Earnings Call: Q1 2019

Apr 25, 2019

Good day, and welcome to the Essex Property Trust First Quarter 2019 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties. Forward looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC. When we get to the question and answer portion, Manager asked It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin. Thank you for joining us today, and welcome to our 1st quarter earnings conference call. John Burkhart and Angela Climen will follow me with comments and we'll end with Q And A. Our first quarter results represent a good start to 2019. Core FFO per share grew at 4.5 percent year over year and was 0 point 0 $4 ahead of the midpoint of our guidance primarily due to solid operations, which John will discuss in a moment. Market rent growth was up 3.1% from the start of the year through March, which was in line with our expectations. As such, we are not making any changes We are pleased following our first quarter results as a result of great execution from the Essex team. Angela will provide more detail on the guidance increase in a moment. Taking a broad look at several economic indicators we are feeling pretty good about the setup for Essex in 2019. Job growth, both nationally and in our metros, decelerated earlier this year, slightly underperforming our annual expectations on Page S-sixteen of the supplemental. The most significant underperformance was in Southern California, some of which may be attributable to year end market volatility, the government shutdown and cost reductions related to the merger of Disney And Twenty First Century Fox. Less robust economic conditions, both in the U. S. And globally, has tempered inflation expectations and reduce the chances that the Fed will raise short term rates in 2019. In our experience, lower interest rates and steady economic growth generally provide an attractive environment for NOI growth and asset value appreciation. While we are closely monitoring job growth, we are encouraged by other economic indicators in the Essex markets such as office construction, venture capital investment, job listings and personal income growth, which are all either accelerating or trending at healthy levels. Major developments of large scale office projects continue especially in our Seattle and Northern California markets. Under construction office projects from San Francisco's to Silicon Valley aggregate almost 14,000,000 square feet, while Seattle is adding approximately 8,000,000 square feet, both representing greater than 5% of existing stock. Venture Capital Investment recently reached a record level in the Bay Area with over $60,000,000,000 invested in the region on a trailing 12 month basis, supporting continued strength for the Bay Area economy. Several West Coast based unicorns are expected to complete their IPO in 2019, and much of this liquidity is likely to be reinvested back into the local economy. 10 largest public tech companies, which recently reached over 26,000 job postings, representing a 33% increase in the past year and the highest level since we started tracking this information several years ago. Amazon's job openings in Seattle also reached an all time high with Coast is driving average incomes higher. For example, growth in per capita personal income in the Essex markets grew over 6% last year and is expected to remain strong growing at a similar level in 2019. With income growth outpacing rent growth, affordability has improved in all of our markets as compared to 1 year ago. Each of our markets rent to income ratio with the exception of Ventura is now 0.4%, which is below its long term average for the first time since 2011. In summary, against the backdrop of low interest rates, several of the most relevant economic indicators in California and Washington suggests healthy demand for rental housing. Fast growing and innovative companies continue to attract top paying talent from across the country leading to higher average incomes and improved rental affordability. On the supply side, we see no noticeable change from the supply estimates on page S16 of the supplemental. We are aware that other data providers have much higher development delivery estimates for the Essex markets and believe that their estimates will be lowered as we proceed through 2019. In addition, prospective yields on new development deals continue to decline as the tight labor markets are causing construction cost increases that exceed rent growth. Overall, our delay adjusted supply forecast for 2019 have not changed. Looking a bit further into the future, we are encouraged by a recent decline in residential permits in our markets as shown on Page S 16.1 of the supplemental. Residential permits, which include both multifamily and single family housing have fallen about 10% from the peak we recorded in the second quarter of 2018, While we can't be certain that permitting activity will not reaccelerate, we suspect that the recent decline is attributable to financing and other consequences of compressing development yields. The decline in permits is a good indication that capital is responding to lower development returns which should lead to lower multifamily supply beginning after 2020. Turning to the investment markets, we've seen no significant change to cap rates for A or B quality properties. As I've mentioned in prior quarters, cap rates generally do not move quickly and are mostly a function of capital private market pricing. We took advantage of this disconnect in the fourth quarter of 2018 by selling Ethan Hope a Class A High Rise property located in downtown L. A, at an attractive cap rate and buying back the stock at a discount to NAV. In the first quarter, we saw a nice improvement in our cost of capital and use this opportunity to buy out our partners' interest in one South market at an accretive yield. One South market is a Class A High Rise property located in the heart of San Jose and can be seen on the cover of this quarter's earnings supplement. With Google in the early stages of developing over 11,000,000 square feet of office space near downtown San Jose, we are happy to increase our exposure to a high quality asset in a great long term market. Given our improved cost of capital since last quarter, are actively looking for acquisition opportunities, and we continue to have an ample preferred equity pipeline. We will continue to underwrite assets with the same diligence and process that has helped us succeed in the past. Lastly, regarding California regulatory matters, There are many moving parts as a variety of state and local government officials attempt to balance the need for more housing to address chronic shortages with the expanding renter protections. We will continue educating others with respect to the unintended consequences of rent control while helping to create housing at an attractive risk adjusted return to our shareholders. With that, I'll turn the call over to John Burkhart for some more color on the quarter and our markets. Thank you, Mike. We started off the year strong, achieving year over year 3.1 percent revenue growth for the first quarter, which exceeded our expectations due to one time other income in March. At the City conference, we published our January and February preliminary revenue growth rate 2.7% and we noted that our scheduled rent for the same period grew approximately 3%. That trend continued into March 2019 where scheduled rent grew 3.1 percent over the prior year's period. The variations in revenue growth rates relates solely to other income. March 2019 other income was elevated due to a combination of line items, including lease break fees, one time filming income and early utility collections related to the spike in natural gas costs in January. Occupancy for the same store portfolio in Q1 twenty nineteen was 96.9 percent or 20 basis points below the prior year's