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 asks that you be respectful of everyone's time and limit yourself to one question and one follow-up. 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. Welcome to our first quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments, and we'll end with Q&A. Our first quarter results represent a good start to 2019. Core FFO per share grew at 4.5% year-over-year and was $0.04 ahead of the midpoint of our guidance, primarily due to solid operations, which John will discuss in a moment. Market rent gross was up 3.1% from the start of the year through March, which was in line with our expectations. We are not making any changes to our full year rent or revenue assumptions at this time.
We are pleased to be raising our 2019 core FFO per share midpoint by $0.05 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 S16 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 The Walt Disney Company and 21st Century Fox. Less robust economic conditions, both in the U.S. and globally, has tempered inflation expectations and reduced 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 to Silicon Valley aggregate almost 14 million sq ft, while Seattle is adding approximately 8 million sq ft, both representing greater than 5% of existing stock. Venture capital investment recently reached a record level in the Bay Area with over $60 billion 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. Much of this liquidity is likely to be reinvested back into the local economy. We continue to track job openings in the Essex markets for the 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 over 11,000 openings. The competitive environment for talent on the West 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 one year ago.
Each of our markets' rent-to-income ratio, with the exception of Ventura, is now within the upper end of the desired range. San Francisco now has a rent-to-income ratio of 26.4%, which is below its long-term average for the first time since 2011. In summary, against a backdrop of low interest rates, several of the most relevant economic indicators in California and Washington suggest 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've seen no noticeable change from the commentary provided on our last quarterly update. We continue to see delays in development deliveries, which are already factored into 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 S16.1 of the supplemental. Residential permits, which include both multi-family and single-family housing, have fallen about 10% from the peak recorded in the second quarter of 2018. While we can't be certain that permitting activity will not re-accelerate, 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 multi-family 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 mentioned in prior quarters, cap rates generally do not move quickly and are mostly a function of capital flows. As such, we try to create value for our shareholders by arbitrating the differences between public versus private market pricing. We took advantage of this disconnect in the fourth quarter of 2018 by selling 8th+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 used this opportunity to buy out our partner's interest in One South Market at an accreted 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 million 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, 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 Burkart 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% revenue growth for the first quarter, which exceeded our expectations due to one-time other income in March. At the Citi conference, we published our January and February preliminary revenue growth rate of 2.7%, 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% over the prior year's period. The variations in revenue growth rates relate 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 2019 was 96.9%, or 20 basis points below the prior year's period, as expected.
We continue to see opportunities to create more value in other income line items. In the first quarter of 2019, our parking revenue is up 14.2% compared to the prior year's period. We expect that trend to continue. Our expenses came in higher than expected due in part to one-time costs related to the water and snow damage from the heavy storms in January and February. Additionally, our gas expense spiked due to both an increase in the use and rates caused by the colder than normal West Coast winter weather. Fortunately, 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 eliminate printing and trips to the office to sign documents, reducing labor while playing a foundational role in our Steps to Success program, which is focused on growing employees' careers and related compensation at Essex. The rental market was strong as we expected in the first quarter. However, it slowed down since the quarter's 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 . I 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% for the first quarter of 2019.
Amazon continues to grow their presence on the east side, announcing plans to move a 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 one of Amazon's under-construction towers. Dropbox executed a pre-lease with the potential of adding 5,400 jobs to the downtown market. The North and South submarkets continue 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. 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 four-quarter basis, venture capital funding hit a new 20-year high in the Bay Area. In 2019, three 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 2.4 million square feet of mixed-use development in San Bruno. Facebook revealed plans for their 1.8 million square feet mixed-use development in Menlo Park. LinkedIn and Alibaba increased their combined footprints by a little over half a million square feet in Sunnyvale.
In San Jose, Google pre-leased another 700,000 sq ft 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%. Loss to lease at the end of March was 1.9% for the Bay Area. 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, well below our 1.3% 2019 estimate on the S16 in the supplemental. In 2018, the BLS showed lower employment growth for San Diego, Orange County, and Los Angeles, then revised these markets up between 50 and 100 basis points with the March 2019 prior year revisions.
