Good day, and welcome to the Equity Residential 4Q 'eighteen Earnings Conference 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.
Thank you, Mary. Good morning from the polar vortex, and thanks for joining us to discuss Equity Residential's full year 2018 results and outlook for 2019. Our featured speakers today are Mark Perell, our President and CEO Michael Manelis, our Chief Operating Officer and Bob Gaertana, 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.
The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I'll turn the call over to Mark Corral.
Thank you, Marty. Good morning. Greetings from chilly Chicago where it's a negative 21 degrees right now with a Minus 50 degree wind chill. But while the weather outside is quite cold, our business on the contrary feels quite warm to us and we will spend a few moments this morning with you discussing it. We're pleased to have delivered same store revenue growth at the top end of our original guidance range As well as solid normalized FFO growth in 2018, we had strong momentum in the Q4 and 2019 has started well, Though admittedly, December January are months with a seasonally low volume of transactions.
Both strong high wage job and income growth in our markets, Combined with positive demographics and a consumer preference for a rental lifestyle in our highly desirable cities has created a supportive backdrop for our business in spite of elevated levels of new supply. Recent announcements regarding Amazon's HQ2 and Google's continued business expansion are a reinforcement of our belief that the knowledge economy will be focused in the markets where we do business. In Washington, DC, 70% of our NOI Comes within 5 miles of the location of HQ2. In New York, we have more than 20 properties that are short commute from the Long Island City location of HQ2 And more than 20 that are a short commute from the new Google expansion location in the West Village. We expect that 2019 will be another good year for us, With strong demand across our markets, creating high occupancy conditions, but continuing elevated supply levels in some of our markets, keeping us from seizing the pricing initiative.
But while our internal dashboards are all indicating green, we're also aware that the economic and other headlines are giving a more With that in mind, in a moment, I'm going to turn the call over to Michael Manelis, our Chief Operating Officer, To give you color on how we are looking at revenue growth across our markets in 2019, then Bob Garachana, our Chief Financial Officer, will follow with a review of normalized FFO and expense results and guidance and also discuss our balance sheet. And then I'll wrap it up on the prepared remarks side by speaking to our investment activity. And after that, we'll open the call to your questions. So go ahead, Michael.
Thank you, Mark. So today, I'm going to begin with a quick recap of our 2018 performance. I'll share the assumptions that create the midpoint of our 2019 guidance range and I'll provide updated commentary and outlooks for each market. Here are a few key takeaways from 2018. 1st, strong demand fueled by good job growth and record low levels of unemployment in our markets Aided the absorption of elevated supply.
2nd, Equity employees delivered remarkable experiences to our residents, which resulted in the highest Customer satisfaction and online reputation scores and the lowest resident turnover in the history of the company. We reported 51.1 percent turnover in 2018, which is around 200 basis points less than 2017. And if you exclude turnover for those residents who moved to a new unit in the same community, our net turnover drops to 45%. Finally, our 2.3% same store revenue growth was achieved with 96.2% occupancy, Negative 30 basis point new lease change and achieved renewal increases of 4.9%, which were all stronger than 2017 results. As we sit here today, we have strong momentum coming out of the Q4.
We have more pricing power today versus the same time last year, Which keeps the dashboards blinking green and allows us to remain cautiously optimistic about the outlook for 2019, but we acknowledge that the hard work is still ahead of us in the peak leasing season, but our teams are ready to deliver. Consistent with our preliminary assumptions that we Shared on the last call, our overall guidance assumes approximately the same occupancy and renewal performance as in 2018 With a modest improvement to new lease change based on expected pricing power during the first half of the year and an embedded rent roll that is better than 1 year ago. Our guidance also assumes that the steady but lower job growth expectations as being predicted by many economists Will lead to the continued efficient absorption of the new supply in our markets. In 2019, supply will be less in Boston, New York and Orange County and the other markets are expected to be flat or up as I will discuss in my market commentary. Our 2019 same store revenue guidance range of 2.2% to 3.2% has a midpoint of 2.7%, which is 40 basis points better than our 2018 results.
The upper end of our range assumes a slight improvement in occupancy With strong pricing power on new leases staying in place through the peak leasing season. The bottom end of our revenue guidance Assumes no intra period growth in rents and a modest reduction in both occupancy and renewal performance. All of our markets except for Seattle and Orange County are projected to deliver better revenue growth in 2019 as compared to 2018. So let's move on to the individual markets beginning with Boston. Boston finished the year strong with continued growth in biotech and other high wage Job growth accelerated in the second half of the year and 4th quarter deliveries were very light.
These Factors contributed to a 4th quarter performance that defied seasonal trends by growing both rate and occupancy each month throughout the quarter. In 2018, Boston delivered full year revenue growth of 2.5% with 95.9% Negative 80 basis points new lease change and a 5% achieved renewal increase. The theme for our 2019 guidance in Boston is modest pricing power. Only a small percentage of the 2019 supply will compete with our assets in Boston and Cambridge, which comprises almost 70% of our revenue in the market. Most of this new supply is expected to deliver later in the year, which should lead to a favorable peak leasing season.
The 2019 revenue midpoint for Boston will be 2.8%, which is primarily based on improving pricing power heading into a period with lower overall supply. Today, our occupancy is 95.7 And January renewals came in at 5.8%. Our local team and portfolio are well positioned to capture the opportunity. Moving to New York, which delivered 80 basis points of revenue growth in 2018 with 96.5 percent occupancy, Negative 150 basis point new lease change and a 3.4% achieved renewal increase. These results were also accomplished with using approximately 40% fewer concessions than in 2017.
New York's 2018 outperformance, albeit with Still the lowest same store revenue growth in our portfolio was a major contributor to us achieving the high end of our overall company's same store Revenue guidance for 'eighteen. We finished the year with strong momentum in the Q4. New supply in our competitive footprint will be approximately 50% lower than in 'eighteen with expected deliveries just under 10,000 units. The deliveries will continue to be concentrated in Long Island City and Brooklyn, where to date we have not seen a significant impact to our operation. In In fact, we've been monitoring forwarding addresses from our move outs for over a year now, and we continue to see less than 2% of our residents leaving us for Long Island City.
Similar occupancy, strong renewal performance and improvement in new lease change are the foundations to our 2019 Revenue guidance of 1.8 percent for New York. We expect the market pricing to remain disciplined, which allows us to continue to use concessions at a very With 96.3 percent occupancy today and January renewals at 4.3%, the local team continues to feel the strength that propelled them through the Q4. So D. C. Is a market we definitely have all been hearing a lot about in the news.
Our assumptions regarding 2019 do not include the impact from any future government shutdowns. During the initial shutdown, We did not experience anything outside of waiving a few dozen late fees. If there are additional shutdowns, we have a good process in place to ensure that we work with any residents who is being impacted. We finished 2018 with revenue growth of 1% in DC, which was comprised of 96.3 percent occupancy, a negative 180 basis points on new lease change And achieved renewal increases of 4.4%. We also saw the Washington region's economy continue its strong performance in the 4th quarter, remains strong as Class A absorption continues at a record pace.
Expectations for new job growth in 2019 Still indicate enough demand creation to aid in the absorption of the 13,500 deliveries expected in 2019. We are forecasting limited pricing power to continue through the year, and we expect DC's 2019 revenue growth to be 1.4%. The 40 basis point improvement over 2018 is entirely due to growth that is already in place on the rent roll as our full year assumptions include A slight decline in occupancy and very similar new lease change and renewal performance. Most of the decline in occupancy is expected in the back half of the year, Well, we have a difficult comp period from 2018. Today, our dashboards are green in DC and occupancy is at 96.5% And January renewals came in at 4.5%.