period as expected. We continue to see opportunities to create more value In the first quarter of 2019, our parking revenue is up 14.2% compared to the prior year's period, and we expect that trend to continue. Our expenses came in higher than costs related to the water and snow damage from the heavy storms in January February. Additionally, our gas expense spiked due to both an increase in Some of the utility cost increases were offset by declines in electricity costs related to our green initiatives. Including the installation of PV Panels at over 50 properties. We continue to make progress towards our digital transformation objectives completing the implementation of Workday, a paperless mobile HR platform that will enable, that will eliminate printing and trips to the office to sign documents, reducing labor, while playing the foundational role in our steps to success program, which is focused on growing employee's careers and related compensation at Essex. The rental market was strong as we expected in the 1st quarter, However, it slowed down since the quarter end with SoCal being the weakest. It's hard to say what the driver is with such a small sample period, although it appears to be mostly supply related as the weakest markets are L. A. And Alameda County. Now, we will provide an update on our markets. Seattle employment growth continues to outpace the U. S. And other major East Coast markets, posting year over year growth of 2.2 percent for the first quarter of 2019. Amazon continues to grow their presence on the east side, announcing plans to move the business division from Seattle to Bellevue by 2023, as well as pre leasing and potentially buying an additional 900,000 square feet office space in Bellevue. In Downtown, Apple and Oracle are vying to sublease 1 of Amazon's under construction towers. Dropbox executed a prelease with the potential of adding 5400 jobs to the downtown market. The North And South submarkets continued to lead in year over year revenues for the first quarter posting 3.3% and 5.3% growth, respectively. Followed by the east side with 2.5% and Seattle Cbd improving with 1.3%. Loss to lease was 1.1% at the end of March. Moving on to Northern California. Job growth in the San Francisco Bay Area averaged 2.4% year over year, in Q1, led by San Francisco with 3.8% growth, the vast majority of which continues to be in higher paying industries. On a trailing 4 quarter basis, venture capital funding hit a new 20 year high in the Bay Area. So far in 2019, 3 Bay Area Tech Companies, Lyft, Pinterest and Zoom video have completed their IPOs and others such as Uber and Postmates filed for IPOs with many more IPOs in the process. The liquidity from the IPOs of some of these unicorns will both free up funds for additional investments and provide capital to certain employees who often create their own startups. Office expansion has been robust. YouTube kicked off an environmental study for 2.4000000 Square Feet of mixed use development in San Bruno. Facebook revealed plans for their 1.8000000 Square Feet mixed use development in Menlo Park Linkedin and Alibaba increased their combined footprints by a little over 500,000 square feet in Sunnyvale. And in San Jose, Google pre leased another 700,000 square feet office park currently under development. Our Q1 year over year same store revenue growth was led by our San Mateo and San Jose submarkets with 4.5% and 3.8% growth, respectively, followed by San Francisco at 3.3%, Fremont at 3%, Oakland at 1.9% and contra Costa at 1.7%. Clossed the lease at the end of March was 1.9% for the Bay Area. Continuing south, Southern California posted a weak quarter for employment growth. Averaging only 90 basis points for year over year job growth or half the national average in Q1 and well below our 1.3% 2019 estimate on the S-sixteen in the supplemental. In 2018, the BLS showed lower employment growth for San Diego, Orange County, Los Angeles, and then revise these markets up between 50 and 100 basis points with the March 2019 prior year revision. Los Angeles actually performed below the Southern California average posting 70 basis points growth for the period. One of the employment categories that showed weakness was motion pictures, which was down approximately 10% during the first quarter. It is unclear what impact, if any, the Disney 21st Century Fox Studio merger may be having a local employment However, they have stated that they expect to achieve $2,000,000,000 in cost synergies, which will include staffing reductions. At the same time, HBO expanded their headquarters in the market adding just over 110,000 square feet in Culver City. Workspace companies such as WeWork, Knotel And Spaces expanded their combined LA footprint by over 300,000 square feet. Year over year revenue growth in Q1 was led by West LA at 4.6%, Woodland Hills at 3.5%, and Tri Cities at 3.2%. L. A. Had a lost lease of 1.1% in March. Although Los Angeles, Q1 revenue growth was very strong, we've seen a reduction in the year over year market rent growth rates which may be related to the combination of lower employment with some lease ups offering concessions that exceeded 8 weeks free rent. In Orange County, jobs in Q1 grew 90 basis points year over year with the largest gains in professional business services. In January, the BLS posted 2018 benchmark revisions, which erased all the prior years reported softness in this market. On revenues, the South Orange submarket continues to lead with 2.4% year over year growth in Q1, and the North Orange at 1.8% for the same period. We ended March with a lost lease of 60 basis points. Finally, in San Diego, year over year job growth was 1.4% in Q1. Year over year revenues in Q1 were led by our 4.8% growth, followed by Chula Vista with 4.3% and North City with 2.9%. Currently, our portfolio is at 96.8 percent occupancy and our availability 30 days out is at 4.3%. With lost the lease of 1.1% for March 2019. Thank you. And I will now turn the call over to our CFO, Angela Climate. Thank you, John. I'll briefly comment on our first quarter results and increase to the full year guidance then provide an update on our investment and capital markets activities. I'm pleased to report that which resulted mostly from one time revenue items as John Burkhart highlighted earlier. For the full year, we are raising the midpoint of our core FFO guidance by share to 1308. This is primarily driven by more favorable capital markets conditions as the pricing of our first quarter was better than originally contemplated in our guidance. Overall, this revised midpoint equates to a 4% growth in core FFO per share for 2019. Moving on to investment activity. During the quarter, we originated 2 new preferred equity investments. Which comprised of a $24,000,000 investment fully funded at close and a $36,000,000 investment funding in July and will not before we funded until the end of September. Year to date, we had early redemptions and 2 preferred equity investments totaling $27,000,000, The typical term of these investments is 3 years, but the timing of our payoff is often tied to the developer's ability to obtain long term financing or sale of the project, which can result in lumpy repayment and can be difficult to anticipate. Turning to capital markets activity. During the first quarter, our cost of capital improved as the 10 year dropped by over 50 basis points since last November. We took advantage of these favorable conditions by issuing $500,000,000 of unsecured bonds at an average rate of 4%. The proceeds were used to repay secured debt that has mature through April over this year. For the balance of the year, we plan to repay $400,000,000 of debt, which consists of $110,000,000 maturing this year, plus $290,000,000 maturing next year, but can't be repaid early with no prepayment penalties. The reason for making early repayment is the cash