Good day, and welcome to the Equity Residential First Quarter 2018 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Marty McKenna. Please go ahead.
Thanks, Angel. Recorded. Good morning, and thank you for joining us to discuss Equity Residential's Q1 2018 operating results. Our featured speakers today are David Nethercutt, our President and CEO David Santi, our Chief Operating Officer and Michael Manelis, who will take over from David on July 1 as COO. Mark Correll, our Chief Financial Officer
is here as well for the Q and A.
Being recorded. Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal securities law. Being recorded. 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.
Recorded. And now I'll turn it over to David Medica.
Thanks, Marty. Good morning, everyone, and thank you for joining us for today's conference call. As announced last night, being recorded. The Q1 came in pretty much in line with our expectations. Thanks to occupancy levels that remained quite high, another quarter of very strong retention and having achieved very impressive renewal rates during the quarter.
All of this despite significant new supply across most of our markets.
Being recorded. Now this performance is a
result of the relentless focus on our prospects, residents and properties by our property management and operational teams and everyone across our enterprise that supports those teams. Because notwithstanding very deep and resilient demand for apartment living in our urban being recorded in highly walkable suburban markets. We're facing peak new deliveries in many of our markets this year, which means it is a very competitive marketplace for new prospective residents And our existing residents have a lot of options from which to choose when their lease with us comes up for renewal. So I cannot emphasize enough the benefits realized from the remarkable being recorded. Now as far as long as I can remember, these efforts have been led in part by our Chief Operating Officer, David Santee, who as most of you know is stepping down as our COO on July 1 and will retire from equity at the end of the year.
Being recorded. Since joining the company 23 years ago, David has
had a profound impact on all aspects of EQR and it is hard to imagine the company without him. Being recorded. But among a long list of David's accomplishments is the fact that Michael Manelas is ready to step into his role and move us forward without missing a beat. Being recorded. Now everyone will miss David, and I can tell you it sure as hell won't be the same without him.
But thanks to the work he has done in planning for this event, we will carry on and only get better being recorded from here. So I'm happy now to turn the call over to David for what could be his final quarterly earnings call, the preparation for which I know will be one of the things he will miss most Thank you, David. Our reported Q1 results leave us very well positioned
being recorded
as we enter the early stages of our peak leasing season. With elevated deliveries across all of our markets, we are pleased with how the quarter played out. Being recorded. Revenue growth of 2.2% was a result of achieving our goals for both rate growth and improved occupancy. Being recorded.
Renewal rates achieved for the quarter were 4.6%, which is equal to or better than 2017 quarterly results. Being recorded. Most of our markets were almost flat or down with most of the increased turnover occurring in Seattle. Being recorded. Move outs to buy a home continues to be a non event declining to 11.2% of move out from the 12.5% in Q1 17.
While we've had a good quarter on the books, we know that this leasing season will see more new deliveries than in years past. And like last year, we know that it's critically important that every team member at every community knows our operating strategy and the role that being recorded. Next week, I'll join our being recorded. Senior property management leaders to meet with every employee in every market to cement our strategy, communicate our support being recorded and learn how we can continue to be faster and better in a very competitive environment. Now before I pass it over to Michael for the being recorded.
I'd like to take a minute to first thank all of you in the investment community for your support and belief in Equity Residential, being recorded.
It's been one hell of a ride. We all have
our own expectations of ourselves and our careers and I feel lucky being recorded and blessed to have been COO of the best public multifamily company in the world. And to all of my friends and family at Equity Residential, both past and present, I've always been humbled by your passion and commitment to our company and extremely grateful to the tremendous support that you have given me over the past 23 years. Being
recorded. It's been fast at times.
It's been furious at times, but it has always been fun. Now many of you on the phone have met Michael over the years and he and I have spent the last 18 months planning for today. Being recorded. I know I speak for many when I say congratulations and tell you how excited and confident we are in you taking us forward. Michael?
Thank you, David. So you have been an outstanding teacher, Lawson friend for the past 18 years. Being recorded. I'm very excited by the opportunity to be this great company's next Chief Operating Officer and I truly appreciate all that you have done being recorded to prepare me for this role. So now on to the markets.
So let's start with Boston. Boston's residential being recorded. Porcelain Performing as expected with occupancy at 95.5 percent for the quarter and renewals at 4.5%. Our reported Q1 revenue modestly benefited from strong parking garage income. As we moved into March, being recorded.
Demand and occupancy were improving in every submarket. This gave us the confidence to start pushing rate in advance of the peak leasing season.
Being recorded. But with 61% of the new deliveries being in
the city of Boston and Cambridge, where we have 72% of our NOI, we will be watching our occupancy closely. Being recorded. Fortunately, job growth remains strong and continues to support the absorption of new products being delivered. Boston with its well educated workforce continues to being recorded. Large corporate expansions and relocations, especially into the Kendall Square and Seaport areas.
Reebok recently stated that they already have 7 50 employees working at their new Seaport location and recent announcements being recorded. As of this morning, I could tell you we are positioned exactly where we want to be in Boston. Being recorded. Our base rents are up 50 basis points year over year compared to the same week last year and our occupancy is 96.7%, expected achieved increases for April at 4% and May at 4.2%. On to New York, being recorded, which has been the focus of many conversations given the elevated supply in 2018.