Moving over to the West Coast. Seattle delivered 2.8% revenue growth for the full year in 20 This was accomplished with 95.8 percent occupancy, negative 220 basis points in new lease change And achieved renewal increases of 5.8%. Seattle Supply is expected to increase next year to just over 9,000 units As we saw just over 10% shift in expected completions from Q4 of 2018 into Q1 of 2019. In 2019, we expect to see more impact from new deliveries in King County Suburban Eastside than the CBD area. Professional and Business Services and Informational sectors continue to lead the way within the area's overall job growth.
Major companies continue to announce expansions and new hiring into 2019. Even Amazon is still expanding in Seattle Despite their plans for New York and D. C. In fact, last week, they had over 9,200 open positions in Seattle, which is the highest we have seen in a while. In terms of the deliveries, only some of the 3,900 units being delivered in the Bellevue Redmond submarket will be directly competitive with our well located Eastside Properties.
In addition, downtown Seattle should experience some relief from supply in 2019, and we have almost 40% of our income in that submarket. In 2018, we saw growth slow significantly in this market in the back half of the year, and our 2019 guidance of 2% revenue growth Reflects the impact of that second half slowdown. Overall, we expect to see a slight improvement in both new lease change and occupancy, which will be offset by a lower but still healthy renewal growth rate. We are at 96.4% occupied today With January renewals at 5%. Next up is San Francisco, a market that in 2018 demonstrated strong job growth, 34 new IPOs and a consistent daily stream of headlines about major office leases and land acquisitions to support future expected growth from companies in the area.
In 2018, San Francisco delivered full year revenue growth of 2.9% With 96 percent occupancy, positive 80 basis point new lease change and 5.1 percent achieved renewal increase. The expectation for 2019 is that San Francisco market will continue to enjoy economic and job expansion, albeit at a more tempered pace. Deliveries will be higher in 2019, but the concentration shifts to the East Bay Oakland submarket. There is still uncertainty surrounding the broader impact from deliveries in Oakland. To date, there has only been a small deal or 2 come online and the majority of the deliveries are expected in the 2nd Q3 of this year.
We will be monitoring the impact of this new supply in Oakland market on the overall San Francisco market. Our 2019 revenue growth guidance of 3.4% is built on very similar January achieved renewal increases at 4.6%. Moving down to Los Angeles, where our 2018 revenue growth was 3.6 This was achieved with 96.2 percent occupancy, positive 140 basis point new lease change and 6.2% achieved renewal increases. On the supply front, labor shortages continue to create delays in project Deliveries resulting in approximately 2,400 units from 14 projects shifting from Q4 of 2018 into early 2019 completions. This brings our 2019 delivery forecast to just over 14,000 units in LA.
As I mentioned last quarter, it is likely that we will see this trend continue with some of the expected 2019 deliveries being pushed into 2020. The combined total over the 2 year period has not materially changed, and this is a huge geographical area. In 2019, there will be supply concentrations in San Fernando Valley, Downtown and West LA. The growth in online entertainment content is creating strong momentum in West LA and will most likely quickly absorb the new units in the submarket. We are projecting 3.8 percent revenue growth in 2019 for Los Angeles with slightly lower occupancy and renewals and the Same new lease change as in 2018, which is being offset by gains already in place on the rent roll.
The reduction in occupancy is primarily in the second half for the year and is recognizing potential pressure from the new supply in a few of the core submarkets that I mentioned. Sitting here today, San Fernando Valley is starting off a little weaker than expected, but the overall market in LA continues to demonstrate strong demand, which should continue to aid the overall absorption. In total, the market is performing very well with 96.2 percent occupancy And achieved renewal increases for January at 5.7%. Moving to Orange County, we finished 2018 with revenue growth of 3.5%, which was comprised of 96.1 percent occupancy, positive 10 basis points new lease change and achieved renewal increases at 5.7%. Our revenue growth for 2019 is expected to be about 40 basis points lower at 3.1%.
The decrease is primarily due to recognizing the impact of lower growth from leases signed last year, along with a slight decline in projected renewal increases. 2019 occupancy and new lease change expectations are very similar to 2018 results. Job growth appears to be slowing, but the overall outlook remains positive. Overall, deliveries in Orange County will be less in 2019 with just under 3,000 units expected, but the actual impact to us from a competitive standpoint should be very similar to 2018. Today, we are 96.4% occupied and have achieved a 5.6% increase on January renewals.
And last but not least, San Diego. We finished 2018 with revenue growth of 3.9%, which was comprised of 96.3 percent occupancy, A positive 160 basis point new lease change and achieved renewal increases at 6.1%. Our outlook for 2019 will be the same with revenue growth at 3.9% with similar occupancy and new lease change projections And slightly lower increases on renewal, which is being offset by gains already in place on the rent roll. Deliveries are projected to be slightly higher at almost 4,300 units and the impact to us is expected to be very similar to 2018 with pressure on our downtown locations. As of today, San Diego is 95.9 percent occupied and achieved renewal increases in January are 5.3%.
We did reenter the Denver market in 2018 and added another property this month. Denver is not Part of our same store pool and is not included in our guidance range, I could tell you that right now the market is performing to our expectations. Let me close with a huge shout out to the employees of Equity Residential. Their relentless commitment to our residents, Which was reflected in our all time high customer satisfaction metrics is amazing. We are so proud of their accomplishments in 2018 and we look forward to 2019 being even better.
We have strong momentum and we are off to a great start. Thank you.
Thanks, Michael. This morning, I'll take a few minutes to discuss our guidance assumptions for 2019 same store expenses and normalized FFO. I'll round out my remarks with a brief discussion of our balance sheet and capital markets. Before I begin, a couple of quick comments on the Q4 2018. In the quarter, our same store revenue grew 2.6%, expenses grew 4.2% and NOI grew 1.9%, putting us generally in line with our full year operating expectations from the Q3 call.
For normalized FFO, we delivered $0.84 which is a penny shy of the midpoint of our expectations. As we mentioned in the release, this was primarily driven by the negative impact of higher than anticipated casualty losses, driven by rainstorm damage at several properties in our Washington DC area portfolio. Regarding 2018 same store expenses, let me give some more The relatively high year over year expense numbers we experienced in repairs and maintenance and insurance are driven in by very low or negative growth for the comparable periods in 2017. For example, repairs and maintenance grew 1 point 6% for all of 2017 and only 0.7% for the Q4 of 2017 compared to the same period in 2016. Insurance expense for the same periods was negative.
Moving over to payroll, as is typical in the 4th quarter, On-site payroll was impacted by various true ups on payroll related reserves like the medical reserve, which we've discussed in the past. Now on to 2019 guidance. For full year 2019, we expect same store expense growth between 3.5% and 4.5%. 80% of our same store expenses come from 3 major expense categories. So let me walk you through how we currently anticipate that to unfold in 2019.
At a little over 40% of overall same store expenses, property taxes drive anticipated 2019 growth. We currently anticipate fewer refunds for the year relative to 2018 because of the great appeal to success we had for that period. Also contributing to growth in 2019 are certain of our New York properties that are subject to the 421a abatement program and are in various stages of burn off that we have discussed on prior calls. As a result, we would expect 2019 real estate tax growth between 3.75% and 4.75%. In on-site payroll, our 2nd largest category, we continue to Many of our markets are experiencing elevated supply, as Mark and Michael mentioned, which is competing with us not only for residents, but also for our highly skilled employees.