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 on local employment. They have stated that they expect to achieve $2 billion in cost synergies, which will include staffing reductions. HBO expanded their headquarters in the market, adding just over 110,000 sq ft in Culver City. Workspace companies such as WeWork, Knotel, and Spaces expanded their combined L.A. footprint by over 300,000 sq ft. Year-over-year revenue growth in Q1 was led by West L.A. at 4.6%, Woodland Hills at 3.5%, and Tri-Cities at 3.2%. L.A. had a loss to lease of 1.1% in March.
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 growth and the aggressive lease-ups in downtown L.A., with some lease-ups offering concessions that exceeded eight weeks free rent. Orange County, jobs in Q1 grew 90 basis points year-over-year, with the largest gains in professional business services. January, the BLS posted 2018 benchmark revisions, which erased the prior year's reported softness in this market. 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 loss to lease of 60 basis points. San Diego, year-over-year job growth was 1.4% in Q1.
Year-over-year revenues in Q1 were led by our Oceanside submarket with 4.8% growth, followed by Chula Vista with 4.3%, and North City with 2.9%. Currently, our portfolio is at 96.8% occupancy, our availability 30 days out is at 4.3%, with loss to lease of 1.1% for March 2019. Thank you, I will now turn the call over to our CFO, Angela Kleiman.
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 our first quarter core FFO per share grew 4.5% to $3.23, exceeding the midpoint of our guidance by $0.04, which resulted mostly from one-time revenue items, as John Burkart highlighted earlier. For the full year, we are raising the midpoint of our core FFO guidance by $0.05 per share to $13.08. This is primarily driven by more favorable capital markets conditions as the pricing of our first quarter bond offering 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 two new preferred equity investments, which comprised of a $24 million investment, fully funded at close, and a $36 million investment funding in July and will not be fully funded until the end of September. Year to date, we had early redemptions on two preferred equity investments totaling $27 million. The typical term of these investments is three 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 repayments 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 million of unsecured bonds at an average rate of 4%.
The proceeds were used to repay secure debt that has matured through April of this year. For the balance of the year, we plan to repay approximately $400 million of debt, which consists of $110 million maturing this year, plus $290 million maturing next year, but can be repaid early with no prepayment penalties. The reason for making the early repayment is the cash benefit. Although the effective rate on this $290 million debt is 3.8%, the cash rate is 5.5%, which will allow us to generate over $3 million of additional cash savings on an annual basis. We have access to a variety of capital sources and will continue to monitor the capital markets to optimize the refinancing. With over $1 billion in availability on our line of credit, 23% leverage, a net debt to EBITDA of 5.5 times, our balance sheet remains in excellent shape.
That concludes my comments, I will now turn the call back to the operator for questions.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. As a reminder, please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. 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. Just curious how we should expect the cadence of same-store revenue growth now through the balance of the year.
Hi there. It's Angela Kleiman 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 going to be about the same. We're not changing our same store guidance, but because of the first quarter revenue, they'll just end up being more comparable.
Got it. You guys talked a little bit about some softening trends subsequent to quarter end. You highlighted Alameda and L.A., I was just curious if this is being offset by strength in any other sub-markets.
This is John. That's a great question. 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. There is an overall balance there. The whole portfolio performed a little bit better in Q1 than it started out to perform in April. Again, there's clearly a little bit more strength in some of the tech markets.
All right. Thank you.
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 control despite the defeat of Prop 10 and AB 36 stalling. How do you think about portfolio positioning and capital allocation going forward, given the current political backdrop?
Thanks for the question, Nick. I appreciate it. I want to take a step back from that and to talk a little bit about the overall discussion, because I think it's much more balanced than it was a year ago. By that, I mean, I think that there is more recognition that if you push too hard on the rent control side, it'll have a pretty dramatic impact on the housing production within California. Gavin Newsom has been part of that discussion, and part of his
campaign was trying to produce three and a half million new homes between now and 2025, which would be somewhere around 500,000-600,000 per year, versus about 80,000 per year that we produced for the last 10 years. He also noted that he wanted to protect renters. Striking that balance, I think, is what the legislature is grappling with. A lot of the things that are happening are focused on that. I think that what we've done is tried to identify the best long-term growth markets for multi-family 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 issues. I don't think this is a California thing. I think it's a broad movement.