Overall, pricing remains disciplined. Being recorded. Our operating metrics were slightly better than we expected with occupancy at 96.0, renewals up 2.9% being recorded
and our use of concessions being
lower than we expected for the quarter. In a market with elevated supply, it should be no surprise that you read a lot of headlines being recorded by increased concession use. We remain focused on competitive net effective pricing and the use of concessions that are stabilized asset is very targeted and primarily used as a marketing tool for a given unit type or even a specific unit. Being recorded. With yield management in place, the introduction of a concession does not always equate to an exact reduction in net effective price.
Being recorded. During the Q1, 20%
to 30% of our weekly applications received some form of concession. This is compared to a similar percent of applications receiving concessions in Q1 of 2017. Today, our occupancy in New York is 96.7%, based on the Q4 2018 Earnings Call. Today's conference is based on the same week last year. Base rents are flat and for the past several weeks, we have issued concessions for less being recorded in the quarter than 10% of our new applications.
Renewals remain strong with 2.5% expected for both April May against quotes being recorded in the Q4 of 2018 earnings call. Today's conference is being recorded in the Q4 of fiscal 2019. Bottom line is that we are well positioned as we enter the peak leasing season where the majority of our transactions will occur. New York employment is at an all time high and we continue to hear stories being recorded by our company's revving up hiring and increasing compensation. We are going to continue to balance rate and occupancy and being strategically utilized concessions only where needed.
Our position today is better than what we anticipated when we gave guidance, but we are still early in the year being recorded and have 2 of the largest quarters of deliveries coming at us. The results for the next 90 days will have a significant impact on the full year revenue performance And our local team is highly engaged and ready to perform in this leasing season. So moving to DC, the main headline for DC is absorption And we are off to a promising start. BC's apartment market has absorbed more Class A units over the last 12 months than any time in its history. Being recorded.
The positive economic conditions have helped maintain Class A absorption at a pace well above its historical average. However, the elevated being recorded. Our Q1 revenue growth was consistent with our expectations. Being recorded. Occupancy was 96.1%, which was 20 basis points higher than Q1 of 2017 and renewals were up 4.0%.
Today, our occupancy in DC is 96.4%, which is 70 basis points higher than the same week last year. Being recorded. Building up the occupancy in advance of the leasing season was absolutely part of our operating strategy and has allowed us to maintain growth for our 9th consecutive being recorded. Today, our base rents are 80 basis points higher than they were the same week last year. Being recorded.
We expect to achieve a 4.1% increase on renewals in April and are trending to a 4.0 increased in May. Again, this is a market where we are well positioned, but we are still early in the leasing season and have consistent levels of new supply being recorded at almost 3,000 units per quarter coming at us. Moving over to the West Coast. Overall, the Q1 revenue results in Seattle were as expected. On our last call, we told you that we experienced moderation in the Q4 of 2017 and expected that moderation to continue into 2018 And it has.
Occupancy for the Q1 was 95.7%, which is 10 basis points less is being recorded in Q1 of 2017 and renewals averaged 5.7%. While it's still early in the season, our ability to grow rate is somewhat less than we expected. The good news is the vibrancy of the job market in Seattle remains strong. Amazon continues to show strength being recorded. And the initial pause from the HQ2 announcement last year is definitely in the past as today we see over 5,004 100 Open Seattle Physicians on their website.
Today, our occupancy in Seattle is 95.9%, being recorded, which continues to be about 10 basis points less than last year and our base rents are down 1.6% being recorded as compared to the same week last year. We expect our renewals for April to be 5.8% and May is trending towards 5.6%. Being recorded. Demand remains strong and the current moderation of pricing power is something that we will continue to keep a close eye on as we move through the leasing season. Being recorded.
Moving down to San Francisco. We said on the earnings call in January that this is the market that has the most potential to outperform being recorded. Our same store revenue growth expectation for the year and we still believe that to be the case. We continue to see positive news about being recorded. The tech giant's expansion continues unabated and venture capital spending is on the rise was $6,400,000,000 being placed in Q1, which was up 23% from Q4 of 2017.
Being recorded. Our Q1 results
in San Francisco were better than expected, primarily driven by our ability to grow occupancy early being recorded to gain modest pricing power in advance of the leasing season. We averaged 96.4 percent occupancy for the quarter, being recorded, which was 60 basis points better than Q1 of 2017. Renewals were up 4.2%. The Peninsula and South Bay are performing the best. Is being recorded.
South Bay is benefiting from a low in new supply as that submarket is back half loaded with deliveries. Today, we are 96% occupied in San Francisco,
being recorded, which is 30 basis points better than the same week last year
and our base rents are up 3.9% versus last year. This week will mark the 8th consecutive week of incremental increases to our base rents. Our renewals for April are up 5.5% being recorded and we expect May to be up 5.3%. Trends all seem positive, but it is still early and I look forward to adding being recorded on this market in the July earnings call. As we've discussed on prior calls, Los Angeles is a market with significant increase in being recorded.
And while it's a large geographic area, almost 60% of this new supply will be concentrated in the downtown metro area, where we have 18% of our NOI. Employment growth is diverse and remains strong. Jobs related to online content creation continue to ramp being recorded. With Netflix, Apple and Amazon making investments into the area from Hollywood to Culver City. This along with continued strength and expansion of silicon beats are aiding in the absorption of the new supply, but we know that the volume of new supply may become a pressure point being recorded against our pricing power in 2018.