That coupled with a strong general employment backdrop Means we continue to focus on retaining our colleagues on-site. As such, our expectations on payroll for the full year 2019 is for growth between 4% 5%. Finally, our last major category, utilities. Utilities should benefit in 2019 from a couple of factors that reduce our Expected rate of growth relative to the 4.5% increase we posted in 2018. First, in 2018, we experienced higher than usual growth in trash and store in Southern California that shouldn't repeat itself in 2019.
Secondly, we experienced some very weather in the first half of twenty eighteen in the Northeast that we did not include in our 2019 forecast. We aren't in the business of forecasting weather, but our guidance does assume a more traditional run rate. Finally, we continue to benefit from our forward electricity and gas purchase contracts along with our investment in LED lighting, cogeneration and other initiatives to manage As a result, in 2019, we expect utility expense to grow between 1% 3%. Our guidance range for normalized FFO in 2019 is $3.34 per share to $3.44 per share. Major drivers for this change between our 2018 normalized FFO of 3 point $0.25 per share and the midpoint at $3.39 per share from 2019 guidance Include a $0.10 contribution from same store NOI and our same store properties based on the revenue and expense assumptions that Michael and I just outlined, A $0.04 contribution from our lease up properties, which are anticipated to generate $40,000,000 in NOI in 2019 A $0.01 contribution from the timing of our acquisition and disposition activity in both 2018 2019, offset by $0.01 in higher expected interest expense.
While we continue to benefit from favorable refinancing activity, We do anticipate short term rates on average to remain elevated in 2019 relative to 2018. This expectation is driving the negative impact. A final note on the balance sheet before turning it back to Mark. Our financial position remains the strongest in the company's history and one of the strongest in the REIT industry. During 2018, we not only issued $900,000,000 in unsecured bonds, we retired over $1,000,000,000 in higher coupon secured debt.
Our NOI is now over 80% unencumbered, creating ample capacity to opportunistically access either the secured or the unsecured market. We issued an unsecured bond early in the year at one of the lowest 10 year REIT credit spreads ever and were the 1st multifamily REIT to issue a green bond. In addition to being an attractively priced piece of long term capital, the Green Bond is a reflection of the many sustainable projects and initiatives We anticipate issuing between $700,000,000 $900,000,000 in debt capital to refinance debt that either matures in 2019 or matures in 2020, but is pre available at par in 2019. We have very manageable development that we anticipate being funded entirely from free cash flow, ample debt capacity and industry leading access to the full spectrum of capital. As I just mentioned, we also have plenty of capacity to issue either unsecured or secured debt capital.
For the first time in quite a while, We've also seen a convergence of pricing between the unsecured and secured markets for lower levered, high quality borrowers like ourselves. With that, I'll turn it back to Mark.
Thanks, Bob. Just quickly on the investment front, we had a relatively quiet Q4 with no transactions. As you saw in last night's release, we had a busy January. We acquired 3 properties. We continued our push into Denver with the acquisition of a newly Constructed property in the Golden Triangle neighborhood, which is near Downtown Denver.
This 274 unit property was completed in 2017, Has a 90 walk score and is slightly less than 90% occupied. We acquired it for 110,500,000 At a 4.4% cap rate on the current rent roll and a 4.6% cap rate once fully stabilized. We see the price is at about a 7% discount We now have 3 properties or about $385,000,000 of capital invested in Denver. We will continue to look for opportunities to expand our presence in Denver as we think that assets in the right location will produce excellent long term returns. We do note that similar to many markets, Denver is experiencing significant new supply.
This is both a challenge to near term operating fundamentals that we do reflect in our underwriting and also an opportunity for us to buy well located product at modest discounts to current replacement costs. Moving over to Seattle, we acquired 174 unit property constructed in 2016 in the South Lake Union neighborhood. This asset was acquired for $74,100,000 at an acquisition cap rate of 4.6%. The property has a tremendous walk score of 97 and we were able to acquire it at a discount to current replacement costs. We like this property's location, which is in walking distance of many major employers, parks and other We also added to our New York Metro area portfolio with the acquisition of a 131 unit property In the desirable Paulus Hook neighborhood of Jersey City, we acquired the property for $74,000,000 at an acquisition cap rate of 4.6%.
The property has a 92 walk score and easy public access, transportation access into much of Manhattan. On the disposition side, we're in the process of disposing of several assets with closings expected in late in this quarter or in Q2. This includes the sale of an asset in Manhattan that was reported in the press. I'll have more to report on this transaction once it is closed. We have given guidance for $700,000,000 of acquisitions and $700,000,000 of dispositions in 2019.
You can expect us to continue our selective portfolio pruning as we find attractive opportunities from both an acquisition and development perspective for new investment in our markets. Overall values and cap rates are holding steady in our markets as there continues to be demand to own high quality apartment assets. On the development front, during the Q4, we completed the development of our 100 ks Street property in Washington, D. C, which we expect to deliver at a stabilized yield of 5 point 6%. We also stabilized our Cascade development in Seattle at a yield of 5.8%.
We did not start any developments in the 4th quarter.
So now let's go to the
Q and A session. Operator, if you could begin.
We'll take our first question from Nick Yulico of Scotiabank. Please go ahead.
Hi, good morning. This is Trent Trujillo here with Nick. Thanks First, all the market level color on your in your prepared remarks. That's great. Kind of a big picture question related to supply.
It Seems like a theme that we continue to hear is more of it being shifted from 1 quarter to another, from 1 year to another. So now 2019, Based on industry level data, it seems to be the new peak for supply deliveries at the national level. And we appreciate you do your own internal analysis of supply. But we've been talking about this for a while as it gets pushed and pushed further into the cycle. So when do you think we truly see the peak supply as it pertains to your markets?
Hey, Trent, it's Mark Parrell. Thanks for that question. So, it seems that we do have this conversation every year. We always Seem to have the highest supply numbers right now for the year. So, our internal estimates now for 2019 are give or take 77,000 units, But we fully expect 10% or 15% of that to move because it always moves.
So again, we do think something will move into 20%. Right now, our 2020 numbers are lower and we will be putting out an update on our numbers a little bit later in the quarter. But again, we see continual pressure on construction costs. Labor costs, materials costs, land prices have not really declined at this point. We see all that.
We also See rents not growing as quickly as construction costs are and we see a pressure on developers and we see that growing over time. When that really comes to pass in a very significant decline, we would expect that to occur at some point. I just can't hazard a guess at this juncture, but at this point, we do think 2020 is lower Then 2019.
Okay. Thank you very much. And just a quick follow-up, something relating to your guidance. It looks like you have a 25 basis point dilutive Cap rate spread between acquisitions and dispositions. And you've already announced a healthy amount of acquisitions in the mid-four range.
And you have that Chelsea asset pending sale, which we would assume would be something in the low 4% cap rate range. So I guess The question is, what are you planning to buy or sell that would flip this dynamic from being accretive to dilutive, just to get some details on that? Thank you.
Sure, Trent. Yes, thank you. All we do with our guidance is give you the number that's in our estimate. So, it doesn't mean that that's where we'll We end up because we don't know exactly what we're going to buy and sell during the year. At this point, we do have somewhat of an accretive trade going on, But there are other assets we've identified for sale that would be higher cap rate assets.
So, I can tell you there is almost equal probability that we could be 50 basis points accretive as 50 basis points dilutive. I mean, it's just a pretty small margin in between. And in terms of the impact on this year's numbers, which I don't think was exactly what you asked, It's really minimal because it's really about the timing of these trades and because we're buying relatively early, we're going to be slightly accretive, my guess is, in 2019 Almost no matter what.
All right. Thank you very much. Thanks for taking the questions.
Thank you.
We will now take our next question from Nick Joseph of Citi. Please go ahead.