benefit. Although the effective rate on this $290,000,000 debt is 3.8 percent, the cash rate is 5.5% which will allow us to a variety of capital sources and we'll continue to monitor the capital markets to optimize the refinancing. With over $1,000,000,000 in availability on our line of credit, 23% leverage and net debt to EBITDA of 5.5 times, our balance sheet remains in excellent shape. That concludes my comments. And I will now turn the call back to the operator for Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question. Hi, good morning. With respect to guidance, you mentioned that the first quarter you had a one time benefit. So just curious, how we should expect the cadence of same store revenue growth now through the balance of the year? Angela here. The cadence given the first quarter performance on same store, we had originally anticipated that, first half was going to be much lower than the second half and now they're probably going to be about the same. So we're not changing, our same store guidance. And, but because of the first quarter revenue, they'll just end up being more comparable. Got it. And then you guys talked a little bit about some softening trends subsequent to quarter and you highlighted Alameda in L. A. I was just curious if this is being offset by strength in any other submarkets? Well, this is John. That's a great question. And the answer largely is yes. We are seeing, other parts of the Bay Area that are a little bit stronger and certainly Seattle is a little bit stronger. So there is an overall balance there. The whole portfolio performed a little bit better in Q1 than it started out to perform in April, but Again, there's clearly a little bit more strength in some of the tech markets. Our next question is from Nick Joseph with Citigroup. Please proceed with your question. Thanks. Mike, you mentioned improving affordability there continues to be a broad push for rent control nationally and specific to your markets, Governor Newsom in California appears to be supportive of some additional rent troll despite the defeat of Prop 10 and AB36 stalling. So how do you think about portfolio positioning and capital allocation going forward given the current political backdrop Thanks for the question, Dick. I appreciate it. I guess I want to take a step back from that and to talk a little bit about the overall discussion. And because I think it's much more balanced than it was a year ago, And by that, I mean, I think that, there is more recognition that if you push too hard on the rent control side, that'll have pretty dramatic impact on the housing production within California and Governor Newsom, has been part of that discussion and part of his campaign was trying to produce 3,500,000 new homes between now 2025, which would be somewhere around $500,000 to $600,000 per year versus about $80,000 per year that we produce for the last 10 years. And so he also noted that he wanted to protect renters. So striking that balance, I think, is what the legislature is, is grappling with and a lot of the things that are happening are focused on that. I think that what we've done is try to identify the best long term growth markets, for multifamily property, we think we're in those markets. And it seems like other potential places that we might be interested in investing say Oregon or Colorado or Florida or some of the Bigger East Coast cities are having some of the same issue. So I don't think this is the California thing. I think it's a broad movement. And so I think that we are pretty comfortable with our existing geographic focus. Thanks. And then just, how do you think about underwriting the preferred equity deals versus some more vanilla acquisition or development deal? And recognize the risk profile is different, but how from FX's vantage point do you underwrite them? Sure. Again, this is Mike. Once again, we underwrite them much like we underwrite our development deals, our direct development deals. And so in other words, we look at costs and the spread between what acquisition values are and what the development yields are. In order to get comfortable with that. And what we are trying to do is we're trying to find the best, let's say, development oriented strategy for the company. And the reason why it focuses us on preferred equity investments is because we don't take that upfront risk between when we are financially committed to a land purchase, because we step in in those transactions at the point that the deal is closing and construction is beginning. So we've eliminated that front end, risk element. So we think it's just a better risk reward equation for the company. Our next question is from Trent Trujillo with Scotiabank. Please proceed with your question. Hi, good morning and thanks for taking the questions. Just looking at Seattle real quick, I think your midpoint in guidance calls for similar growth in 2019 versus 2018, despite some new supply. And we've seen some areas in the Seattle MSA get up zoned. So how are you thinking about the potential to continue rate growth trends in that market? Yes, maybe I'll start. This is Mike and John might want to comment more directly on the market itself. But As to the up zoning, I think it's going to be several years before you really see the impact, the potential impact of that. And it's not as quite as simple as, Hey, there's going to be up zoning and therefore, there's going to be more units produced because there are, affordable unit requirements and construction costs as you go up in density can increase. So I would say it's not just a slam dunk that we're going to see a significant, increase in the amount of developed departments in the Seattle market. So John, can I turn it over to you? Yes, absolutely. As what we're seeing right now in Seattle is overall continued strength, which was consistent with the really the end of last year. The supply is getting absorbed. As I mentioned previously, the job growth is strong and it continues to absorb that flies. So, we'll see what may happen is maybe we're a little stronger in Seattle and a little weaker in LA overall. With our guidance, but Seattle is certainly performing well. The tech markets are performing well. Does that answer your question? Yes, yes, sure, does. Thank you. And I guess, touching on a theme from earlier, in terms of capital allocation, You've been opportunistic in buying back shares. And since then your repurchases, since your repurchases, the stock has rebounded about 15% and you're now trading above consensus NAV. So at what point do you consider issuing equity as a source of funds for the acquisition opportunities that you cited in your prepared remarks? Well, keep in mind that for our investment activities, we balance the, the, cost of capital or the spread And so it's really going to be driven by that. We haven't issued yet so far because we've had proceeds excess proceeds from the sale of Ethan Hope and our preferred equity investments have been funded by the redemptions. And so until we have a need for that capital. We'll take a look at that point in time what the best opportunities are, whether it's issuing, over the, you know, over the broad market or via our joint venture or dispositions. And that'll relate to also on the investment side and what yield are we producing to get the best spread possible. Our next question is from John Kim with BMO Capital Markets. Please proceed with your question. Thank you. With affordability improving in all of your markets and all these tech IPOs coming out, can you just what that means for the housing market and your ability to push rents above the 3% market rental growth forecast? Yes, John. This is Mike. And, that is the key question. I think affordability is has been the key constraint over the last couple of years plus, I'd say, peaking development pipelines. And, when development deliveries occur in essentially