Embedded in our LA guidance was a strategy of increasing occupancy early being recorded to position us to raise rates beginning in March. For the quarter, we had 96.1 percent occupancy, which was 40 basis points higher than Q1 of 2017 being recorded and renewals were up 5.6%. Overall, our results were marginally better than expected, but we are still early in the season being recorded and the ability to maintain pricing power will be challenged. Our occupancy in LA today is 95.9 8%, which is 30 basis points better than the same week last year. Our base rents are up 4.6% year over year being recorded and we expect a 5.9% increase on renewals in April and are trending to 6.1% for May.
Being recorded. Moving to Orange County. 1st quarter results were in line with expectations. Occupancy for the quarter was 96.2, being recorded, which was 10 basis points higher than Q1 of 2017 and renewals were at 6.3%. Today, we are experiencing being recorded.
Pressure on pricing and occupancy at a level greater than we expected for April, and it's being created from the lease ups in the Irvine area. Being recorded. Our occupancy is 95.5 percent, which is 80 basis points lower than the same week last year. Our base rents are up 1.7% And our renewals are up just over 5% for both April May. Demand remains strong and this trend does have a potential to recover through the leasing season.
And last but not least, San Diego. Our results for the quarter were slightly less than expected, almost entirely due to the occupancy of 95.8, being recorded, which was 30 basis points lower than last year. Renewals in the quarter were up 5.7%. Military being recorded. Spending remains strong in the area, but we are also facing several lease ups in the downtown area.
Qualcomm, San Diego's 7th largest employer, being recorded. Also just announced that they will be cutting just over 1200 jobs in the market. And while this news is a negative for the market, a quick search of our residents would suggest being recorded. The impact of our portfolio would be minimal. Today, our San Diego occupancy is 96.2%, which is 30 basis points higher than the same week last year.
Our base rents are up 3.9% and renewals for April are at 6% and May is trending towards 6.2 So to summarize all of this sitting here today, we continue to see strong demand and we are well positioned for the leasing season. We have New York and San Francisco trending modestly ahead, Seattle and Orange County a bit behind and the rest of the market on track and performing as expected. In closing, I want to give a quick shout out to the entire Equity team. Being recorded. Deliver remarkable experiences to our residents is evident through our strong renewal results and the tens of thousands of survey results received.
Being recorded. Renewing our residents in the face of elevated supply remains the team's number one goal. A sincere thank you to each of you for the work that being recorded. Thank you, David.
All right. Thanks, Michael. Angela, we'll open the call to Q and A now, please.
Thank you. No problem. Is being answered. We'll go ahead with our first question from Juan being done on
the same store revenues, what's the expected being recorded. Directed from here throughout the rest of 'eighteen, do you still see a decline in the second and third quarter mainly due to supply? And when do you think same store revenue growth on a year over year basis will stabilize?
Juan, it's Mark Parrell. So The answer to that really depends on how the leasing season goes. And as Michael Manelis and David Santi just said, being recorded. We're well positioned going into the leasing season. So we would hope that our quarter over quarter number for the 2nd quarter would be just modestly lower than the number we just reported and then the rest of the year to be approximately equivalent, again, if we have a good leasing season.
If the leasing season is less strong, then the numbers will decline towards the back half of the year quarter over quarter.
Okay. And then that decline is the quarter over quarter decline that you're saying is on the year over year numbers, 2018 versus 2017?
Yes.
Okay. Great. Got you. And then just on the upside and downside risk For the 2018 same store revenue numbers, where is that risk? Is it concessions In New York or with all the Long Island City and Brooklyn supply, and if you could speak to that or What represents the downside risk from here to the numbers?
What would have to happen?
Well, I mean, this is Michael. So I guess I would tell you that just based on the commentary. I mean, we have markets with elevated supply coming at us and we're entering in the peak leasing season in the position where we want to be. Being recorded. But our risk clearly, I mean, we denoted that I think on the last call is New York.
We also have LA, which has elevated supply and while it's doing well in the absorption and we're positioned well, those are markets as we go through the peak leasing season that can have a lot of weight on our full year performance.
Okay. And how is New York, Manhattan being insulated, if it is, from supply in Long Island City and Brooklyn?
Yes. So, again, we kind of look at this in a couple of different ways. So we know the elevated supply is concentrated with traded with 11,000 of the 19,000 units being in Brooklyn and Long Island City. And as we think about kind of that performance, we're looking at being recorded. And I think we've said to date, we have not seen the impact from Long Island City supply.
Being recorded. We did a trailing 12 month view back in February and at that time we had less than 1% of our move outs, providing us a forwarding address in Long Island City, and we just updated that from a year to date basis that trend has being recorded with less than 1% of our move outs having that address. So to date, I would say, the absorption in both Brooklyn and Long Island City is better than what we expected, and it is not impacting the performance in Manhattan. And even in our Brooklyn portfolio, sitting here today for the quarter. We are better positioned than what we would have thought given the amount of elevated supply that we are facing.
Being
recorded. Your next question comes from Nick Yulico of UBS. Please go ahead.
Thanks. David Nethercutt, I guess question on supply in 2019. I think you And a lot of others in the industry have pointed to supply trailing off in 2019 at some point being recorded. In terms of deliveries, a lot of the data providers are showing that as well. However, we got some Census Bureau data at the national level that showed being Supply permits and starts for multifamily still being a bit high last week.
So I guess, being recorded. How are you thinking about that latest data that came out? Does it pose some risk on the supply picture still being elevated through 2019.
Well, I think that data you're referring to Nick is national data and the data we give you is that which we see very specifically being recorded in the markets, but in the footprints that we believe are going to compete with our assets. So nothing's changed from our perspective with respect to being recorded. Supply reducing generally significantly in some markets like New York, but generally across our footprint, Notwithstanding what may be happening across the entire country.