I think that we are pretty comfortable with our existing geographic focus.
Thanks. Then just how do you think about underwriting the preferred equity deals versus a more vanilla acquisition or development deal? I recognize the risk profile is different, but how, from Essex'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. In other words, we look at the cost and the spread between what acquisition values are and what the development yields are in order to get comfortable with that. What we are trying to do is we're trying to find the best, let's say, development-oriented strategy for the company. 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. We've eliminated that front-end risk element. We think it's just a better risk-reward equation for the company.
Thanks.
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. We've seen some areas in the Seattle MSA get upzoned. How are you thinking about the potential to continue rate growth trends in that market?
Yeah, maybe I'll start. This is Mike, and John might want to comment more directly on the market itself. But as to the upzoning, I think it's going to be several years before you really see the potential impact of that. It's not as quite as simple as, hey, there's going to be upzoning, 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. I would say it's not just a slam dunk that we're going to see a significant increase in the amount of developed apartments in the Seattle market. John, can I turn it over to you?
Yeah, absolutely. What we're seeing right now in Seattle is overall continued strength, which was consistent with 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 supply. What may happen is maybe we're a little stronger in Seattle and a little weaker in L.A. overall with our guidance, but Seattle is certainly performing well. The tech markets are performing well. Does that answer your question?
Yep. Sure does. Thank you. I guess touching on a theme from earlier in terms of capital allocation, you've been opportunistic in buying back shares, and since your repurchases, the stock has rebounded about 15%, and you're now trading above consensus NAV. 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 cost of capital or the spread. It's really going to be driven by that. We haven't issued yet so far because we've had excess proceeds from the sale of Eighth and Hope, and our preferred equity investments have been funded by the redemptions. 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 broad market or via our joint venture or dispositions. That'll relate to also on the investment side and what yield are we producing to get the best spread possible.
I appreciate the color. Thank you very much.
Thank you.
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 discuss what that means for the housing market and your ability to push rents above the 3% market rental growth forecast?
Yeah, John. This is Mike. That is the key question. I think affordability has been the key constraint over the last couple of years, plus, I'd say, peaking development pipelines. When development deliveries occur in essentially several properties being delivered at one time, you start seeing these concession levels increase, which is tamping our ability to push price to this point. We see those forces changing somewhat over the next couple of years and not to a huge extent, but on the margin. 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 that was partner-led or your decision? It sounds like it was more yours. Remind us how you derived the purchase price.
Yeah. On the One South Market transaction, our partner had a life on their fund that was coming to an end. The timing was driven by that. We normally wouldn't have chosen to, say, market an asset in the fourth quarter in the midst of, on the tail end of a Prop 10 vote. It's really driven by them.
The purchase price, were there other bidders for that stake?
Yes. It was broadly marketed, we ended up purchasing it at a growth of $179 million. It made sense to transact with us on several levels because we already own the asset, and it was a certainty of execution as well. The pricing made sense to us.
Great. Thank you.
Our 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've been some articles about certain municipalities sort of 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? Are you guys seeing any impact 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, 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 four cities in California, whereas we operate in about 80 cities. We're pretty diversified within California as it relates to this rent control issue. It isn't like a change in any one municipality is going to have a huge impact on the company. I think that's important to keep in mind. There has been increased regulation proposals on the local area. A lot of them have had to do with these just cause evictions and higher caps. In the case, for example, of Glendale capping rents at 7%.
Over long periods of time, we grow rents at somewhere around 3%, 3% plus or minus. Some of these caps are set at a point that it should not have a dramatic impact on our longer-term results. We're cautiously optimistic. We've left the Californians for Responsible Housing entity in place so that we can have a coordinated industry response to all these various proposals. We're working through it. We could speculate about what might happen, but again, it's so early on that I think it would be both challenging and imprecise to do so. We're going to avoid trying to look into the future because, at the end of the day, we don't know what exactly is going to happen.
