacancy and any early indicators that could play out in the next 2 or 3 years in New York that you're seeing happen today.
Hey, John, before I let Michael launch into giving you that detail, which is very important, I think the overall comment about New York and what we've all read about Just increased demand that's coming. All of these tech relocations into New York, particularly the West side of New York, where we have a lot of assets, Very encouraging to us. Now when they announce something, it doesn't happen right that moment that they hire, but we see that. And in fact, Our research is indicating, research we've seen has indicated, there's actually more tech jobs in the New York Metro area than there is in the Bay Area now. So we're Excited to be involved in that.
And again, you're right, we have to adjust to these rules. But the overall demand drivers in New York the next few
years are really good to us. Yes. And I'd say right now, we have not noticed any material change in this looking at the rent state properties versus kind of the market rate units or Market Weight Building. So we're not seeing any differentiation on turnover. We're not seeing kind of, from an operation standpoint, anything yet that has manifested itself where we're going to be running those buildings differently.
Yes. And I was suggesting, John, I think on prior calls and our meetings that We thought turnover might start to decline in New York because with lower renewal increases, there'd be more reason for people to stay. Obviously, we only have a couple of quarter sample size. We really haven't seen that yet. We're looking more carefully at our capital spending in New York, but we have a high end clientele.
So Continue to maintain those assets as well. So I don't have anything to add there in terms of again, it seems to us intuitive that turnover should get even lower and The term of our residents should get even longer, but
we haven't quite seen that yet. Okay. Thank you.
Our next question comes from Steve Sakwa with Evercore ISI.
Thanks. I guess two questions. When you sort of think about New York, how does sort of the Jersey kind of Gold Coast play into sort of your outlook in terms of the rent growth that you got in that part of the region versus maybe the city.
Yes. So I
mean for 2019, it was pretty comparable, right? When you just think about the various submarkets between Manhattan, Brooklyn as well as the Hudson Waterfront. And I think going forward, We would expect kind of hopefully start to see pricing power return to Manhattan and see some market rate growth that could accelerate that beyond what we're going to see kind of from the Hudson Waterfront. But right now, they're pretty packed, like really close together from a results standpoint and our expectations. But I think you will see Manhattan start to differentiate itself over time.
Okay. And then I guess second question, maybe Mark, as you think about new development, it looked like you were able to buy some relatively new It's in, call it, the high 4s. And you're thinking about some new development starts. Where are those yields on the new starts? And how is that spread contracted and how narrow would it need to be for you sort of not to pursue new developments?
Yes, that's a great question. So we are just constantly, Steve, comparing because we are not committed to being either a developer or an acquirer. We can do either or both.
I mean, we constantly compare
the 2 to see if it's sort of on a risk adjusted basis, you'd rather just buy the asset, even if it's a slight premium or replacement Oskogrew's Fair Amount of Risk in Development. As we look at our development pipe now, you heard me say we're going to refill it. Some of those are special events, like we own the land already, And we have an apartment building on it. We're doing a density play. And so those sorts of things, especially because on a GAAP basis, you have very low basis in the land.
When you bought it many years ago, those returns look great. And even when you market to market, they look really good. So I'd tell you, in some cases, for us, we're building all the way down the yields in the Middle Fours. There's a tower we're thinking of building on the West Coast that's more in that range.
And
our thought process is it's just terrific product. We like the per unit cost. We like the location and because we're not a merchant builder where we have to hit the cycle perfect and if we don't hit it when we get the CFO in a year or 2, we can get pushed out of the deal. I mean, we can kind of build for the long run. So I think I'd tell you, I don't worry about spreads altogether.
I worry about just getting the right location, do we have exposure in that submarket. Can I buy in that submarket? Those sorts of things. And then do I like the per pound kind of cost? And how are we funding it?
Well, maybe to be a little more specific on the I think you said you were going to start a couple of $100,000,000 in 2020?