Thanks. The last 2 years, you've been pretty conservative with initial same store revenue guidance as you ultimately finished at the high end of your initial expectations. So first, did they think change this year with how you set guidance? And then which markets have the largest potential variance that would drive you to the high end or low end of the range? It's Parral and Manelis.
We're going to kind of split this one up. So, in terms of anything changing in our process, no. Our process is sort of both a Bottoms up and a top down process and we sort of arrive at a consensus number. So, no, the process is the same. We've talked to our field personnel and there's often asset specific Positive and negatives going on, new supply, where they know sort of the exact impact, maybe a renovation at a property, things of that nature.
On the top of the house, we're looking at supply numbers, job growth, we're thinking about how the market moved to prior year and we sort of merge those 2 together and reach consensus. I'll let Michael speak to the markets with positive and kind of momentum.
Yes. So I think that the one way to just start thinking about this is there's 4 core markets that are Driving 18% to 20% of our revenue, which would be kind of D. C, New York, San Francisco and L. A. So obviously, those are big focal points because if any one of those markets kind of either outperforms or underperforms, it has more weight into the overall company.
I guess I'm just going to tell you sitting here today, I think we're off to a great start, right? You got Boston, San Francisco and New York that We feel like we've got good momentum and would tip us towards kind of at the outperform state, but again, we're very early I think on the downside, we're going to be watching D. C. And L. A.
Just for any signs of softening in the absorption of this supply, Which could impact our projections, but as of right now, we're not seeing anything to suggest that that's occurring.
Thanks. And then with the supply coming to Oakland in the East Bay, do you think that the new product will pull demand from San Francisco? Or do you
I mean, that's a great question and That's something obviously that we're going to be looking at. I think I even said that on the last quarter, which is, it's a little bit different than Long Island City because Oakland does have Areas to go to today. So it's a little bit more established than Long Island City. It's something that we've got to watch. I think in the next Probably several weeks, we're going to have one of the first deals, bigger deals, 420 units start to their pre leasing.
So, it's just going to be interesting to see kind of that price relationship to San Francisco. My guess is it will come out of the box somewhere 15% to 20% discount in rents, but we'll see. And then we just got to watch their ability to absorb what happens with them
We will now take our next question from Jeff Spector of Bank of America. Please go ahead.
Thank you. Good morning. Mark, just stepping back from results for a minute, now that you're in the CEO seat, I just want to confirm From a strategy standpoint, is there any potential change or anything you've been wanting to do, whether it's More development, less development, market exposure and I hate to even say it, but even the balance sheet increasing leverage Possibly at this point.
Thanks for the question, Jeff. I've been at the company 20 years and was the CFO for 11. So, I'm fully invested in the strategy. I mean, the strategy has always morphed and changed over time and it undoubtedly will continue to. Last year, we went back into Denver.
We telegraphed that. We talked about it. We continue as we did under David, time at the helm as we will undermine, we will always think about markets and different types of assets we can buy in our markets. So I think that sort of evolutionary process will continue, but in terms of some dramatic changes that the Board and I are contemplating that would not at this point be the case.
Okay, great. Thanks. And then just two quick follow ups. On Oakland, I was just going to ask historically, have you seen an impact When there's new supply in Oakland in your San Fran portfolio or are we saying that it's really not a good Comparison to look in the past given the changes going on in Oakland?
Yes, I think so. I think you got to wait and see. This is some concentrated new supply High end stuff coming online. So I think in the past, I don't know that they've ever had this wave of the concentration all coming online in a couple of quarter period To really have an impact and really test the ability to absorb.
And Jeff, if I can just add to that a little bit, it's Mark. We do see maybe 3,500 plus units being delivered. This is into the a market that has by that I mean the Bay Area in general, the least amount of housing in the country. I mean, it needs more housing. So whatever little blip this might cause or might not cause the operations of our assets Across the Bay in San Francisco or the few assets that we do have in East Bay, in the long run, this market will absorb this product readily because it's just An area where there's just incredible demand for housing, it's very undersupplied.
And so we don't look at it as some kind of permanent disability or even frankly much more than a temporary blip. Okay,
thanks. And then my last follow-up is just on supply New York City. You commented that you're still expecting a decline of 50% in We hosted a broker call last week and we heard 2018 supply was down more than we expected. So we weren't sure if the slippage into 2019 would decrease that estimate, but it sounds like you're sticking with The 50% decline in New York City supply.
Yes. So actually, when I look back at Where we thought 2018 was going to be, we really have not seen a significant change at all. So the 19,000 units that we expected Kind of came in maybe 1 unit slipped out or 2 units, small units, but we really didn't see that kind of slippage in New York. And again, as we think about the 2019 landscape, it's against our competitive footprint.
Great. Thanks guys.
Thank you.
We will now take our next question from John Kim of BMO Capital Markets. Please go ahead.
Thank you. Based on your market commentary, it looks like the biggest improvement that you're seeing In 2019, the same store revenue guidance will be coming from New York. But when you look at the earn in from blended lease growth rates from last year, it does not I'm just wondering if you could provide some more commentary on your confidence level in achieving this other than just supply coming down.
Well, so I guess I would say from an earning perspective, New York is contributing we have 70 basis points Stronger embedded growth today than we did at this time last year. So we do have some embedded growth in the rent roll from leases that were signed, call it, mid year to the back half of the year, and we've got good momentum right now. We've got demonstrated pricing power. It's not Robust pricing power, but it's more pricing power than we've had in that market in a long time. And if that momentum can continue, I think we're going to be just fine With this range that we put out there.
You had strong momentum in the Q4 versus I think your prior guidance in New York. I just want to make sure that was the case.
Yes. Both from a demand, from an occupancy,
Okay. Also there was commentary on waiving some late fees in DC. I'm just I wanted to make sure that we understood your revenue recognition when a tenant is late in paying rent. And also is your expectation that government workers will be fully current on rent when the government shutdown is permanently over?
Yes. So I'll take real quick the revenue recognition spot here, Shanna, on late fees. So we recognize the late fee When do? So we recognize that through revenues almost like on a cash basis. Obviously, if we didn't collect it, we would not recognize it.
So just to give you an order of magnitude, John, to help you a little here, and we're talking about like 2 dozen people. So we're not concerned about it. We waived those late fees, so we're not going to get them. So that's undoubtedly true. So we do charge the accounts the late fees.
We do recognize that through revenue. And if they aren't paid, we have a process where a couple of months later, it all gets written off. We have very low write offs in this portfolio. One of the advantages of the portfolio shift Was to have a portfolio where you didn't have a lot of people that move out in the middle of the night. You didn't have a lot of people who don't pay their rent.
So, right off this portfolio effectively de minimis. So I don't expect that to change as a result of this recent incident.
But the workers to your knowledge, they will be Caught up in rents once they go back to work.
Yes. I guess at this point, there's nothing out there that would Suggest that even if there are additional shutdowns that there is not going to be a retro pay catch up and therefore that the residents won't be in a position to get caught back up on rent. Yes.
We have family members of government workers that were furloughed and they know they're getting their money and they've been told that by the union side. I Yes. Between that and reading the paper, I expect you'll get the money and then we'll get the rent.
Got it. Okay. Thank you.
Thank you.
We will now take our next question from Steve Sakwa of Evercore ISI. Please go ahead.
Thanks. I just wanted to touch on the investment market and just maybe get your comments on kind of unlevered IRRs today, how you guys are underwriting sort of acquisitions this late in the cycle. And do you guys think about a downturn? Do you put that in? Or how do you sort of think about the next possible recession?
Hey, Steve, it's Mark. Thanks for the good question. This is as much art and science as you know. We got people on Ground really look at it this hard. We underwrite every deal.