Okay. And then just being recorded. A question on capital use. As I think you had recently or We're in the process of having your Annual Board meeting where you talk about where you think NAV is for the stock And how that would dictate your capital strategies. And so I guess latest thoughts on how you're thinking about Some of the development pipeline has really slowed and spending has slowed as well.
Your use of the excess Just free cash flow there, whether it goes to greater dividend growth, stock buyback, other uses, how should we think about Your order of priorities right now.
Well, let me first state that does not it's not an annual conversation. It's a quarterly conversation being recorded with respect to deployment of capital, and we did in fact have that in our most recent meeting in March. And Mark went through just the cash flow. And as you note, the fact that our cash flow being allocated to development is coming down considerably, which does create some more optionality with respect to where to invest that. And being recorded.
We've taken them through the choices and those conversations are ongoing. Nothing has changed at the present time. I think that being recorded. As I've shared with the investment community on this call many times over the last year or so, we're certainly aware of where we trade relative to You know what the Street thinks and what we think our NAV is. We have bought stock back in the past.
We won't hesitate to do so in the future. But being recorded. Our belief of where kind of that discount needs to be relative to many others is just a wider discount. So being recorded. We will continue to have 13,000,000 shares available under our announced plan.
And at the appropriate time, we won't hesitate to take advantage of that.
And I guess just following up lastly on that is, I mean, do you think at some point of if the stock is at a discount to NAV, I mean, Do you think about selling even more to capitalize on what seems like a still strong pricing in the private market versus where the stock is trading. And then also do you think about looking at perhaps some of the newer developments you delivered where you don't have as much of being recorded. A tax gain to deal with, and so perhaps that could be more attractive to sell some of developments being delivered in New York City over the last several years, for example.
Yes. Hey, Nick, it's Mark. I appreciate you starting by noting that
being recorded. Assets we've owned, implicitly owned for
a while, have a great deal of tax gain. In fact, the $300,000,000 or so we sold in the Q1 has about $210,000,000 of gains. Just to give you a sense of when you own assets, you buy right, you hold them for a while, You do have quite a bit of gain in them as well as our frequent use of 10/31 exchanges. In terms of selling newer assets, whether it's New York or San Francisco, being recorded. I mean those assets we think are the ones that will drive long term growth for the company and its shareholders.
We feel to some extent that you're selling your seed corn. We'd suggest to you that if we sell these better assets in bulk, that, that would affect our multiple at some point as well. So again, it's not something, as David said, the Board or being recorded. The management team is unwilling to do, but it just isn't costless either to sell even the newer assets that have less gain in them. Yes.
I guess the only thing I'd add to that, Nick, is that the development that we've done coming out of the Great Recession has been Extraordinarily profitable. And notwithstanding the fact that it's brand new, we've made a lot of money on those and there's a lot of built in gain in those assets as well.
Being recorded. Thanks everyone.
You bet. Thank you, Nick.
Your next question comes from John Pawlowski of Green B. Sheath Advisors. Please go ahead.
Thanks. Mark, I think last call you mentioned that the 421a burn off in New York Citi was going to increase 18 same store expenses by 170 bps. Could you Give us an update on what inning we're in, in that burn off across your portfolio and will that impact grow,
being recorded. Hey, John, thanks for the question. Just to clarify, being recorded. 1.7 percentage points of impact is to real estate tax number, not to overall Same store expense growth. So just to give you a sense of that.
That outcome will persist for a while. We have about being recorded at 1.7 to 1.8 percentage points for the next 3, 4 plus years, in terms of these abatements burning off. Being recorded. Again, as I noted in the prior call, every increase in net abatement does certainly hurt us on same store expense growth, But the assets become more valuable, the cap rate declines. So it's like you're paying off an expensive loan of sorts.
So you are creating value in these assets. It's just not as visible through the P and L.
Understood. And then moving on to the Boston development, right across the street from TD Garden, is that slated to still start this summer. And then could you if it is, could you just remind us, late 20 B. 'twenty one delivery. I think you mentioned a low 6% stabilized yield.
What kind of rent and construction cost growth rates are you underwriting between now and then?
In the process of starting that, it will likely I would expect that to be on the development schedule at our Q2 call. So we're now in the process preparing to site the demolition of the garage. So we're full steam ahead on the Q2. So that is a $410,000,000 or so project. Being recorded.
We do expect it will deliver it in late 2021. And as you note, it is currently a low 6% yield. Being recorded. The construction costs are all sort of bought in. So we're not facing any meaningful or a lot of risk with respect to the construction costs.
Being recorded. And I'm sorry, I don't have at my fingertips what we might be projecting for revenue growth there. We feel very good about the market, as Michael said in his being open. Opening remarks, but we're quite comfortable with that low 6 number.
Okay. And then, I know you've been working on the deal for the better part of a decade. So is that all in construction costs, a fully loaded number that contemplates All the leg work that's gone into the deal?
It contemplates all the capitalized costs that we've incurred during that time frame, yes, if that's your question.
Being recorded.
And your next question comes from Nick Joseph of Citi.
Thanks. David, you guys were active in the Q1 in terms of acquisitions and dispositions. So just wondering if you've seen any change either in cap rates or buyer interest Across multifamily.
No, Nick. We continue to see a great deal of demand For the product we're willing to sell as well as for the product that we'd be willing to buy. Being recorded. There may not be as many bidders, but there's certainly sufficient number of bidders to continue to validate the pricing and the valuations that we've been looking at for quite some time.