Okay. The second question is for Angela. On the guidance, maybe it's continuing on with the legacy of Mike Dance. If you look at your NOI, your NOI expectations for the year are higher, but you left the same NOI range unchanged. Your interest expense is now higher. Just thinking about it, is it the fact that it's just 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 growing the same store NOI range?
Yeah. Alex, it's a good question. You're right, it's a fine line to try to walk. In terms of let's just make sure that you understand where I'm coming from. On the NOI, it looks like there's a change to the midpoint on our guidance page, but that is really because of the One South Market consolidation. It was off balance sheet, rolling that to the consolidated NOI. Then we have partial offsets to that. At the end of the day, it's not a meaningful change to NOI at this point, nor do we see a meaningful change on a trend line basis. 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. A lot of my questions have been asked already, 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? What you're achieving?
Yeah, sure. This is John. I can answer that. One thing that's important to understand is we send our renewals out 60 days in advance. Our Q2 renewals have gone out largely, almost all of them, at around 4.9%, very strong. Again, realizing that I also mentioned in the opening that the market is a little bit weaker in April. Those may get negotiated down a little bit, but they are up from where they were in Q1, was about 4.1%, and Q2 is at about 4.9% at this point, where they were sent out.
Okay. That is helpful. That's an aggregate. Can you break that down quickly, maybe across the three sort of bigger markets?
Sure.
Yeah. Thanks.
Yeah. No, absolutely. That is an aggregate. We have at about 4.3% for SoCal overall, about 5.4% for NorCal, and about 4.9% for Seattle.
All right. That's perfect. That's it for me. Thank you, guys. Thanks, John.
Great. Thank you, Rich.
Thank you.
Our next question is from Drew Babin with Robert W. Baird. Please proceed with your question.
Hey, good morning.
Hey, Drew.
A question on your deliveries coming in later this year in San Mateo and Santa Clara. I was hoping to kind of talk about those specific sub-markets in the Bay Area. Obviously, supply coming into the Bay Area is very sub-market specific, and markets are kind of all over the place in terms of their performance. I guess, can you comment specifically on where your developments are achieving first occupancy in 2Q and 3Q?
Drew, this is Mike. Just make a couple of quick comments. First is that we've had a pretty severe winter here. They are, from a timing perspective, being pushed back somewhat given rain delays and that type of thing. That's the first comment. The Station Park Green development is about a mile from our corporate office here in San Mateo. It's a very strong sub-market. In fact, I think, is that the strongest region, I think, John, within the portfolio right now?
No, that absolutely is the strongest region. Rents are up over 6% year-over-year in San Mateo.
It seems like we've timed that well. Mylo is in Santa Clara. That market has a little more concessionary activity, but it still seems like San Jose and 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. 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?
This is Mike again. 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 in L.A., which is the downtown is the primary component of that. It really doesn't slow down until Q4 2020. I think we're going to have continued supply deliveries for at least the next year.
Thank you. 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, 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. As Mike mentioned earlier, the risk-adjusted return also makes a lot of sense. That's just a general statement. As far as what we're expecting, we had guided between $50 million to $100 million, we're not, at this point, ready to go outside of that guidance. Primarily, we do have redemptions to offset that. To the extent that we can ramp up, we would certainly love to do so. At the end of the day, we still have a very disciplined underwriting process, even if there are a lot more opportunities, it doesn't mean that we're going to automatically do more deals.
We're pushing, Drew.
Good to hear. That's all for me. Thank you.
Thank you.
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 assets at the high-end price point-wise within the specific market versus those that are sort of in the middle or somewhere in between?
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 As and Bs, and it performs very well. If you're competing head-on with supply, again, say, downtown Oakland, downtown San Diego, downtown L.A., those areas, the newer assets are finding more challenges with rents, for sure.