We end up bidding on a select group of them. So, I'll give you a little bit of flavor of how we're thinking about things. You're talking about revenue assumptions in the next few years. We do feel like we have more visibility there. So, for example, the Denver asset that we just bought a few weeks ago, We effectively assumed because we know there's near term competition, no revenue growth for a couple of years and concessions.
We understand that market. We know where it's going in the next few years. And then over time, at some point, things will balance themselves differently. You'll have a year with a 6 in it later on. So, what generally happens is in the near term, you have whatever you really think is going to happen in that market from your knowledge on the ground from our investment and Property management teams.
Going forward, you sort of revert to some sort of average in the market, which generally for us on revenue growth in year 5 on might be somewhere in the 3s depending how we feel about the market's long term prospects. And then you look at your cap rate, your reversionary cap rate at the end, because a lot of the product we're buying, like the Stuff we're buying in Denver are high rise. We don't see as much cap rate widening in the sale as maybe you'd see if you were buying garden product. That gives you just the framework for our thought process. But again, picking what year 7 revenue growth is going to be is definitely an estimate.
So no effective real downturn in a market like or just nationally 2, 3, 4 years out, There isn't sort of a down 4%, 5%, 6% within a strong bounce back and you kind of just kind of look
at it, obviously. Yes. Well, and you just said it, you look through that. I mean, if you think the number is going to be 350 in a market for revenue growth over a long period of time, You may have underestimated it in year 4 and you overestimated it in year 7 and it just kind of averages out. So, again, the near term stuff, we underwrite tight Based on having product in these markets, knowing how it's performing, having a real good feel, as you go further out, it's a little bit more of an averaging effect.
And then just in terms of unlevered IRRs, where on the things that you've been buying or the things that you've underwritten but haven't won, where would you say the market is today in your Kind of core 5 or 6 markets?
Yes. I mean, we are seeing trades go off where we think unlevered IRRs may be in the 6s. The stuff we've been Willing to purchase has been in the 7s. Again, some of that is skewed by Denver maybe being a little bit higher cap rate market, but Stuff we're buying in the 7s, but we do see product trade into the 6s, maybe even in the 5 high fives in terms of IRRs. But again, Those would be deals we wouldn't plan on.
And then just lastly on development, I mean obviously the pipeline for you is kind of dwindling down here. How do you sort of Think about new land sites and new development starts over the next couple of years?
Yes. Thanks for that question. So on Development, we've had a terrific run. We have a great team in place. We do think about it as a long term value creator for our company.
Right now, our development folks have mostly been busy with adjacent land sites, the properties we already own. We do have a couple of other land sites on the Coast that we're thinking about, but we made a decision a few years ago as we saw these costs really go up as we saw rents kind of flatten out, It really wasn't worth the risk. We completed, I think, a very lucrative development pipeline for the most part. We do have a couple of things still in process. I guess the way we think about it right now, Steve, is we think about it as part of the long term mix of capital allocation for the company.
I don't think you'll see us Accelerate that in the next year or so. We just don't see an opportunity to do that at yields we're willing to accept to take that kind of risk. But I do think you should expect that there'll be a time and a place where we'll do more development for sure. And I think we'll constantly do these Densification plays where we take a property and it's the parking lot, the back parking lot or the garage and we'll do something there where we're adding units, We're adding a new building or what now.
Okay. And then just one quick one for Bob. Just on the debt that's expiring this year and kind of your new debt that's in guidance. Just kind of from a timing perspective, how should we think about that? And to the extent that you were to come to market with, say, a new 10 year deal, where do you think pricing is?
Yes. So real quick on the timing. So the 2 components of debt that are either maturing or prepayable at par are kind of mid year at the End of the day, one of them is an unsecured bond that's floating, swap to floating and another one is that big secured debt deal That I mentioned is pre payable par. So that's kind of mid year. So I think from a modeling standpoint, mid ish year is probably pretty close.
We obviously could be opportunistic if the markets present an opportunity to go a little bit earlier and take them off the line, etcetera. But overall, that's the timing plan. From a pricing perspective, I'd say, and this probably applies to secured and unsecured, low levered secured for borrowers like us, Because as I mentioned in my comments, the spreads are pretty tight to each other. I'd say we're probably a little bit under 4 overall. So sitting here at call it 2.75 treasury, you're in that kind of 115 area for either one.
Great. Thanks very much.
Thanks, Steve.
We will now take our next question and comes from Drew Babin of Baird. Please go ahead.
Hey, good morning.
Good morning. I'm here.
Moving past the earn on assumptions moving into 2019 and looking more towards peak leasing season and the potential for Continued second derivative leasing spread improvement. I guess, are you assuming that most of your markets or your markets kind of on average Roughly in line with 2018 as far as renewal and new leasing spreads or are there certain markets where you're assuming some incremental acceleration or deceleration?
No, I would say and I went through each kind of market as to what those overall assumptions were. But I would say clearly New York probably stands out where we have significant improvement in the new lease change assumption. The rest of the markets, I would say, are pretty close. Boston, where you have pricing power existing, is going to generate improvement in new lease Change as well. And I think as we get closer into March, we'll have an investor presentation deck that goes out.
You get to see a little bit of those assumptions as kind of they lay out Yes, by quarter as well. But I really point to the markets where I talk about kind of having some pricing power momentum. Those are the ones that our expectations are kind of geared towards improvement in new lease change and the rest is probably just holding the line on the occupancy and Renewal.
Thank you. That's helpful. You talked some about The repair and maintenance costs being relatively high in 2,008 off of difficult comps. I noticed that the buildings Building improvements and replacements capitalized per unit were down about 9% year over year in 2018. Can you talk about How the capitalized expenses are kind of going down while the expense ones are going up?
Is there anything different on the accounting side? Does it reflect the younger portfolio? Just curious kind of why that bifurcation is occurring?
Drew, it's Mark. So specifically when you look at building improvement, Building improvements are large scale systems, so that's like air conditioning unit replacements on top of buildings, Elevators and things of that nature. So, there is some interplay between that. There are some things that when you do a big capitalized project End up falling into expense, but there isn't that interplay isn't quite right. There isn't there wasn't a switch there.
As much as I'd like to tell you that's what happened, it really was just these sort of additional expenses relating to flood damage that hit same store And otherwise non same store. So that really was more of it.
So nothing changed on the accounting front or our capitalization policy at all.
Okay. So what do you attribute the 9% decline year over year? Is that just sort of asset mix over the years? Is there anything kind of behind that?
Sure. Those are generally big projects, in a few cases big window replacements or siding deals on a few Kind of mid rise units we own. So those just slide. Those just move down a little bit and they'll get done in the next year. So it's really more about just timing of some big Chunky projects more than anything else.
Okay. And then one more for me. Obviously, there have been some headlines About tech companies kind of reaching out and hoping to increase the inventory of affordable housing or in some cases kind of medium income Type housing projects, has there been any talk of them partnering with other capital to potentially do larger projects that might deliver more units than we're kind of currently talking about? Do you think there's any potential that these companies might reach out to EQR or other public REITs to kind of Partner in these projects, and would you say that the rents on them are probably a little bit too low, Kind of considering EQR's target customer, is there anything developing on that front or is it maybe just too early in the process?
I'm thinking it's too early. I mean, we certainly know these people in our markets, but
we don't have a lot
of detail on those programs at this point. We've run very affordable product before. We own some Bay Area stuff that I would characterize as highly affordable product. We have affordable units throughout the whole Folio as well. So, I think we have the ability to manage in our markets all types of price points If the returns make sense.