Thanks. So then Guidance assumes a 50 bps spread between the acquisition disposition yields and it's actually inverted, I think 20 bps the other way in the Q1. Was that something unique To the assets that you sold relative to what you're expecting to sell the remainder of the year?
Yes. We sold a deal in the Upper East Side of Manhattan at Sub-three percent cap rate, which had a big impact on the weighted average cap rate for all the dispositions for the quarter.
Thanks. And then just finally on the San Francisco development that delivered, you increased the cost by about $20,000,000 for amenity and apartment improvements. Being recorded. I just want to get your thoughts on why you did that and what the additional benefit of kind of increasing the scale of that was. Being recorded.
Well, we just felt that putting the hard surface flooring and upgrading the kitchen cabinets, doing the countertops rather, being recorded. I think stepping up the overall quality of some of the amenities all made sense. We continue to have some costs relative
being answered. Thanks.
You're welcome.
Your next question comes from Rich Hightower of B. C. R. I. Please go ahead.
C. Butler:] Hi. Good morning, everybody. Good morning, Rich. First, really quickly, just congrats to David Santi on a long successful at EQR.
I just wanted to bring that up. It's been a real pleasure working with you. So On to the Q and A here. Really quickly, within the embedded guidance for the year, where do new and renewal rents factor into being recorded. Into the guidance range, what are you assuming for those metrics?
So for the full year, for the portfolio, The new lease change guidance was at negative 60 basis points. Renewals were up 4.2%.
Okay, perfect. And then just back to the question on discounts, NAV and share repurchases. So Coming out of the Q4 earnings call and then coming out of the Citi conference, the stock was much lower than where it is today. I I think the commentary was a little more forceful in terms of the discount to NAV. There was a board meeting coming up.
If you don't mind, give us a little sense of maybe if being Any thinking at the Board level change from one time period to the other in the fact that no shares were repurchased being recorded in the interim period. Just help us understand the thinking there.
I don't think there was any change in thinking, Rich. Look, the Board, I think, very appropriately looks at capital. Equity capital is a very precious being recorded. And while it understands the arithmetic, just believes again that we've done it in the past. Being recorded.
And I think what we did in some of the stock we bought back in all 10 plus years ago, we were buying at 30% 40% discounts to replacement cost. That one only gets being recorded. Limited opportunities, as we talked about, limited sort of bites at this apple, and we just felt like it was not appropriate at this time. Being recorded. I don't want for a minute to have anyone believe that we're unwilling to.
I'm not sure anybody's bought more stock back than we have over the history of the company. Being recorded. As you know, we returned a great deal of capital back to our shareholders in the big disposition strategy that we undertook in 2016. So these are there's not an unwillingness on our part. It's just a belief that the discount needs to be greater than what it is today.
Being recorded. Okay. Thanks for that guys.
You're welcome. Thank you, Rich.
Your next question comes from Rich Hill of Morgan Stanley. Please go ahead.
Hey, good morning guys.
Good morning, guys. Good morning, guys.
I'm sorry if you've disclosed this previously, but could you refresh
Yes, we can. That number has been fairly consistent, David. Yes. I mean, being recorded. Certainly changed.
Over the past 2 years, the most notable change that we've seen was in Seattle, where rents being recorded. Rents have grown, but the absolute level of rents have been lower. But you've seen this influx of high paying tech jobs. So over the past 2 or 3 years, Seattle has kind of come down and mirrors New York City, which is our lowest at 17 being recorded. Percent of rent to income.
Everything else is kind of in the 20s and we're at 22% being System for quite some time in that low 20s, given the portfolio we have today.
Got it. And so when I hear those numbers, I don't see any issue with continuing to pressure to push rents. You would agree with that?
Well, not from an income standpoint. Correct. From a supply standpoint, but not from an income standpoint, no.
Got it. And then one more question on the job front. You guys have a really great chart, I guess, on Page 27 of one of your recent decks illustrating that your medium resident age is 33 And primarily focused on millennials. I'm curious, how much is population migrations factoring into some of the job growth that you're seeing. You mentioned Boston.
Is it really job growth that's driving this or jobs becoming or job is coming because you're seeing population migrations to certain markets. I tend to think that given your millennial population, you're in a really in position to maybe address that question.
Well, I guess I'm not quite sure what difference it makes. A lot of the businesses are going to the talent being recorded. And the talent is going to these high density sort of urban environments, and so therefore, the companies are having to go there. So I mean, we're just seeing being recorded. Very, very, very strong absorption of this new supply.
It negatively impacts pricing power. We believe being recorded. The tide will turn come 2019, but we're seeing an extraordinary absorption of this new product, Certainly from millennials. They're having a profound impact. But as I we have mentioned a lot, nearly 20% of our residents are 50 years of age and older.
So we really do believe that we appeal to anyone who's interested in living that sort of high density urban lifestyle.
Got it. And so maybe flipping it on Ted, are you seeing any signs of being recorded. Population migrations out of New York City. We've heard anecdotally some of that, but we personally haven't seen a lot of evidence of it yet. I mean, are you seeing any signs
being Well, I guess people try if you look at the larger SMSAs, that may be the case. But that doesn't mean that you're not adding population in the urban core. You may be losing population in some of these markets being recorded within the entire footprint of the SMSA, but we continue to see what we think is increases in households and density in the urban core. I being recorded. I think Washington D.