Okay. Unless competing with supply, there's no sort of drag on A and A-plus assets in terms of rental rate growth.
No.
In those sub-markets.
In-
Yes, definitely. Outside those sub-markets, yeah, 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. You guys haven't started a new 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? What's the potential for additional redevelopment projects starting in 2019?
Yeah, Rob, that's another good question. On the direct development side, again, the dynamic that we've talked about a couple 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 the cost structure on them. We, again, had a preference for preferred equity investments as a result 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.
From a variety of perspectives, I'd say direct development is the third most interesting investment opportunity at this point in time, given that headwind behind preferred equity investments, number 1, and acquisitions, either in a joint venture or on balance sheet, would be number 2. We're going to continue to be cautious, but we don't have a huge land inventory as you know. We're just going to sit back and wait for the optimal time to start.
Redevelopment starts?
Sure. I'll answer that. We're 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. They're newer acquisitions or joint venture transactions. 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. 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.
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. 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 & 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 and how substantial that could be in the longer term, like the runway you see longer term. 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.
Yeah, I'm glad to. We do see a pretty good amount of opportunity in the other income line items. They include some of the initiatives we have right now, which include renting out amenity space to non-residents, the same thing, renting out parking to non-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 accordingly. We do see many opportunities. We're working on some smart unit pilots right now and a variety of other items. There are some offsets as well. Certainly have cable cutting and some other line items that are offsetting that. 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're putting up enough results to then translate that into numbers. I don't think it'll have a material impact on 2019, and we'll see an update as time goes. We have quite a few things going in the other income line items.
Got it. Just as a follow-up to that, have you considered looking at assets that might have excess parking in your view to maybe add snap-on units, maybe like 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 them?
We're looking at the real estate every which way you can to try to drive the most dollars per square foot we can. Again, we're not in a position to say, this is the future, that we've summed it up, but we are evaluating many options. There's some units, there is 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. As far as optimizing it, we're working very hard at this point to optimize our revenue.
Thanks. That's all for me.
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, what did you actually achieve in the first quarter on renewals and as well as new lease spreads?
Yeah, no, fair enough. We actually achieved 4.1 in Q1. That number will move around some, but we did achieve 4.1 in Q1. The new leases in Q1, again, to be clear, this is on like-kind leases, which typically are basically 12-month leases, and we provide the information this way to be insightful into the marketplace. The new leases on like kind were about 3.6% year-over-year in Q1.
Okay, thanks. Then Mike
Sure.
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'd like some comments from your lens over the next five, 10 years, how will the backdrop be different when the Governor is setting higher regional housing need targets, and then you have legislation like Senate Bill 50 gaining traction? What markets could see a sea change in supply, and what markets would probably be a non-event under different regulation?
Yes, John, it's a good question. 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 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 50, which is greater densities near public transit, is something that California has talked about a lot. 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 has countersued over who has the right to dictate housing policy.
I expect that some of that type of activity will continue as we're working our way through this process. 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. Candidly, there are markets that really need the housing, and 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 that's coming in.
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 over supply embedded in those numbers. 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 Omotayo 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 mixed-use developments, maybe working with a retail REIT or someone on the retail side on some of the densification projects. What would get you interested in doing things like that?
Hi, Omotayo. This is Mike. We have actually worked with a number of retail organizations, trying to determine whether we can provide the housing. I would say those conversations are interesting, and they've, to some extent, gone pretty far, but we haven't been able to actually strike a deal on those transactions. We're trying. You're right. There's a natural synergy between the two of us if we can figure out.
How to get the economics right. 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?" When you get through the numbers, that's what happens. I'd say it isn't necessarily that the will isn't there. I'd say it's more a function of cost and yields and essentially the land valuation when you start looking at a spin-off of a part of a property from a retail company. It's complicated, but it's 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 a risk premium to justify direct development.
If we found transactions that were in the low fives on an untrended basis again, that would represent maybe 100 basis points of cap rate over an 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 rates do end up kind of staying lower for longer, shouldn't the natural outcome for that program be just less origination simply because yields may end up not being as attractive anymore, and also because you'll probably end up with more redemptions as people start to refinance?