Sure. So we've got about 500 or 600, maybe 650 will start, Steve. And so I would say when you talk about the JV deals that we've spoken about. Those deals tend to have yields around 5% on current rents, so current construction costs and current rents. The tower I'm talking about is, call it, a 4.6 percent yield on current.
And again, we're still in the underwriting process, so that may change a little bit. But we feel again that we like the location and we like how that feels. And then you've got a few of these other density plays that we're doing that I would say, when you mark the land to market, feel like 5% plays or so on current rents. So that gives you a general feel.
Okay, great. Thanks.
Thank you.
Our next question comes from Richard Hill with Morgan Stanley.
Hey guys, thanks for taking my call. Quick question.
Look, it resonates with me about maybe occupancy being stable. And so I think that new and renewal leases and the disclosure that you gave on leasing pricing statistics are increasingly important in 2020. So I'm wondering if you can maybe give us a little bit of color. Do you as revenue growth maybe decelerates a little bit compared to last Do you think that's equally from new and renewal leases? Are you seeing more strength in newer and renewal leases or vice versa?
Well, I guess I
would say we gave the top level guidance that would suggest that renewals are going to grow 20 basis points lower, which is down to 4.7% versus the 4.9%, and we're improving new lease change in the overall gain. So It's our expectation that you're going to continue to see this kind of convergence between new lease rate and renewal. So our expectation is We should start to demonstrate better new lease rate growth and kind of take the impact on the renewals, mostly from the rent regulation.
Got it. Understood. That's helpful. And look, 4Q 2019 seemed weak relative To the other quarters, you obviously noted that that was a return to seasonality. We had also heard some color that that was a broad trend.
Do you expect 4Qs going forward to be equally as weak or I guess what really drove That weakness compared to the strength that
you saw in 2018. Yes. I guess, I don't know if I would say that it's weak. I look back almost like at 2017. We've gone back over multiple years to understand just rent seasonality, demand seasonality.
And really what we 2019, is it kind of just return back to the norm and 2018 was the anomaly where you just had that strengthening of demand in that kind of later part of the year that allowed you to accelerate what otherwise you wouldn't expect to. So I think embedded in our normal guidance process right now for 'nineteen Normal seasonal declines in the Q4 of or for 'twenty, normal seasonal declines for that quarter.
Got it. Okay. That's helpful guys. That's it for me.
Our next question comes from Hardik Jole with Zelman and Associates.
Hey guys, thanks for taking my question today. Bob, if you could talk about a little bit the expense guidance and how those ranges work and maybe talk about the big components like real estate taxes And what you guys are underwriting in your guidance for that?
Yes. So I mentioned in my prepared remarks, there's really 4 large categories and real estate taxes is By far, the largest. So that's at 40%. At the moment, we're expecting 3.75% growth to 4 point 3.25% growth, so very similar year at the midpoint relative to 2019. The drivers of that continue to be a lot of the same conversation.
So that's the 421a tax abatement growth that we're experiencing in New York. But also what's unique in 2020 relative 2019. And you've heard other companies talk about this in 2019 is that we saw a good meaningful benefit in Seattle, where in Seattle, Real Estate Tax Growth is Actually Negative in 2019, and we're not expecting that or forecasting that to be the case in 2020. On payroll, it's which is the next largest category, it's 2.25% to 3.25%. I talked in the prepared remarks about some of the drivers there.
It really is mostly the medical benefit piece. The initiatives that Michael is putting in place is really helping us curtail some of that salary growth that we would otherwise have expected. And then finally, on the 3rd piece, which is really or the 3rd and 4th piece, Utilities and Repairs and Maintenance. We're expecting normal growth, 2.5% to 3.5%.
Got it.
And just one quick follow-up, if you could share kind of the blended rent growth you're getting in
So I don't have that. I have for the renewals that we're kind of expecting to be around 4.2%. I'll tell you, from a new lease change standpoint, we kind of wait until a quarter end just to really look at that. But just based on where rents are moving each and every week In our asking rents, I could tell that we're seeing improvement in those stats as well.
Well, I guess, so How about January over January the new lease rate? Because I know you mentioned every week was improving. So I'm just trying to get
a sense for how much the improvement is.