C. Is a perfect example. I mean, you've much of the new construction has been in the district. The district is now providing a lifestyle Salve had not been available for a long time and you're seeing extraordinary growth within the urban core of the district.
Got it. Really helpful guys. That's it for me. Thank you.
Thank you, Rich.
Your next question comes from John Kim of BMO Capital Markets. Please go ahead.
Thanks. Good morning. In New York, the 32 BJ union workers strike was recently averted After an agreement on salary increases. And I'm wondering, A, how much of this union impacted your New York portfolio? And also if you could just give us an update on where you think labor costs will go over the next couple of years?
This is David Santi. Yes. I mean, we've seen we've renegotiated contract that's part of being recorded. If you want to call it elevated payroll growth for this year, we have a very good team that works being recorded very closely with 32 BGA and a lot of these 421a buildings require being Unionized later. As far
what was
the second part of your question?
I mean, do you
see this Issue in other markets outside of New York?
Just overall labor. Yes. I mean, well, if you look yes, I mean, being recorded. Overall, our labor costs in our industry, we've talked about this for the past couple of years. I mean, when you're building being recorded.
10,000 units, 20,000 units in New York. You're creating tremendous numbers of jobs in our industry. Being recorded. I would tell you that with the impact of retail, being recorded. Our ability to attract and retain our office folks has been fairly reasonable.
Being recorded. But on the service side with levels of construction, some of the immigration issues, some of the being recorded. High costs in some of these urban cores, it becomes more challenging being recorded to attract and retain the service side of the equation. So when you look at our overall salary growth this year, I mean office, being recorded. The administrative function is very much in line, but we're seeing the elevation on the service side.
And John, just to give you some more detail, it's Mark for New York. Being recorded. It's real estate taxes we're really driving. So New York reported a 5.3% quarter over quarter number. They did an exceptional job managing payroll in New York and it was flat for the quarter.
It was really about real estate taxes being up 13% and dragging that number up.
Okay. Thank you for that. And then turning to the development pipeline, it now stands at $1,000,000,000 which is less than half
of where it was a
couple of years ago and that's very consistent with what you guys have been saying. But how low are you comfortable with the pipeline going to given the core competency But development costs remain elevated.
Well, it's a $1,000,000,000 pipeline, but what is truly under construction is meaningfully less than that. I I mean, we're comfortable having that development pipeline be whatever it needs to be, that allows us to commit capital in appropriate sort of risk adjusted manner. Being recorded. Development remains a core competency. We've got a terrific group of development folks in each of our being They continue to look at product for us.
It's difficult
being recorded.
Actually justify any sort of transactions today. They do other work for us. They've been involved in some capital projects deals. Being recorded. Underwriting potential acquisitions.
So it's a group of people, resources that we'll retain, and we'll look Forward to building that business back up, but only if and when it makes sense to do so. We're not going to chase products just because we've got folks who would like to be building it. Being recorded. We put those folks to work doing some other things in addition to them underwriting product and the time will come when we'll look forward to doing that business back up.
Peter Goldfarb of Sandler O'Neill. Please go ahead.
Hey, thank you. Just, yes, David, just Best in your next and assuming that your handicap will improve. So just two questions. First, David Nethercutt, you mentioned the sub-three on the Upper East side, which sounds like that asset had a lot of growth in it. So if you can comment, 1, how you think about selling assets that may have a lot of embedded growth and how that affects FFO growth of the company, But also given I would assume the desire to have a mix of assets in your markets of As and Bs, how selling an asset like this Fits into that strategy of trying to straddle a number of price points to maximize the portfolio's performance.
Well, I guess you presume there's a lot of growth in that because of the cap rate. Obviously, we feel that there was less growth being recorded in that asset and perhaps the buyer did. I think that there's a great deal of demand across the space today for being the value add product and I think this fits squarely in that. While we're certainly capable of undertaking that work ourselves,
being recorded. Oftentimes, we think someone will pay us a nice
premium to take that risk and work on themselves, and this is one of those situations. And it's just I mean, take an example of the kind of trading that we've communicated The Street that we're they should expect being recorded. We expect us to be doing by selling assets that we believe will be slower growth and reallocating that capital hopefully in assets that will be higher growth. And it would be interesting to note that we were under contract to buy another being sent a much newer asset in the New York metropolitan area, not in Manhattan specifically, but in the New York metropolitan area. So it's not being recorded.
A retreat from New York, but just a reallocation of capital in New York. And look, we own properties across sort of the spectrum in terms of quality. Being recorded. We're not I'd like to consider ourselves sort of agnostic in that regard. Well, certainly, we've got a lot of very good quality properties.
We also do have Bs and Perhaps even some Cs that we're in the process of bringing to be. So we're happy to invest across the spectrum.
Okay. And then the second question is, you guys have 25% of your exposure in California. The rent control proposition seem to be gaining steam. So if you could just comment, 1, on how you guys are viewing it, efforts and your thoughts on if this does succeed, how this impacts The growth profile of your California assets.
Well, California does represent a meaningful share of our invested capital and of our revenue and net operating income. And we are working very closely with the group being recorded. That includes other public REITs and other large private owners of multifamily to address this referendum to appeal the Costa Hawkins Law. And for those who are unfamiliar with that, Costa Hawkins is a law in the State of California that limits rent control only on properties delivered before February of 1995 and it restricts It actually requires vacancy de control on those properties that are subject to rent control. So it's important to sort of note that rent control exists in California today.