Hey, Tao, it's Mike. I'm going to take that question from Angela, if you don't mind. It's been interesting because there's more money in the direct development side as it relates to some of the merchant builders out there. In cases, for example, last year, where we didn't hit our guidance range on the preferred equity side, what we found was some of the sponsors willing to write an additional check to put more equity into the transaction to get it moving ahead. 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. It's hard to tell which transactions are going to move forward and which are not.
I would say there probably are some headwinds there, but keep in mind that our pipeline for preferred equity, we have about $400 million outstanding, and we probably are 25% of the capital stack, so that you're talking about $1 billion to $1.5 billion of development. It's just not that big. I think that we.
Got you.
Given the size of the West Coast, I think that the opportunity is still pretty substantial.
Makes sense. Thank you.
Thank you.
Our next question is from Rich Hill with Morgan Stanley. Please proceed with your question.
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 maybe might have impacted any numbers, if at all, during the quarter.
Sure thing. Actually, for us, it's simple. On the lease accounting changes on the P&L side, there's no impact because we've already been disclosing our bad debt in contract revenue. The only new disclosure you'll see is really on the balance sheet where we break out operating leases and, of course, lease liability. It's just a new disclosure item on that front.
Got it.
They end up netting each other out essentially. Once again, no impact on FFO either.
Got it. Really helpful. Just one quick question, and I'm sorry if 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?
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, the numbers came out as expected. We had expected that Q1, it was going to trend this way. That's another reason why we didn't need to revise our operating expense guidance either.
Got it. Okay. That's it for me. Thank you, guys.
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 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.
No kidding. Wow. Hey, yes. 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 were bidding out the GC work, et cetera?
It's a good question. We do have a phase 4 of Station Park Green. John Eudy is not here with me today. I know that the costs are up. I don't know what the magnitude is. It's higher in both cases. 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 % range.
Okay.
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 have mentioned our yield in the past. It's kind of in that mid-fives range upon stabilization, which usually is another, say, at least a year out from initial occupancy.
Okay.
That really hasn't changed, that the rents are coming in as planned on our development.
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., a 25, 30, $35,000 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?
Again, let me talk broadly about our redevelopment program. Right now, we're typically doing 2,500 to 3,000 units a year, which roughly, 5% it implies a 20-year life. That's just taking care of the units. 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 this supplemental because they're not in the same-store portfolio, so they're not pulled out of it or otherwise identified. 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 bucket that are coming from the current same-store portfolio. Again, we're working through the opportunities we had. We're near completion, and those will be coming out. We'll probably be adding a few more. There's others that are going on right now that 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 Richard Anderson with SMBC. Please proceed with your question.
Hey, thanks. Good morning.
Hey, Rich. Welcome back.
Thank you. I don't know if you've ever seen this commercial, the AT&T Wireless commercial when guy's going to get surgery and the nurse said surgeon's just okay, or going to have sushi dinner, and they said the food's just okay, except the cook went home sick. The reason why I bring up that commercial is because you started off this conference call by saying things feel, quote, "pretty good." I know you're tying that to the job growth discussion, decelerating, underperforming your expectations. You also lobbed in a lot of other things that sort of paint a relatively good picture for you guys. I'm just curious, am I overreading 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?
Well, that's an interesting feedback. I don't think that is our desired goal to be negative on the call at all. We feel pretty good about things. Again, we're off to a good start this year. I would say, having said that, jobs are the locomotive of rent growth. If we see any hiccup on the job front, I think it's appropriate that 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, et cetera. 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.
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 seeing it, call the way it is. I meant it as a compliment, really, but I just wanted to judge your bigger picture view of things. Second, is HQ2 not going to New York a good thing for Seattle, or is it a non-event for Seattle?
I think it's a good thing for Seattle. Amazon, hey, I would say all of these tech companies that have these incredible growth rates, they're going to find ways to grow within the cities that they're headquartered in or nearby or somewhere else if they can't grow there. I think all of them have similar perspectives in what are we going to do? How are we going to grow? How are we going to pursue our opportunities? 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. The political structure elsewhere turned out to be maybe more challenging than the Seattle marketplace and some others. It led to a different decision.