Sure. Just from a base rent or an amenitized rent standpoint, our rents today are up 2.5% over the exact same time, Next thing week last year. And they've been improving each and every week. That's true. Yes.
Thank you. That's really helpful.
Our next question comes from Haendel St. Juste with Mizuho.
Hey, good morning. So I guess the call wouldn't be completed for any questions on the regulatory environment. So I guess I could help on that
My question specifically is on SB 50,
the California law that would allow for denser apartment buildup around public transportation areas in the state. I guess, I'm curious, first of all, do you expect that to be ratified on January 31? And if so, how might that impact your view or plans for California development? Hey, Haendel, it's Mark. Thanks for continuing the tradition.
We appreciate that. A comment on SB 50, I think you I did pretty accurately. We're not sure if it's prospects. We certainly are big supporters of it, both the company and the industry. I think having additional density near transit hubs and having that state mandated is a good idea.
I know the sponsor that measures made some changes to try and get Support. And having talked just recently to our experts on this, I can tell you we hope it passes. We aren't sure it will get through the statehouse, and we're Sort of waiting to see what will happen in the next few days, as you said. But certainly, we think it's a good idea. We don't think it will add to the road traffic much by putting it near transit hubs.
And If you want to make an impact and you want to have 3,000,000 or 3,500,000 more housing units in New York, as a lot of policymakers have said in that state, you need to start somewhere and starting with putting More dense senior transit hubs is a good idea.
Appreciate that. Thank you.
Thank you.
One more. I appreciate the comments earlier on Your portfolio recycling plan, selling older, buying younger. But curious perhaps where you're looking to add and I know it might be a
bit up there in
the selling year, but Just curious about the opportunity set in front of you and how much of the volume that you're contemplating an issue that could come from new markets. You talked about perhaps Austin A quarter or so ago. And then maybe some comments on how the underwriting in some of those newer non coastal markets would compare from an initial cap rate and IR perspective versus your coastal market. Thanks. All right.
A lot of questions funneled up into there. But So our average age of our asset is about 18 years old. So the portfolio is relatively young. And then again, there is some skew in some of our markets like Boston, New York, where we own some great But they're older properties. So, I would, like I said to the prior question, say there's always a handful of assets that probably Should be sold and we do have a handful of those and especially when you get the offer to do that in a non diluted basis, you should do that and we hit the gas on that and We hope to do more of the same based on what we heard coming out of National Multi Housing Conference last week.
There seems to be a lot of demand. Some of the deals we're talking about are deals where the buyer may revalue add thought process, so we'll push that. In terms of just moving capital around a little, which I'll take as the middle part of your question, We've talked in prior calls about adding a little bit less exposure in Washington, D. C, maybe shifting some of that capital to Denver. That's really a reaction to what has been consistent high levels of supply in Washington, D.
C. That said, we'll go to buyer and developer in that market and have announced Both in 2019 and expect to do the same next year. We'll keep freshening up the portfolio there, but it is an area where we think the supply is pretty continuous. We'd like to own more in Boston and Seattle. We've said that on the call and maybe you'll see us laying our load a little in California to fund those.
In terms of new markets, we do like Austin. There has to be an entry point that makes sense. Obviously, when you do an investment pro form a, you start with your price at the beginning and The price at the beginning for Austin is quite dear. There are assets that are we understand to be trading inside the floor cap rate on current rents. That's pretty tight for us to buy into a new market.
So there's a lot of markets, several markets that we're monitoring. And I guess I'd say in terms of how the underwriting will differ, well, There's probably, if you're being really honest, some additional property management costs in running an asset away from your main platform, and we often take that into account. And then the rest of it's market specific. How do you feel about cap rates? How do you feel about values?
How do you feel about growth rates? We had an advantage with Denver because we knew it so well from being in the market for most of our existence. But these other markets, Austin included, we are in as well and have a recollection of how that market cycles. So I'll pause there. I don't know if I addressed what you wanted to address.