So, would we be interested in it? I guess, sure, possibly. But I guess I just don't know enough to react to that yet.
Okay, great. That's all for me. Thank you.
We will now take our next question from Rob Stevenson of Janney. Please go ahead.
Good morning, guys. What's your expectation for fee growth in 2019, the application pet and all that other stuff? And are there any new ones that you guys have recently implemented or will implement 2019?
So I would say, I think right now if we look through the guidance, I'm guessing it's 3%, which is kind of in line with kind of where we see these other From an initiative standpoint, I'll tell you, we did a hard look at the parking many years ago. Our parking revenue is up to 54,000,000 In 2018, we actually grew parking by $3,000,000 or 6%. We have basically the roadmap laid out for every single property, And some of that just takes some turnover, some renewals, some changes in the leases to get that income. So, I think we still have a little bit of room left To optimize some of the parking income, but it's not like there is significant kind of opportunities in front of us. The rest To the fees, I mean, it's a very strategic review asset by asset to try to understand where do you have opportunities, where do you have levers to increase.
I don't think I'm aware of anything kind of on the new fee side coming in That's worth talking about on this call.
Okay. And then what are the expected stabilized development yields on the 3 properties in the current pipeline?
Sure. Bear with me for a second here. So For Westend,
6
for 249 Third Square 5 and for 1401 East Madison 5.8.
Okay. And what's the $0.08 gap between day REIT and normalized FFO guidance for this year?
Yes. So, for 2018 or for 2019, sorry?
For 2019, the guidance.
Yes. So for 2019, the guidance, there's a page in the very back. The biggest issue and we noted on the disclosure, the biggest item is The write off or anticipated write off of an unamortized discount on a tax exempt bond that we would expect to incur In conjunction to a planned disposition that Mark may have alluded to in his comments.
Yes. So it's a non cash charge, Rob. So it's Costs we incurred when we bought this asset a long time ago and when we sell it, we have to write it off. So that runs through the NAREIT and EPS versions of FFO, not through our normalized version and that's the biggest item.
Okay. And I know that there hasn't been any sort of formal plan put out there Yes, Mark. But given that the administration says that they have the ability to do something with the GSEs, I mean, what So what do you how are you guys thinking about that? And does that impact any of the timing for you guys in terms of dispositions And or the way that you guys think about financing in the space through the remainder of the year?
Yes, I'll take this real quick and I'm sure Mark can piggyback on it as well. So we're familiar with the same kind of media reports that you guys have seen. It's All over the page, right, in terms of as of late, most recently, it's been the privatization kind of rumors. What I'll say kind of more Specifically, I think answering your question on 2019 is at the moment we see no disruption to the GSE and the kind of the operating business as usual. They had very large production volumes in 2018 prior to the Change of the regulator, whose term expired at the end of 2018, they put out their caps, which were very similar to what they were previously.
So for 2019, we wouldn't expect anything to kind of impact our position or their kind of operations overall. I guess what I would say kind of longer term is who knows, right? I think the bigger issue that will drive kind of GSE reform is Both political, but also probably single family financing in this country. And so it's unclear. From a specific standpoint, I'd say for us, we would certainly be less impacted or less negatively impacted By GSE reform, I would say for two reasons.
The first, as it relates to funding ourselves, we have very strong access to capital, as I alluded to in my comments, Particularly strong relative to the private market, which is very reliant on the GSEs, whether it's for stabilized assets Or for refinancing their construction loans. I mean every bank in the country basically when doing a construction loan underwrites the take out to the GSEs. So we benefit kind of from a direct standpoint of having all of this access. The other thing I would say is our portfolio on the Secured debt front is very attractive to other secured lender types as well. So we're we don't have a lot of the Large sales, suburban kind of stuff that is probably more the core GSP product today than what we might have had 10 years ago.
Yes. That's the point I just want to emphasize, Rob, without beating this to death is we got rid of a lot of the product that we thought was more susceptible to GSE risk some time ago. So some of these dispositions, including Florida and the Denver suburban stuff, was product that we thought that really only financier was the GSE market. We don't feel it. And so it's not changing our plans.
Most people who buy assets from us are buying free and clear and they may finance it later at some point, But the financing market is not particularly relevant to them, they're cash buyers.
Okay. Thanks guys. Stay warm.
Yes. Thank you.
We will now take our next question from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Thank you. And I guess given the temperatures maybe that those Florida assets look a little attractive now. Just two questions. First, you guys are not alone in facing operating expenses and taxes are what they are. You can grieve them all you want, but that is what it is.
But wages, especially with the sustained with this economic recovery, Yes, ultra low unemployment and the fact that you've had a lot of local mandates for higher minimum wages just seems to be something that's continuing to weigh on the apartments. Some talk about more automation, but still you need people at the properties to run them, to fix them, etcetera. So do you expect that for the next few years, we're going to see 4 ish type percent expense growth, driven by Payroll or do you think there's some offsets here?
Yes. I believe in the mean reversion theory of these long term expenses. Over the last 5 years, our expense growth rate has averaged 2.5%. Certainly, we're expecting it to be higher in 2019 than it's been. Real estate taxes are what they are, but some of these sales of these New York assets where we've affected the 421a growth in our real estate tax line item, That stuff, Alex, is going to help us over time.
We expect that number to go down. Allison, these appraisers have noticed how well apartments have done. They've raised their values. They've taxed us more. At some point that will change and those values will go down and we'll have more appeal success.
That's just the cycle. In terms of headcount and wages and stuff, I would say the same. Right now, with so much new product being built, there's just a lot of competition for talent, as Bob suggested. At some point, that will wax and wane. So, I don't know.
I don't feel like 4% is a run rate. I feel like that's just kind of this year's number. And I think there's some good chance it could be lower Depending on how things break during the year. I don't know, Michael, if you got anything you would add.
Yes. I think the way I guess I can bring up that. Obviously, from an automation standpoint, we're about to pilots to kind of go after mobility on the maintenance side of our business. I don't know if that's really not a headcount. I think that's more around utilization.
So, it's allowing us to maybe get some more stuff done in house and have less dependency on contractors. But I think I was right. Some of these minimum wage increases, And they're not done in 2019. They're going to continue going and that is going to continue to keep pressure on any of the contract labor services That we utilize. So I think we're taking a hard look at all of that, trying to make sure that we've optimized, trying to make sure that the staff is as utilized as possible.
So I think there will be things that come out of the learning from 2019 that will get folded into 2020, but I don't think we're in a position to really impact The 2019 with any of these types of initiatives, yes.
Okay. And then the second question is, as you look here in New York, obviously Albany is now all Democrat, rent control is up this summer. There's a lot of talk about a lot of taking out a lot of things that were more favorable to landlords. From any of your local real estate contacts, especially who deal with Albany, is there any concern at all that rent control may spread to market rate units and or that they may start to limit the ability to raise rents within existing 421a deals Yes, on either the 20% restricted or I think someone mentioned that the other 80% is still Subject to some qualification, but just sort of any commentary of what you're hearing as Albany debates renewing the rent control this summer?
Yes. Thanks, Alex. Listen, this is a very complex area. New York rent control regulations are very involved. We have several full time staff members to administer this.
It's that complex. We're used to these regulations. The Governor was Rather general in his remarks, but I don't have anything specific to react to. We will continue to advocate through our Local Trade Association as we did very effectively in California, that rent control in the long run and New York, I mean, listen, they've been rent control in New York forever and it hasn't helped Keep prices down to somehow lower level on workforce housing or produced more affordable and workforce housing, I would argue. I think enlisting the private sector by having incentives like the Affordable New York program, by having zoning that's more inclusive, things like that, I'm aware you're going to make a real dent in it.