Yeah. This is John. I would just add that it may turn out to be a lot better for Bellevue as well. We are seeing more and more and getting more indications 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 they have a tremendous supply concentration in downtown, or Amazon does in downtown Seattle, they're looking to expand, and it seems like the east side is the beneficiary part of that.
Okay, fair enough. Thanks, that's all I got. Thanks.
Thanks, Rich.
Our next question is from Karin 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 candidates courting 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, Karin. It's Mike. It's a good question. I think anything that helps with the affordability issue will continue to spur more production of housing and increase demand and all those types of things. I think when you start pushing affordability, you start having more double ups and other things that destroy demand. I think it would help incrementally. I think that, again, the broader political discussion is one that is continuing to evolve. 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. 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. My second question is, with all the IPO money coming into Northern California, do you think we might be nearing a tipping point on condo conversion economics?
It's another good question. It's interesting. In the past year, the price of a for-sale home has not really moved a whole heck of a lot. We've continued on the apartment side to have rents grow, which of course, gets capped out. Home prices really haven't done that much. Having said that, a year ago, we had incredibly large increases in for-sale prices. 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. 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 questions.
Good morning.
Mike, going back to Amazon, in your prepared remarks, you mentioned that they have around 11,000 job postings. With news of them moving some of the operations from downtown Seattle to Bellevue, do you think there will be any changes to fundamentals in those sub-markets on the supply or demand side, especially in relation to your assets?
Yeah, I'll grab that. Clearly, Amazon is a major force in downtown Seattle, we don't see that changing. We think they will have continual demand pressure there. We do see the benefit 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. 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. Yes, we do see the benefit of that in the Bellevue area.
Okay. On job growth in OC, you mentioned in January, that was at 90 basis points, and you're maintaining job growth at 1.2. Is that due partially to the conservatism originally baked in that number, or how comfortable do you feel with that number? I guess what could change that would make you change your mind to either revise that up or down?
Sure. The numbers are pretty volatile, to begin with, last year, as I mentioned, the Orange County, San Diego, and L.A. had benchmark revisions between 50 and 100 basis points. Pretty substantial benchmark revisions. We all focus on what's going on. It's the only number we have, we look at that, we look for other checks and balances, 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, 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. 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, that's why I pointed out to L.A., because we're seeing a little bit of weakness in the rental market, that does tie to the jobs market, it kind of becomes a confirming item there, if that makes sense.
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 into peak leasing season. I'm just wondering if you can update us on the strategy for the broader portfolio. As I recall, it was to push rates this year. Is that still the case?
That absolutely is. Again, our position is, we try to communicate clearly and transparently. 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. In that, 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 transparent in what we see.
Okay, fair enough. 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. Again, as Angela said, potentially it can change. It can be moved up or back, depending upon conditions. We've received several that have had early repayments, given a refinance and completion of construction, and some others where we've carried on with a preferred equity investment at a lower outstanding balance for years following the completion. Just depends. A seat at the table is really the key point as it relates to the maturity of the preferred equity investments. On all of them, there is a maturity date.
Okay, I guess, maybe, I'm not sure if you have it offhand, but should we model for 2019, 2020, and 2021, like a $50 million-$100 million a year repayments, or is there 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.
Yeah. 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. We're trying to size the program so that our essentially origination will offset the maturity. To the extent that we do a good job of that, I think that everything is good. 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. 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 think if you want to target, let me step back. Our program is about $400 million. They tend to have a three-year term. For modeling purpose, one-third, one-third, one-third is probably reasonable. Having said that, keep in mind that we also guide to every year, at the midpoint, somewhere around $75. There will be an offset, if you are going to have roll-offs, you don't want to say a whole one-third of them roll off, because then you'll have very odd numbers.
Yeah. That's fantastic. Thanks for all the detail.
Yeah. If that's helpful.
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 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.