No, it's very helpful.
But I guess ultimately, I'm curious what type of IRR Spread. Would you be willing to accept understanding that some of those markets might have, in the case of Austin, a lower initial yield, but perhaps operating efficiencies, maybe even better growth Given some of the overall in migration, job growth, etcetera, so just curious how you would think about the acceptable IRR spread perhaps versus The Coast. Yes. Great question. So in our investor materials, this key map we've had for a long time, which tends to be on Page 16 of our materials for some reason every year.
It has all the factors we take into account. I don't know that a market needs to have a higher IRR or a much higher IRR just for us to move into it. Maybe it has other benefits, regulatory and diversification benefits, for example. So I guess I'd say you got to underwrite your starting point and Austin is a pretty expensive starting point. And then maybe to your point, you make it up because you think growth there is better than some of your other markets.
Then you got to think about how is it going to feel in 10 years with the amount of supply a market like that gets. So again, I wish I could be absolutely Clear about what that margin needs to be, but there are markets we go into that don't need to do a lot better on an IRR basis. They just need to provide some benefits overall in terms of diversification of And their IRRs can be comparable to those in our main markets.
Got it. Got it. All right. Thank you, Mark.
Thank you.
Our next question comes from Alexander Goldfarb with Piper Sandler.
Thank you. Thank you and good morning out there. So just following up from Haendel, actually on two fronts. So first, Mark, just continue on the markets. If you look across, I mean, a lot of the markets have converged around similar NOIs and similar cap rates.
You guys obviously a number of years ago made an effort to focus on certain key gateway markets and now you're sort of going back and looking at you invested in Denver, you talked about Austin. Do you feel that this convergence that we're seeing is going to sustain where The idea to go to the certain gateway coastal markets may not be appropriate for the next decade or you think this convergence is just temporary And the markets ultimately will go back to the ones that you guys have really focused on over the past number of years.
I get that is an outstanding question and something we think and talk about a lot. You should always be thoughtful about your markets, why you were there before, why you're there now. So I appreciate the question. I think one of the things we think about is you've got such a wall of money going into the apartment industry. Is it distorting perceptions of returns and risk?
Are there markets that are frankly overvalued relative to what they normally and probably should trade for on a go forward basis. So we look at the 9 metros we're in now and say, We like our customer. We like our CapEx spending. We like in most cycles the supply picture in these markets And nothing there has changed for us. To me, it's more like, are there other new markets where we can find our customer in abundance?
Someone, Alex, who is relatively affluent renter by choice, who wants to live in an urban dense suburban setting with a lot of walk to amenities. When we find those people, we will go to them if the competition makes sense, the supply and demand picture makes sense. So I guess that the way I think about it is, are there cities that are sort of being promoted into the ranks of the markets in which we do business As opposed to saying all markets are equal, I think some markets are definitively not equal. And what's going on is just the wall of capital is moving cap rates and stuff to a convergence point, and I don't necessarily believe that's permanent.
Okay. And then the next question is On the regulatory front, yes, switching coasts here in New York, I'm sure you guys have seen in the press that Albany wants to go back, Even tightened the CapEx restrictions on rent control units even more. The talk of a market wide CPI plus cap. I think I read 1.5, I don't know where ultimately the habit. But given what happened, lessons learned from 2018, How are you guys thinking about approaching this year's Albany session, which I think expires in or ends in June?
Yes.
Well, I think in terms of recent good news, the governor in the state of the state address didn't mention affordable housing. Our sense from what we've heard from some of our contacts is that many in the legislature would like to see these new rules play out a bit And see what the impact is before adding even more to it. We hope that would be the case. Obviously, it's difficult for us, Whether you're in New York or you're here in Chicago to predict the action of politicians, but we're working hard through our trade association. I think you've got Real new energy and focus on this issue and having the right kinds of conversations and just educate people because this is going to do The Enelaria is doing the exact opposite of what they intend.
It's going to cost disinvestment in housing, less supply and make the city That's the energetic place we all want it to be. That's just what's going to happen and is happening. I just would say I think the trade association is in a better position this year Than they were before, but what exactly happens remains to be seen.