several properties being delivered at one time. You start seeing these concession levels increase, which, has championed our ability to push price to this point. So we see those We see those forces changing somewhat over the next couple of years and not to a huge extent, but on the margin, And as a result of that, we think that there will be more pricing power going a few years down the road. On your acquisition of the joint venture stake at One South Market, can you just remind us if, if that was partner led or your decision, it sounds like it was more years. And remind us how you derive purchase price? Yes. On the One South market, transaction, our partner had a life on their fund that was coming to an end. So the timing was driven by that. We normally wouldn't have, you know, choose to say market an asset in the fourth quarter in the midst of, on the tailwind of Prop 10 Boat. So it's really driven by them. And the purchase price, was it, were there other bidders for that stake? Yes, it was broadly marketed. And the we end up purchasing it at a growth of $179,000,000 and we ultimately it may sense to transact with us on several levels because we already owned the assets and, there was a certainty of execution as well. And the pricing makes sense to us. Next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question. Hey, good morning out there. Two questions for you. Mike, just first one, going back on the regulatory front, there have been some articles about certain municipalities sort of going, putting in rent caps or different sorts of rent controls subsequent to the defeat of Prop 10. Can you just provide a little bit more perspective on this? And are you guys seeing any impact in the markets in your markets? Or is this more of a localized thing that doesn't seem to be spreading? Yes, Alex. Good question. I would say that we are at the beginning of the process. And so it's going to take some time to work through all the different regulations that are out there. Keep in mind that we have, concentrations really in, really 4 Cities in California, where we operate in about 80 cities. So we're pretty diversified within California as it relates to this rent control issue. And there isn't it isn't like a change in any one municipalities is going to have a huge impact on the company. So I think that's important to keep in mind But there has been increased regulation proposals on the local area. A lot of them have had to do these just cause evictions and higher caps. So in the case, for example, of Glendale capping rents at 7% And again, over long periods of time, we grow rents at somewhere around 3%, 3% plus or minus. So some of these caps are set at a point that, it should not have a dramatic impact on our longer term results. And, so we're cautiously optimistic. We've left the California for responsible housing entity in place, so that we can have a coordinated industry response to all these various proposals. And, but we're working through it. And there's we could speculate about what might happen, but again, it's so early on that I think it would be, made both challenging and imprecise to do so. So we're going to avoid, trying to look into the future because at the end of the day, we don't know what's exactly is going to happen. Okay. And then the second question is for Angela. On the guidance and maybe it's continuing on with the legacy of Mike Dance, But if you look at your NOI, your NOI expectations for the year are higher, but you left the NOI same store NOI range unchanged your interest expense is now higher. So just thinking about it, is it the fact that it's just too too early in the year where you don't want to be changing your NOI guidance or are there other things that are going to sort of push back on the NOI? Because otherwise, it sounds like both should have moved up commensurately with your performance in the first quarter versus is there a reason that you're sort of holding back on, on growing the same store NOI range? Yes, Alex, this is a good question. And you're right. It's a fine line to try to walk. But in terms of let's just make sure that, that you understand where on the NOI and it looks like, there's a change to midpoint on our guidance page, but that is really because of the one South market consolidation, it was off balance sheet. And so rolling that to the, consolidated NOI. And then it's, you know, and then we have our partial offsets to that. And so at the end of the day, it not a meaningful change to NOI at this point and nor do we see a meaningful change on a trend line basis So it's and as you know, we've always made sure that there is, of course, a level of conservatism, so we don't miss. Having said that, we certainly aren't seeing anything so compelling right now that it makes sense to try to get ahead of the numbers and move guidance. Okay. That's helpful. Thank you. Our next question is from Rich Hightower with Evercore. Please proceed with your question. Hey, guys. How are you? Hey, Rich. Hey, Mike. So a lot of my questions have been asked already, but I guess just to follow-up on the guidance question and what you're seeing currently. Are you able to tell us where you're sending out renewals over the next 60, 90 days at this point in April? And what you're achieving? Yes, sure. This is John. I can answer that. One thing that's important to understand is we really we send our renewals out like 60 days in advance. So our Q2 renewals have gone out largely almost all of them at around 4.9%. So very strong, but again, realizing that I also mentioned in the opening that the market is a little bit weaker in April. So those may get negotiated down a little bit, but they are, up from where they were in Q1 was about 4.1% and Q2s at about 4.9 at this point where they were set out. Okay. That is helpful. And that's an aggregate. I mean, can you break that down quickly maybe across the 3 sort of bigger markets? Sure. No, absolutely. So, that is an aggregate. And so we have at about 4.3% for SoCal overall, about 5.4% for NorCal. At about 4.9% for Seattle. Our next question is from Drew Babin with Robert W. Baird. Please proceed with your question. Hey, good morning. Question on your deliveries coming in later this year in San Mateo and Santa Clara. I was hoping you could kind of about the specific submarkets in the Bay Area. Obviously, supply coming into the Bay Area is very summer specific and markets are kind of all over the place in terms of their performance. But I guess can you comment specifically on where your developments are achieving first occupancy in 2Q and 3Q? Yeah, Drew. This is Mike. Just make a couple of quick comments. First is that they are we've had a pretty severe winter here. And so they are from a timing perspective being pushed back somewhat given rain delays and that type of thing. So that's the first comment. The Station Park Green Development is about a mile from our corporate office here in San Mateo, and it's a very strong submarket. In fact, I think that is that the strongest region, I think in John, within the portfolio right now. So Yes. No, that absolutely is the strongest region rents are up over 6% year over year in So it seems like we've timed that well. And then, Milo is in Santa Clara And that market has a little more concessionary activity, but it still seems like San Jose in the tech markets are doing so well from an employment perspective that, we think that both markets are well positioned, both properties well positioned and timing is good. Okay, great. That's helpful. And then on Downtown L. A, would you say that the bulk of the supply that you're expecting there this year has hit or is hitting now as you mentioned, the weakness kind of so far in 2Q or is there more to come as we get later into the year? Yes, we we, this is Mike again. We have about our estimate is about almost 12,000 units in 2019 and actually