The industry does want to be helpful both in New York and otherwise. And in fact, Alex, The annual trade show event for the industry is going on right now in California. And I know right now because we've got senior people attending That there's conversations about New York, about California, about all the places that have these affordable housing issues. This isn't an area where you can legislate A good outcome. You need to really enlist, I think, the private sector.
I think the industry is willing to do its part. So, I can't answer your question specifically because there's no details. Once there are, we'll be on it. But our sense is in New York that the industry association has been pretty effective in education and we'll hope the same occurs this time.
Okay. Thanks, Mark.
Thank you, Alex.
We will now take our next question from Harald Goelff of Zelman and Associates. Please go ahead.
Hey, Mark. Thanks for taking my question. Thanks for providing color on your markets earlier regarding 2019 guidance. And as I look across them, I'm just wondering Where are the ranges the widest? Which markets do you see potential for upside and also on the other end potential for downside and What are the factors influencing you there?
Yes. So this is Michael. I guess I would say from a range Perspective, we have equal upside and downside in almost every one of our markets relative to our midpoint. I think as I alluded to earlier in one of the questions, Yes. The markets that have the elevated supply, so we have DC and LA and they're driving 18% of our revenue, Are the markets where the range could be tested, both on the up and on the downside.
So it's the markets where We need to watch the absorption of the elevated supply, and we need to balance kind of the pricing power that we have in place. Right now, like I said earlier, the dashboards are all green. We've got good pricing power in those markets. So sitting here today, I would say we have minimal on the downside risk. But I think the way to think about it is the markets that are contributing the majority of the revenue growth and where is their elevated And that's kind of how we're thinking about it.
Thanks.
We will now take our next question from Rich Hill of Morgan Stanley. Please go ahead.
Hey, good morning guys and thank you for the time. I want to just Come back to 2 things, one of which you've already spoken about, maybe some of that at length. But New York City, Looks like you put up a really nice number in 4Q and expect that acceleration to occur. One of the things that I know you and I have chatted about in the past It's sort of how neighborhood by neighborhood New York City is and certainly our own analysis supports that. So I'm curious, when you think about the various neighborhoods and where your properties are located, what's driving that outperformance relative to maybe what we see in Trends in overall New York City.
Is it lack of supply or is it just people unwilling to move or a little combination of both?
I think it's a little bit of a combination of both. And then you also got to remember what our earning or what our embedded growth is sitting in some of these neighborhoods That maybe didn't have as much pressure on supply in 'eighteen that allowed us to start getting some momentum on raising rents and getting Some momentum on pricing power. So Manhattan still has an attractiveness to it. We see it in our foot traffic. We see it in the demand for our product type.
And sitting here today, when we look through New York and I go through almost every submarket, Every submarket is demonstrating more pricing power today on where our rents are in the marketplace than where they were this time last year. So I think you're right to think about at a submarket level, we could see kind of deviation in the projections. And in fact, our own projections have ranges going down to 1.5% up to all the way up to a 4% based on various submarkets. So I think some of it is what is embedded with us and some of it is what do we see as the competitive landscape that we're going to be facing in 2019.
Got it. That's helpful. Thank you. I mean, I wanted to come back to the supply comment. One of the things that we focused on and we keep hearing a lot about It's a tremendous amount of private equity dry powder that's on the sidelines.
I'm wondering if you get any sense that the supply, which continues to get Pushed out is really driven by builders anticipating that maybe that private equity wants to go into apartments and they can't find enough apartments So is there a chance that developing maybe last longer than we're all anticipating because of all the dry powder that might be attracted to Multifamily or do you think that's maybe misguided?
Yes, I'm not sure that dry powder is looking for development I mean, some of it is, but I think some of it is probably interested in value add and some of it is interested in core and different flavors and the continuum there. I would say that lately we've had more anecdotal evidence to the contrary in terms of more inbound calls to Alan George, our Chief Investment Officer and his team of people that have sites tied up, but can't find the equity to do it or their equity went away and they're looking for someone else To jump in and wondered if we were interested. So, I'm not suggesting that's yet a full trend, but we are hearing more of it. We are also seeing and again not yet meaningfully, but we are also seeing land come available at prices that were lower or Less high than before. So, to us, I'm not sure that that dry powder is waiting for development.
I think if you really wanted to do development and you didn't care About the yield, you can figure out a way to do more development. I think a lot of that is probably interested in other kind of plays, in real estate in general or in apartments. And right now, I kind of see equity. Equity is probably a little bit more hesitant in our opinion on development now than it was a year ago. But until something dislocates, they're still going to put some measure of capital into that because the play has worked so far.
Got it. Thank you. That's helpful. That's all for me guys.
Thank you, Rich.
Have a good day.
We will now take our next question from John Guinee of Stifel. Please go ahead.
Great. Just a nice quarter by the way guys. Just building
on the last couple of questions on development. The merchant builders dominate
the business. What do you
think the yield on cost that they are willing to accept Versus the yield on cost that you're willing to accept,
is that overall a 25 basis point gap or 150 basis point gap? That's almost an existential question for us, because when we think about development, it isn't with the merchant And builder mentality of what's the cap rate if the market is trading at 4.25%, we need to get 5.25% and otherwise we won't build it. I We're looking at a price per unit, a price per square foot, a feeling that this location has been hard to buy. I mean, a lot of what we built Coming out of the great recession that we got from Archstone was cat with properties in San Francisco because we had such a hard time finding stuff to buy. We figured we had to build it if we wanted to own it.
So, I guess I'd tell you, I think we, the REIT industry in general and equity residential for sure on the apartment Development side just thinks a little bit differently and more like a long term investor. So, I think most of these developers that are private guys will build until someone Doesn't give them the money. And they can have different yield expectations that they are what they are. I think for a company like ours, we're very disciplined. That's one of the advantages and We're perfectly willing to sit on our hands and, like I said, continue to look at things that are already in the portfolio to create densification and or buy assets that already exist.
So I don't know that it can be reduced to the manner you just reduced it to. If you try to reduce it to that manner, could you? It's probably too cold outside.
I mean, we might be
willing to accept well, we might be
willing to accept a little lower spread than they are if it's really hard to build Asset like San Francisco, we might require a lot more in a place that maybe is a little bit easier to build like DC because we have the ability to go optionally between buying Existing streams of income and buying and building new streams of income. So I guess that would be my full answer. Great. Thank you. Thank you.
We will now take our next question from Tayo Okusanya of Jefferies. Please go ahead.
Yes, good afternoon. Keep warming Chicago, please. First a question, The $700,000,000 to $900,000,000 of debt you are planning to raise in 2019 and the debt you are planning to pay off, I just wanted to confirm from a payoff Perspective, it's the $450,000,000 notes due July 1, 2019 And also the $500,000,000 due July 1, 2020, is that what you're planning to pay off?
That's correct.
Okay, perfect. Second question, the green bonds, congrats on getting that done. Just kind of curious What kind of buyers you're seeing for that specific type of bond? And generally, the type of rates you're getting on them, whether they're More advantageous than just issuing regular way unsecured bonds?
Yes. So I'll cover kind of the buyer base Since the differentiation between a green bond and a conventional bond, obviously with the green bond, you do attract a different type of buyer base In part, but not in total is what I would say. So in part, this deal that we last did probably have 15% or 20% of capital that came from dedicated kind of green institutions that had a mandate from their stakeholders to invest in these types of bonds and that is certainly helpful to the overall demand as you're issuing a bond. To kind of get to your second point, which is from a pricing perspective, it is really hard to quantify, whether or not you get kind of any differential between the Spread on a conventional bond versus a green bond. That being said, obviously demand for our paper, which has been high, given our credit quality and Our reputation in this space for fixed income is very good.