Thanks, Mark.
Thanks Alex.
Our next question comes from Rob Stevenson with Janney.
Good morning, guys. So turnover was 49.5%, I think in 2019. What's the expectation for 2020? And how much of the 200 or so basis point decline that you guys talked about earlier, what's the benefit to earnings from that given the spread between new and renewal leasing?
So this is Michael. I'll start by saying I think our expectations for the year is very similar. We're not It to continue to go down, but we don't anticipate kind of some reversal in the trend and all of a sudden see a spike in turnover. As far as the contribution goes, clearly, if renewals were producing a 4.9% and you had some subset of your resident more residents renewing with you. That contribution was boosting the revenue lift for the year versus replacing them and absorbing the vacancy loss as well as kind of the new lease change at 30 bps.
I don't have a quantified number, but I do know that lower turnover At higher renewal rates is a positive. Okay.
And then what's driving the gap between NAREIT and normalized FFO guidance? Like $0.02
Yes. So there's you can kind of see that on Page 30 of the release. There are 2 items that are forecasted. There's a penny associated with write off of pursuit costs and then there's another You have other miscellaneous items that include advocacy costs, which you've had in historical periods, etcetera. So those are the 2 main drivers.
Okay. Thanks guys. Okay. Thank
you. Our next question comes from John Guinee with Stifel.
John Guinee, thank you. Big picture question, it looks like At the midpoint, almost half of your FFO growth is coming from interest savings, dollars 0.07 a share, $27,000,000 in interest cost reduction. Should this make us nervous, 1? And 2, the end result is you basically are getting about 2.3% FFO growth from everything else, Well, your midpoint of your same store NOI growth is 2.5%, which seems a little unusual that 2.5% same store NOI growth translates to 2.3% FFO growth ex The interest cost savings. Any thoughts?
Yes. John, I'm going to start. It's Mark. What happened in the prior year 2019 influences the numbers in 2020. So in 2019, we acquired things early in the year And we sold late.
This year, you're going to see we have a number of assets lined up for disposition that are going to occur relatively early in the year. So even though we're a net buyer and that is going to fuel FFO growth in future years, this year, some of that, like the math you're doing is absolutely right. There should be a bigger your fundamental growth on NOI is in that 2.5% rate. Your number should be higher on NFFO. You're getting a little dilution from transactions.
And I think we pointed that out in the release. You're getting a little bit of a headwind from transactions that is going to offset some of that benefit. The interest benefit, I'll tell you, is just we continue to be able to borrow cheaper, and that's all very real. And I'm not sure why that's Concerning in any regard. I mean, the company's balance sheet is really strong, and the percentage fixed to float is sensible, and We have great access to all forms of capital.
So I'm not the $0.07 to me is good money and is something we've executed on before.
So the vast majority of
that $0.07 too, John, just so you know, is so we're not changing the profile of the overall credit metrics. We would expect credit metrics at the end of 2020 to be very similar to 2019 on kind of all regards, so very healthy, very strong. And the bulk of That gain, if you will, is already locked in by having paid off debt that was in 5 handle coupons with new long term debt that's in the 2.5% to 3% range.
Thank you. The obvious issue is that you're benefiting a lot from paying off above market debt and borrowing at market. So my question really is how much longer can that last? Is there still a lot of fresh market debt on the balance sheet?
Yes. So if you look at Page 18, there we disclosed for you in each maturity buckets what our weighted average coupons are and you can see in kind of 2021 4.64 percent as an example. To give you a point of reference, if we were to issue a 10 year unsecured bond today, I would expect that to be 2.5% or lower. So There is still a fair bit of runway going forward. Certainly, a longer runway than we had anticipated a few years ago, We didn't anticipate rates continuing to be this low for this long, but there is still some favorable refinancing opportunities, which we've taken advantage of in the past
I
would now like to turn the conference back over to Mark Perrill for closing remarks.
Thank you all
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.