increasing a bit in 2020 to almost 13,000 units in downtown L. A. Or ALA, which is the downtown is the primary component of that. And it really doesn't slow down until Q4 2020. So I think we're going to have continued supply deliveries for the next at least the next year. Okay. Thank you. And then one for Angela. Would you say that your preferred investment I guess aggressiveness, maybe increases, given the redemptions in the first quarter, are you maybe looking to do more preferred investments as was implied in the original guidance this year or might the proceeds just be spread among other investment opportunities as well? That's a good question. Generally speaking for on the preferred equity investments, we would like to do more than we have, always targeted on the pipeline just because the yield is so compelling. And as Mike mentioned earlier, and the risk adjusted return also makes a lot of sense. So that's just a general statement. But as far as what we're expecting, we had guided between $50,000,000 to $100,000,000. And And we're not at this point ready to go outside of that guidance. And because primarily we do have redemptions to offset that. And so, but to the extent that we can't ramp up, we would certainly love to do so. But at the end of the day, we still have a very disciplined underwriting process. And so even if there are a lot more opportunities, it doesn't mean that we're going to automatically 2 more deals. Our next question is from Rob Stevenson with Janney. Please proceed with your question. Good afternoon, guys. Are you seeing any difference in rent growth between your asset the high end price point wise within the specific market versus those that are sort of in the middle or somewhere in between? Yes, yes and no. Certainly, if you're talking downtown L. A. Where we're competing head on with supply, the high end is hurt. If we're talking in other parts of the portfolio, it's not necessarily that way. We love the portfolio we have. It's broad in the sense of geography and as well as in the sense of A's and B's, and it performs very well. But there, if you're competing head on with supply, again, say Downtown, Oakland, Downtown, San Diego, Downtown, LA, those areas, the newer assets are, finding more challenges with rents for sure. Okay. So no real, unless competing with supply, there's no sort of drag on A and A plus assets in terms of rental rate growth? No, we, I mean, in those submarkets, yes, But outside the submarket, yes, no. It depends. It's really a function of the concentrations of lease ups and especially those that are offering large concessions. That's what really impacts price. Okay. And you guys haven't started to do development, I think, roughly 18 months or so. Can you talk about where you are in the process with your current land parcels and anything that you might be thinking about doing there? And then What's the potential for additional redevelopment projects starting in 2019? Yes, Rob. That's another good question. On the direct development side, again, the dynamic that we've talked about a couple of times over the last year or so, where construction costs are growing faster than rents in general are, essentially pushing back some of those potential starts. We do have a couple relatively small, direct development deals that we could start. We're trying to find a window that sort of optimizes their the cost structure on them. And so, we, again, had a preference for preferred equity investments as a old of that work. Again, someone else takes those risks and we step in at the last minute before construction begins and earn a very decent yield. So From a variety of perspectives, I'd say direct development is the 3rd most interesting investment opportunity at this point in time given that that headwind behind preferred equity investments number 1 in acquisitions, either in a joint venture or on balance sheet would be number 2. So we're going to continue to be cautious, but we don't have a huge land inventory, as you know. And so we're just going to sit back and wait for their optimal time to start. And then redevelopment starts? Sure. I'll answer that. We are looking at several assets in the same store portfolio currently, but I would say there's other assets that we've started redevelopment programs on that are not in the same store portfolio. So they're not outlined in our financials, the newer acquisitions or joint venture transactions. So we continue to find opportunity in the portfolio, continue to monitor that. We're also balancing that watching the regulatory environment, making sure that the program is going to work for all constituents. Okay. And then out of the 17 preferred equity investments you have currently, are you expecting to own any of those or you expect to get repaid on all of them? At this point? Rob, we don't know. We don't have an option on any of them. And, we always try and get an option, but we find that, our developer is typically more aggressive in terms of what he thinks the values are than we are. And therefore, it's not worth it to us to negotiate an option. Having said that, we always have a seat at the table when it comes time to refinance or sell these properties and there's been a couple of cases where we have actually bought, the properties and or in one case, stayed in as a preferred equity provider after stabilization has occurred. So we like the optionality of the preferred equity investments because both upfront, in some cases, we've chosen to be a part of the ownership group. And at the backside, we have potential for buying the property and or remaining involved in some way like in a preferred equity type of format. So, we try to look at that portfolio as part of our opportunity set. Okay. Thanks guys. Have a good weekend. Thank you. You too. Our next question is from Hardik Goel with Zelman And Associates. Please proceed with your question. Hey guys, thanks for taking my question. I wanted to ask about the parking fees and maybe other ancillary revenue opportunities that you see kind of how substantial that could be in the longer term like the runway you see longer term? And also whether that was concentrated in a few markets or whether that was a broad based initiative. If you could just talk through some of the details there? Yes, I'm glad to. The, we do see pretty good amount of opportunity in the other income line item. Line items and they include some of the initiatives we have right now, which include renting out amenity space to non resident the same thing, renting out parking and on residents, also looking at our parking space with current residents, in the light of revenue management, you might say, recognizing the different values of the different spaces and charging it accordingly. So we do see many opportunities. We're working on some smart unit pilots right now and in a variety of other items. There are some offsets as well. Certainly have cable cutting and some other line items that are offsetting that. And as far as for the magnitude of this, we're pretty focused on it. We think there's a good future there, but we're not at a point where we were putting up enough results to then translate that into numbers. I know it'll have a material impact on 2019. And we'll see an update as time goes, but we have quite a few things going in the other income line items. Got it. And just as a follow-up to that, do you have have you considered looking at assets that might have excess parking in your view to maybe add Snap on units, maybe like the 100 units? Snap on development sort of deal that some of your peers have done, what kind of opportunities exist across your portfolio there and have you considered that? Yes, we're looking at the real estate every which way you can to try to drive the most dollars per square foot we can. So there again, we're not in a position to say this is the future that we've summed it