Being recorded. Municipalities can adopt rent control today. It is just subject to Costa Hawkins. So while we certainly don't think the repeal of Costa Hawkins is a good thing, We also don't think that it's a disaster because you can't have rent control today. Many, many, many municipalities have decided or opted not to.
Being recorded. And in those that have actually been on the ballot measures over the past several years, many of those have actually been defeated. So it's certainly something that we're watching very closely. Being recorded. We're aligned with our peers and others that have got significant investments in multifamily in California and we'll sort of see where it goes.
But do you have a view on what
it would do to your rent profile, your growth?
Well, again, cost to Hawkins is not introducing rent control. So the fact that Costa Hawkins is repealed does not mean every municipality in which we operate will automatically adopt being recorded. Rent control. So first of all, cost to Hawkins has to be repealed, and then municipalities have to decide whether or not they want to adopt Some form of rent control, an option that they currently have, but as I mentioned many of them don't. So it's very difficult to sort of tell you what the impact would be.
I Could tell you if you wanted to ask if a particular municipality adopted rent control, what that impact might be. But to sort of suggest would it be on the entire state would be impossible. Being recorded. Okay. Thank you.
Your next question will come from the line of Tayo Okusanya of Jefferies. Please go ahead.
Yes. Good morning. Two quick ones from me. First one, I just wanted to confirm for the quarter interest and other income was about $5,800,000 That seems to be like some one time item in there. Could Just let us know what that was and whether that's being backed out of normalized FFO per share?
Thanks Tayo. It There is a schedule we prepare for that on Page 22 and those are lawsuits that were settled in our favor Relating to some development activities, but we do take those out of those recoveries in our favor out of normalized FFO. And that is on page 22, that $5,300,000 almost all of that is really that nature. Okay.
I see that now. That's helpful. So that's number 1. And then number 2, heading into spring leasing season, I know it's just April at this point, but Any insight at this point that you can give into new lease rent growth? I mean, it Sounds like it was negative again in 1Q.
And just some sense of if it's possible for it being positive in 2Q or given the supply constraints just to kind of cautious in making such a statement.
Yes. So this is Michael. So I do want to start out and I wanted to share, I do not believe that looking at the results for just the first recorded. I will tell you that every market other than Seattle and Orange County was on track or slightly ahead with our Q4 our Q1 forecast even though those were negative numbers. Being recorded.
And really there has been no change to our full year new lease guidance assumptions that we shared in the investor presentation back in March. Being recorded. I can also tell you that Seattle and Orange County, which we talked about, were also offset by greater being recorded on the renewal side. And since the volume of transactions during this quarter is low, being recorded. A lot of this stuff can change on us as we start moving through the leasing season.
And I think what you just alluded to, if you just go back to some of the commentaries for each one of these markets, being recorded. We are on like our 8th consecutive week of incremental rent increases week over week over week And that absolutely manifests itself into improvement in this new lease change. So sitting here today, like we look at that every single week, being recorded. This last week, we were positive. It doesn't mean that that trend is old, it doesn't mean that it can't get even more positive.
Those are the kind of indicators that we have right now and the fact that rents have been moving up kind of do help fuel performance on the new lease change metric.
Being recorded.
Your next question comes from Dennis McGill of Zelman and B. O. C. S. Please go ahead.
Hi. Thank you, guys. First question, so just carrying forward on the new lease question there, appreciate the clarification, But do you have what the new lease rate was just for our records in the Q1 and then how that spans across the markets?
Yes, sure. So I'm just going to I'll kind
of rattle it off.
I will tell you for the entire portfolio, same store, we were negative 2.6% And I'll just move kind of market by market real quick. So Boston was down 4.2%, New York was down 5%, Washington, BC was down 4.8%, Seattle was down 4.5%, San Francisco down 1.5%, being recorded. Los Angeles was positive 20 basis points, Orange County was negative 40 basis points, San Diego was positive 50 basis points. And again, I just want to make sure everybody realizes that that standalone quarter is not a really good indicator. And I think what's more relevant is whether or not The assumptions for the full year are changing based on what has occurred in the Q1.
And outside of that trajectory for Seattle and Orange County, I will tell you these are exactly where we expected them to be.
That's really helpful. And just for comparison, so that minus 2.6 percent across the whole portfolio, that's Comparable to what you just referenced as being slightly positive in the most recent week.
Yes. Yes. So I don't have that in front of me, but I think we were positive 20 basis points for the last week for the entire portfolio on that new lease change metric.
Great. Thank you. And then second question, can you maybe just share what you're hearing and seeing with With respect to capital availability for the development side.
Well, I think everybody just being recorded. All he has sort of anecdotal sort of things about that, Dennis. I can tell you that we have received so our investment team has received inquiries about our interest in providing some equity capital for developments from sponsors that never would have called us 12 or 18 months ago. We've just we've seen we've heard about things being mothballed, things being put on the back burner, etcetera. Now that doesn't mean that well capitalized people can't find the capital, can't find the institutional We've heard of some big institutions sort of stepping aside.
Martin, can you talk about maybe the debt side and how that's affecting Sure. So what we've seen is generally steady ability of developers who are able to being recorded. Equity to finance themselves in the debt market at this point. We see some banks, for example, 5th Third just announced that they are Reducing their multifamily lending. The other banks we survey generally say they're going to be in about the same place as they've been in the recent past.
There may be a touch more focus on suburban deals that are tending to pencil better, so that they're doing a little bit more development in the suburban areas that are being financed. But it doesn't seem to me that the banks are the restrictor, it's the equity, because the banks are only loaning at 50% to 60%. So it's easy for them to make that loan and feel confident it's the equity that's at material risk. Hey, Mike, how about beyond the Hi,
go ahead.