It's helpful to always have more buyers. It was certainly helpful in the market in the Q4, because the market in the Q4 was pretty choppy. So it did assist us in that regard.
Got you. That's helpful. And then another one for me, if you don't mind. I appreciate the information about renewal rates in January And kind of an overall sense of what it could look like this year. Could you just talk a little bit more around kind of new rates, kind of new rent growth and What that's shaping up to be then 1Q overall views for the year?
So the projection for the first Quarter, is that what you're asking, on new lease change?
On new lease change, yes, just some general thoughts about for the year that's built into your forecast.
So, I don't have it broken down by quarter in front of me. I know that in the Q4 of 2018, the new lease change was down at negative 2.4%. And I think I've said on previous calls, Not really thinking that that metric should be looked at on a quarterly basis as much as it should be looked at on kind of the annual year over year basis. I'm happy to kind of share it as we get through the Q1. I don't have it down with me right now As to how we broke that improvement up, my guess is most of the improvement in new lease change that I talked about at the top level is occurring in the 2nd and third quarter As we start to experience pricing power in the peak leasing season.
But I'm sure it's an improvement over Q4 and then I'm sure we stagger it up as we work through the year and then we take Q4 of 2019 back down.
Okay. And kind of on a For 2019 over last 12 months type basis, are you expecting that number to eventually turn positive?
Yes. So for the full year revenue guidance, we would Expect new lease change to be positive 10 basis points.
10 basis points, excellent. Okay. Thank you very much.
We will now take our next question from Wes Dalladay of RBC Capital Markets. Please go ahead.
Yes. Good morning, guys. Looking at the wage growth you're seeing in your markets, I know it's at your property level, you're seeing 4% to 5%, but can you give us a sense of what you're expecting for the overall markets, The EQR markets and which markets are you seeing the biggest buildup in affordability? So it's Mark. So you're asking less about high like wage growth in general of our residents.
So just to be clear, The data we have is a little bit limited on this. So we only pull our residents. We only are able to effectively request When they first apply to lease agreements. They're not as forthcoming afterwards. We're trying to do renewal negotiations.
So, we don't necessarily know what's happened. So, again, it's a little bit of an estimate. Generally speaking, as we see it, the portfolio has had higher Wage growth by our residents and certainly the best way to look at it is that affordability statistic compared to our rents continues to be pretty low. There is room we think To raise rents the old fashioned way because of the wage growth and just the fact that in our segment, our more affluent renter segment, There's room to raise rents because the rent to income ratio is not terribly high.
And it really hasn't moved much either. On a trailing 12 month, We're at 19.3 percent and our ranges in our market go from 17.5% to 23% With Washington, Seattle and New York kind of being the lowest at like that 17.5% to 18% ratio and Southern Cal averages at the highest at 21 point Is that helpful, Wes?
That is fantastic. That's exactly what I was looking for, so fantastic there. And then for your employees now, the 4% to 5 Wage pressure you're seeing, is there any markets that stand out or maybe West Coast versus East Coast?
No. I mean, I would say it's kind of just across the board that we're experiencing that.
Okay. Thanks a lot and stay warm. Thank you.
We will now take our next question from Jamie McDevitt of Dougherty Capital. Please go ahead.
Hi, guys. Thanks for taking the question and good results. Just a question on the Tax Cuts and Jobs Act. There was some clarification about 2 weeks ago on Some of the deductions and the pass throughs. Has there been any adjustment on your side?
Have you guys gone through all the All the new legislation and these clarifications, has there been any updates on your side for any implications on that?
No, I mean there's macro implications and Bob may supplement my answer, but there's sort of big and small implications. I mean, What the Tax Cuts did is actually give our residents on average more cash, and I think you're asking a more technical question, but I'm going to answer it in a more general way initially. It gave our residents more cash because they weren't taking they were now able to take a larger standard deduction. So, For us, it's generally been okay. A negative in our markets could be that some of these jurisdictions were in are relatively high state and local tax jurisdictions.
And if those taxes aren't deductible, is it harder for those jurisdictions to raise capital, to renovate subways in places like New York and And DC and things of that nature. In terms of the technical aspects, again, Bob and I can go back and forth a little bit with you, but generally speaking, they have not been terribly meaningful to us. We appreciate the work the industry association did on the past We appreciate the work the industry association did on the pass through stuff. There's some technical depreciation things that still need to be resolved, but There's nothing that we're watching with a great deal of concern at this juncture.
Yes, that was it was more on the technical side, Dean, if there was any kind of additional pass throughs that you could take advantage of. But on the obviously, on the FF and E, there's a bit more flexibility on that side as well. Has Has that created any opportunities for you to perhaps move into furnishing, moving into furnished departments in greater scale or Are you guys still pretty comfortable where you are?
Well, our tax person will be so excited to talk to you about that. So Certainly, we can do depreciation studies. If we needed to lower our taxable income and that's why people do these sort of studies and we've done them before, So, you can reclassify some things into a faster depreciable class. What's possible, we could do that. We're aware that that exists.
We don't need to do that right now, so it's fine to sit where it is. And if we need to do that study, we will.
Okay. Great.
And just the last thing is also on legislation, But it's more Boston Cambridge focused. And I know you got a question earlier about some of the rent control Concepts that are being thrown out there. The Mayor of Boston recently is trying to impose a cap of 5% on tenants that are over the age of 75, which is effectively a stealth rent control, and Things like right to purchase and of course Cambridge being what it is, is they're also trying to impose some things like paid relocation expenses for evictions and larger rent increases. How I mean as You have more pricing power with your tenants and there's going to be more there's really more ability to push up the rents. Obviously, the Governments are going to get more involved, particularly in Boston and Cambridge.
So I
mean, How worried are you
about this? Is this I mean, this
is something that's going to gain a lot of steam?
Yes. Well, people thought that in California and we won a resounding victory We did through, I think, a good education campaign. Once people understand that this is not a productive way to solve a problem, You tend to get a better reaction from voters. Cambridge had rent control for a long time and it worked very badly. And in fact, there is academic studies about it and that was one of the reasons they got rid of it some years ago.
I realize memories are short. The industry does need to stay very engaged. You can expect we will be. We have a very senior guy in Boston who is involved with the Boston Apartment Association and The different functions groups in Boston that are involved on the industry's behalf and we'll continue to have that conversation. But Yes.
Again, I think enlisting private industry and creating more workforce in affordable housing is the way to solve a problem. I think a lot of the things you mentioned Certainly are negative and it's our job to have a conversation about those and they're not just negative for us. We think they're just negative in general. I think they're not going to provide More affordable housing, I think they're going to do the opposite over time.
Agreed. All right. That's it for me and I'll say the prerequisite of stay warm. Thanks guys.
Thank you.
We will now take our final question from Tayo Okusanya Zania of Jefferies. Please go ahead.
Yes, thanks again for indulging me. 2019 guidance, does that Have any expectations forecast in regards to any benefits from Q2 of Google, which you did discuss in your comments?
No. There's nothing embedded in our guidance either in New York or D. Regarding those expansions, I think our view right now, it's a positive psychological impact. It reinforces, like Mark said in his opening remarks, As to why we're in those markets to begin with. And I think it's like I said, it's too early to kind of see any economic impact from that.
Understood. Thank you.
This concludes today's question and answer session. I'd like to turn the call back to your host for
Well, we thank you all for your time today for sticking with us on what was a pretty long call and we'll see many of you And on the conference circuit over the next few months. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.