up, but we are evaluating many, many options. And there's some units, there are some parking that's being converted into units at some places. There's all kinds of things that are happening and we're evaluating the options across the portfolio. Again, the biggest thing for us though, just to be very clear, is we're always focused on good real estate in the right locations, the right markets. That's always number 1 and that is what we have is a great portfolio, but as far as optimizing it, we're working very hard at this point to optimize, our revenue. Thank you. Our next question is from John Pawlowski with Green Street Advisors. Please proceed with your question. Thanks. John, just a quick follow-up on the leasing spreads in 1Q. You sent out renewals at 4.1, but what did you actually achieve in the first quarter on renewals and as well as newly spreads? Yes, no, fair enough. So, I, we actually achieved 4.1 in Q1. And that number will move around some, but we did achieve 4.1% in Q1. And the new leases in Q1, again, To be clear, this is a light kind leases, which typically are basically 12 month leases, and we provide the information this way to be insightful into the marketplace. So, the new leases from like kind were about 3.6% year over year in Q1. Okay. Thanks. And then, Mike, circling back to the political conversation, and I don't want to focus on rent control. I want to focus on regulatory barriers to supply. I guess, like some comments from Euro lens, the next 5, 10 years, how will the the backdrop be different when the governor is setting higher regional housing aid targets and then you have legislation like Senate Bill 50. Gaining traction. I guess what markets could see a sea change in supply and what markets would probably be a non event under the under different regulation? Yes, John. It's a good question. And I know you guys have written extensively on this topic. Again, I go back to what I said before, which is we are at the beginning of this process and and trying to understand exactly how these things are going to roll out and what they will mean will be something that we will spend a lot of time on to try to understand and to ultimately benefit from it. SB-fifty, which is greater densities near public transit, is something that California has talked about a lot. And, it makes imminent sense if they can figure out how to work through some of the logistical issues. Notably, for example, Huntington Beach has been sued by the state and is countersued over who has right to dictate housing policy. And I expect that some of that type of activity will continue as we're working our way through this process. So I think, unfortunately, it's a little bit too early to tell what the impacts are, in the case of Seattle, for example, I think you guys suggested that maybe it could be 1% of stock. I think that's probably a bit aggressive There could be some impact. And, you know, candidly, there are markets that really need the housing in Seattle would be one of them given its incredible job growth San Francisco would be another one. For example, the Soma district, allowing greater office and residential construction, it's probably a net positive to have additional housing in that area given the amount of office supply to coming in. And that's why we spend some time talking about the amount of office that is under construction because if you have, as we said before, if you have somewhere around 5% under construction on the office side and you're producing about 1% on the residential side it seems like there's an embedded imbalance in favor of demand oversupply embedded in those numbers. So So the short answer is we don't know, but we are engaged and studying it carefully, and we will stay abreast of what's happening. Makes sense. Thank you. Thank you. Our next question comes from Umita Okusanya with Jefferies. Please proceed with your question. Yes, good morning. Given that you still have interest in development and a fairly limited land bank. Just curious about interest in doing a mixed use development maybe working with a refill REITs or someone on the retail side on some of the densification projects what would get you interested in doing and things like that? Tayo, this is Mike. We have actually worked with a number of, retail organizations, trying to determine whether we can provide the housing and I would say those conversations are they're interesting and they've, to some extent, it's gone pretty far, but we haven't been able to actually strike a deal on those transactions. And so, but we're trying. And you're right. There's a natural I guess, synergy between the two of us, if we can figure out how to, how to get the economics right. The the challenge is the same challenge that we have elsewhere, which is construction costs are too high And to some extent, your retail partner looks at it and goes, wow, it really costs that much to build that. But when you get through the numbers, that's what happened. So I'd say it isn't necessarily that the will isn't there. I'd say it's more a function of costs and yields and essentially the land valuation when you start looking at a spin off of a part of a property from a, from a retail company. So it's complicated, but it's as soon as possible. Our general view, again, is, we need costs to settle down a little bit here so that we have more certainty because development cap rates measured today untrended in the high fours. I just don't think that's enough of risk premium to justify, direct development. Now if we found transactions that were in a low 5 on a, untrended basis again, that would represent maybe 100 basis points of cap rate over acquisition transaction, that would be more interesting, but we have not been able to find those transactions. Good. That's helpful. Angela, I just wanted to go back to your comments about the preferred equity program. If it rates do end up kind of staying lower for longer, I mean, shouldn't the natural outcome for that program be just less originations simply because yields may not end up not being as attractive anymore and also because you probably end up with more redemptions as people start to refinance. Hey, Tayo, it's Mike. I'm going to take that question from Angela, if you don't mind. I think that It's been interesting because there are there's more money in the direct development side as it relates to some of the merchant builders out there and in cases, for example, last year where we didn't hit our guidance range on the preferred equity side, what we found was in some of the sponsors willing to write an additional check to put more equity into the transaction to get it moving ahead. So, in our experience, there are limits to the amount of equity that the merchant builders can put into transactions to make them work when costs go up faster than rents and it compresses the yield. And, but it's hard to tell which transactions are going to move forward in which or not. So I would say there probably are some headwinds there, but keep in mind that, our pipeline for preferred equity, we have about $400,000,000 outstanding. And we probably are 25% of the capital stack. So that you're talking about $1,000,000,000 to $1,500,000,000 of development. It's just not that big. So I think that we given the size of the West Coast, I think that the Thank you. Our next question is from Rich Hill with Morgan Stanley. Hey, Angela. Quick question. It looks like there's some disclosure on lease accounting changes. I was wondering if you just maybe provide us some high level thoughts and how that may be, might have impacted any numbers at all during the quarter? Sure thing. Ashley, for Essex, it's simple. On the lease accounting changes, on the P and L side, there's no impact because we've already been disclosing our bad debt in our contra revenue. And so the only new disclosures that you'll see is really on the balance sheet