Yes, Dennis, just real quickly. I mean, you've just had a situation where development costs continue to rise, being recorded. Yields, build to yields getting compressed and it just we just think it's getting to a point where a lot of equity is Heading to the sidelines.
All right. I was just going to follow-up. If you look at the non bank sources, is there anything that would vary from what you just talked about sort stable availability.
Yes, there's more. There's certainly more involvement from them, but their capital is so expensive that they're more being recorded. Of a substitute for the equity than they are for the debt. And again, they are a pretty pricey alternative. So again, with all the cost being recorded.
We just see this general cranking down of yields and IRRs and with revenue growth being modest across being recorded. We do just generally feel like those numbers are just not going to add up and we would expect them to decline over time.
Being recorded.
Your next question comes from Wes Golladay Vijay of RBC Capital Markets. Please go ahead.
Hi, guys. Just a follow-up to that last question. Do you expect to see a meaningful uptick In current developers getting in trouble, the whole backdrop of rising costs, higher financing costs, delays, what are you seeing on the ground?
I guess we've not seen much, really, any of that, at least at this juncture.
Being recorded. As we mentioned
earlier, the products projects that have been delivered are being absorbed. They may not be achieving the rental rates that being recorded. They might have expected, but they're being absorbed. And my guess is that they're far from being in distress. They might not be making their equity returns that they had hoped.
They may not be able
to refinance out every sort of nickel of construction loan that they had hoped. Being recorded. But I mean, we're a long way, I think, from distress in the space just given the very, very strong demand That we're seeing for good quality multifamily today.
Okay. What if we fast forward, call it, 2 years from now? I mean, if you're having a hard time penciling in Developments and I'd say you have a superior cost of capital. You just raised debt around 3.6 for 10 year money. Do you see the people that are going to break ground today getting into any issues?
I mean, again, if they're breaking ground today and they're being financed, as Mark said, at 50% or 60%, They're not going to be distressed. They may not achieve their equity returns, but they will not be in distress. Yes. And just to give a little color around that, We're seeing spreads of 2.50 to 3 100 basis points above LIBOR. LIBOR is around 2%.
So call it 4.50, you imagine that rates are up 2%. You could have a situation where the debt rate of developers staying is 6%, 6.5%. That said, they're underwriting the debt yields of 7% or 8%. I think the lenders are at 50% leverage are probably okay. I think the equity will get pinched at some point and I'll feel it.
But I think the lenders at this low leverage, frankly, are, as David said, probably in an adequate position of coverage.
Okay. And then looking at the deliveries for peak leasing season this year in many of the markets, do you see any risk to at least at some markets Where it will be pushed into the back half of the year, where it's not ideal?
Any of the new product being pushed into the back being recorded. Look, there's plenty of product being delivered in every quarter that it's whether or not something opens their doors 30 or 60 or 90 days later than expected is not going to be a windfall to the space. I mean, there's just a lot of product kind of coming and when something opens its door, I'm not sure it's going
being And
your next question comes from Steve B. Sakhwa of Evercore ISI. Please go ahead.
Thanks. Obviously, you guys have refined the portfolio from a geographic perspective the last few years. And I'm just curious If you or the Board have had any thoughts about reconsidering markets, are you pretty content on kind of the markets you're currently in?
Being recorded. I think the Board asks us, Steve, on a regular basis to sort of test our thesis and have asked us repeatedly, If you were to add some additional markets, what might they be and why are you not entering those today? If you look at the heat maps that we've being shared in all of our brochures that there are certainly some markets that on some characteristics look, I think very attractive. Being recorded. For one reason or another, they're either too small or single family home ownership is the price of single family homes is too cheap or whatever.
But we're not committed. We're not chiseled in stone where we are. If it makes sense for us to add another market or 2, we won't hesitate to do it, and we continue to being recorded. Do that work to determine whether or not that's in our shareholders' best interest or not.
David, could you just maybe share with us kind of the 1 or 2 markets that You might go back into or and would you go into that through acquisition or through development?
Well, look, I guess one of the things that we have to be thoughtful about, Steve, is just given our size being recorded. For us to go into a market requires a very meaningful amount of capital to have it make sense for Michael and his team and for our investment team and for all the support that one needs to give. So my guess is if we went into a market, it would be being recorded with a hopefully some sort of portfolio acquisition that would then be supplemented by one off acquisitions and certainly we would consider Development. I'll say that Denver is a market that when we exited that market as part of the large sale of assets to being recorded. Barry, Sterling and Starwood several years ago.
We'd always consider that not to be a market exit, but rather to be a portfolio exit. Being recorded. It was a portfolio of 30 year old, quite suburban, surface park walk up kind of product that we knew we would not own long term. Being recorded. We did not see our way at the time to having the sort of portfolio that we want to have in that marketplace.
And so we took advantage of what we thought was very being Pricing to sell those assets. And it's certainly a market that we would consider going back into if and when it made sense to do so.
Being recorded.
And gentlemen, there are no further questions at this time. I'd like to hand it back over to Mr. McKenna for closing remarks.
Well, thank you very much, everyone. I'll let you know that David Santee will be in attendance being recorded at the NAREIT meetings in New York, and you'll all get a chance to say goodbye and wish David well. We'll look forward to seeing everybody at that meeting in June in New York. Thank you so much for your time