where we break out, operating leases and, of course, new liability. And so it's just a new disclosure item on that front. They end up netting each other out essentially. And so once again no impact on FFO either. Got it. Got it. Really helpful. And then just one quick question, and I'm sorry this has been asked before. But it looks like expenses were pretty elevated in Seattle. Could you just recap maybe why that's the case? Oh, happy to. On Seattle, it's really driven by property taxes. And it's because in Q1 of last year, we had a disproportionate amount of refunds. Having said that, this is actually the numbers came out as expected. We had expected that Q1, it was going to trend this way. And so that's another reason why we didn't need to revise our operating expense guidance either. Thank you. Our next question is from John Guinee with Stifel. Please proceed with your question. Great. Thank you. First, Mike, you mentioned severe weather last winter this past winter in California. Is that a little bit of an oxymoron? It is. I know I felt very uncomfortable using that as an excuse. Yes. No kidding. Wow, I guess two questions quickly. You're coming down the home stretch on some of your development deals that you started construction a couple of years ago. If you look at something like Station Park, looks like you have cost per home of about $715,000 a unit say 500 Folsom about 750,000, what do you think it would cost you to build these products today if you are bidding out the GC work, etcetera? It's a good question. We do have a phase 4 Station Park Green, and we have, so John Udi is not here with me today. I know that the costs are up. I don't know what the magnitude is. So it's higher in both cases. But I can't, and I can't tell you. Again, it goes back into that comment I made earlier, which is construction costs going up somewhere between, let's say, high single digits, which is down from low double digits over the past couple of years, versus rent growth, which is in the 3 plus minus percent range. So that's been the problem on the development side. No, we understand. Second question, any updated yield on cost for these projects as you get close to initial leasing and occupancy? We had mentioned our yield, in the past. It's kind of in there, Tom. Mid-five's range upon stabilization, which usually was another, say, at least a year out from initial occupancy. That really hasn't changed. The rents are coming in as planned on our development. And then the last question, this is your redevelopment portfolio. And I think somebody asked a few questions about it, but the net net is, it looks like you haven't put any projects into redevelopment, I. E. 25,000 dollars, $30,000 per unit. Overhaul in a lot of years, at least on the East Coast, people are doing that more and more. Anything that you just aren't putting in your sup that your kitchen and bath renovations or things that others might include in a redevelopment pipeline? Yes, again, let me talk broadly about our redevelopment program. So right now, we're typically doing 2500 to 3000 units a year, which roughly, 5% and implied the 20 year life. So that's just taking care of the units. And then on the major renovations, we look through the portfolio and look at opportunities. There are several opportunities we're studying right now that are in the same store portfolio. It's also common for us as we acquire an asset to see opportunities along those lines and those are not called out specifically in the supplemental because they're not in the same store portfolio. So they're not pulled out of it or otherwise identified. So there are some other assets that we have, and we are renovating right now that are outside of that realm. I suspect over the next year, again, we will add a couple more assets into that, into that bucket that are coming from the same store the current same store portfolio. But again, we're working through the opportunities we had. We're near completion and those will be coming out. And we'll probably be adding a few more. But there's others that are going on right now that just aren't, they just aren't in the same store portfolio. So they're not called out specifically. Great. Thank you very much. Have a good day. Sure. Our next question is from Rich Anderson with SMBC. Please proceed with your question. Hey, thanks. Good morning. Hey, Rose. Welcome back. Thank you. Thank you. So I don't know if you ever seen them this commercial or AT and T wireless commercial when guys going to get surgery and nurse that surgeons just okay or Sushi dinner and they said the food is just okay except the cook went home sick. The reason why I bring up that commercial is because you started off conference call by saying things feel, quote, pretty good. And I know you're tying that to the job growth discussion, decelerating underperforming our expectations, but there also lots a lot of other things that sort of paint a relatively good picture for you guys. So I'm just curious, am I over reading your sort of your body language or are you really, sort of thinking that things could decelerate from here, just judging from the way you described it right at the outset? Seeing, feedback. That was, I don't think that is our desired goal to be negative on the call at all. We feel we feel pretty good about things. And again, we're off to a good start this year. I would say having said that, jobs are are the locomotive of, you rent growth. And, so if we see any hiccup on the job front, I think it would be, it's appropriate that we we bring that up. A lot of things seem like it happened in the first quarter. Again, there was huge amount of disruption, stock market, government shutdown, etcetera. And so I guess our inclination or hope would be to believe that things will get back to normal. It seems like the U. S. Economy is doing pretty well. And things will be in good shape. So, but we don't know. And we're just trying to make sure we do a good job of essentially sharing what we know with you. Well, look, you guys always do a great job about to see it call the way it states that's amended as a compliment really, but I just wanted to judge your bigger picture view of things. And second, is HQ2 not going to New York a good thing for Seattle or the non event for Seattle? I think it's a good thing for Seattle. I mean, Amazon, hey, I would say all of these ten companies that have these incredible growth rates. They're going to find ways to grow, within the cities that their head quartered in or nearby or somewhere else if they can, if they can't grow there. So I think all of them have similar perspectives and what are we going to do? How are we going to grow? How are we going to pursue our opportunities? And they're either going to be successful in working with the local political structure or they're going to move elsewhere. That's my view. And in this case, the political structure elsewhere turned out to be maybe more challenging than than the Seattle marketplace and some others. So it led to a different decision. This is John. I would just add that it may turn out to be better for Bellevue as well. We are seeing more and more and getting more indications from in the broker channels that there's a lot more interest in the east side, which does make sense. I think they have acknowledged that there have a tremendous supply concentration in downtown or Amazon does in downtown Seattle and they're looking to expand and it seems like the east side is the beneficiary part of that. Fair enough. Thanks. That's all I got. Thanks. Thanks, Fred. Our next question is from Karen Ford with MUFG Securities. Please proceed with your question. Hi, good morning. There was an article this week in the New York Times about the 2020 presidential candidate recording renters. It sounds like a few of them are supporting tax credits on rent. Do you think something like that could be impactful on demand and propensity to rent? Hi, Karen. It's Mike. It's a good question. And I think anything that helps with the affordability issue, we'll continue to, you know, support more production of housing and, increased demand and all those types of things, because I think when you start pushing affordability, start having more double ups and other things that that destroyed demand. So I think it would help incrementally, but I think that, again, the The broader political discussion is one that is continuing to evolve. And I think it's a healthier discussion as I said earlier in my comments that it's a more balanced discussion between the need for housing on the one hand and how to have, protections at a pretty high level with respect to the residents. And the trade offs are being, I think, appreciated by politicians to a greater extent than they have in the past. It's a good thing. Thanks. And then my second question is with all the IPO money coming Northern California. Do you think we might be nearing a tipping point on condo conversion economic? It's another good question. And, you know, it's interesting in the past year, the, the price of a for sale home has not really moved a whole heck of a lot. So we've continued on the apartment side to have rents grow, which of course gets capped out, and home prices really haven't done that much. Having said that, a year ago, we had incredible, incredibly large increases in for sale prices. So in the past year, actually condo conversions became less appealing when you compare the value of a building as an apartment versus the value of a building as a condo. So no help there. Got it. Thank you. Our next question is from Shirley Wu with Bank of America Merrill Lynch. Please proceed with your question. Good morning guys. Thanks for taking the question. So my going back to So going back to Amazon, in your prepared remarks, you mentioned that they have around 11,000 job postings and with news of them moving some of the operations from downtown Bellevue. What do you think is that, do you think there will be any changes to fundamentals in those markets on the supply or demand side, especially in relation to your assets? Yes, I'll grab that. Clearly, Amazon is a major force in downtown Seattle, and we don't see that debt changing. We think they're continual it will have continual demand pressure there, but we do see the benefits, of some of these movements to Bellevue we're seeing more than Amazon. There's other companies that are expanding out into Bellevue and recognizing the quality opportunity out there. So we think that will benefit our portfolio, which frankly most of our portfolio is outside of Downtown. It's on the east side and a little bit north and south. So yes, we do see the benefit of that in the Bellevue area. Okay. And so on job growth, in OC, you mentioned in January that was at 90 basis points. And you're maintaining, job growth at 1.2. So is that due, partially to the conservatism originally baked in that number? Or do you, or do you how comfortable do you feel with that number? And I guess what could change that would make you change your mind to either provide that up or down? Sure. The numbers are pretty volatile to begin with. And last year, as I mentioned, Orange County, San Diego and L. A. Had benchmark revisions between 50 and 100 basis points, pretty substantial benchmark revisions. So We all focus on what's going on. It's the only number we have. And we look at that, but then we look for other checks and balances. And that's in part why we look at office space, we look at absorption or rents and other factors and try to triangulate and make sense of it. Our belief was last year that Orange County, wasn't falling apart and then when benchmark revisions came out, it showed it wasn't falling apart. It actually had solid job growth We expect the same thing for this year. And we don't have any particular reason to change the expectations at this point in time. I think it'll all kind of come together nicely. We do see some weakness and that's why I pointed out to LA because we're seeing little bit of weakness in the rental market and then that does tie to the, jobs market and it kind of becomes a confirming item there, if that makes sense. Yes. Thanks for the color. Sure. Our next question is from Wes Golladay with RBC Capital Markets. Please proceed with your question. Hi, good morning, everyone. There seems to be a little bit more moving parts heading in the peak leasing season. Just wondering if you can update us on the strategy for the broader portfolio. As I recall, it was to push rate this year. Is that still the case? Yes, that absolutely is. Again, our position is, again, we try to communicate clearly and transparently. So April was a little bit weaker we don't expect that to be the year. We expect it to be a good year and we're continuing with the strategy we started with and that is to continue to favor rental rates over occupancy. We expect that in 2019, our occupancy will be about 20 basis points below the prior year. And that's we're moving forward. As Mike mentioned, it's probably more or less some noise that's going on, but we do want to be parent, in what we see. Okay, fair enough. And then looking on going back to that preferred equity investment portfolio, do you have a set repayment schedule or do these things have extensions, so it's not something you really bake into guidance? No, they have a maturity date. All of them do. And again, as Angela said, potentially it can change. It can be moved up or back depending upon condition. So We've received several that have had early repayments given our refinance and completion of construction. And some others where we've carried on with a preferred equity investment and a lower outstanding balance for years following the completion. Just depends. So we see that the table is really the key point as it relates to the the maturity of the preferred equity investments. But on all of them, there is a maturity date. Okay. And then I guess maybe I'm not sure if you have it offhand, but should we model, like 'nineteen, 'twenty and 'twenty one, a make up $50,000,000 to $100,000,000 a year of repayments or is any any sort of sense you can give us on how we should look at? We know the investment level, we just don't really have the repayment level. Yes. I guess, the challenge, of course, from our perspective is to not take something that's inherently a good thing and make it a headwind down the road. So we're trying to size the program so that our essentially origination will offset the maturity. So to the extent that we do a good job of that, then I think that, everything is everything is good. So the reason why we don't want to grow the program to a huge level is because we don't want to be in a position that we're rolling it down over time. So we want to keep it going as long as we can. Angela, do you have a comment on what the typical maturity is for that program? Well, I mean, I think if you want to target it, so let me step back. I mean, our program is about 400,000,000. They tend to have a 3 year term. So for modeling purpose, 1 third, 1 third, 1 third is probably reasonable. Having said that, keep in mind that we also guide to every year, you know, at the midpoint somewhere around 75. So there will be an offset. And so if you are going to roll offs, you don't want to say a whole 1 third of them roll off because then, then you'll have very odd numbers. Yes, that's fantastic. Thanks for all the detail. Ladies and gentlemen, we've reached the end of the question and answer session. At this time, I'd like to turn the call back to your host Mr. Michael Schall. Thank you, operator, and thank you everyone for joining us on the call today. We are looking forward to many of you to seeing many of you at NAREIT Have a good day. Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.