Earnings Call: Q4 2018

Jan 31, 2019

Good day, and welcome to the property Trust 4th quarter 2018 earnings call. As a reminder, today's conference call is being recorded. Statements made in this conference call regarding the 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 filing with the SEC. When we get to the question and answer portion, management ask 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 Shaw, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin. And welcome to the ESS 4th quarter earnings call. John Burkhart and Angela Climman will follow me with comments and John Yutte is here for Q And A. Today, I will review our 2018 results, summarize our expectations for 2019 and provide an update on the West Coast investment markets. Before beginning, I'd like to recognize John Yudi whose retirement was announced last month for his many contributions 2018 was another solid year for Essex with 5.5 percent core FFO per share growth and 2.9% same property NOI growth, both slightly better than anticipated at the start of the year. To put percent compounded annual total return to shareholders since its IPO 24 years ago, ranking us number 1 in total shareholder return for the REIT industry since C IPO. Over that period, we achieved an 8.5% compounded annual growth rate in FFO per share and a dividend that has grown increasing our dividend for Achieving these results was as much about discipline as it was about being opportunistic especially as it relates to capital allocation. We have found that avoiding major mistakes and understanding the local real estate market has led to a winning formula to use a baseball analogy, our goal is to get many base hits while minimizing unforced errors. Although 20 eighteen's 5.5 percent FFO growth is below our historical average, It is consistent with to per share core FFO and NAV. While we are proud of our nearly 25 year track record as a public company, Our team remains focused on continuous improvement of our platform for the next 25 years as it relates to residents, colleagues, and shareholders. Setting the stage for 2019, we continue to see strong levels of housing demand relative to the national average across our West Coast footprint. We ended 2018 with trailing 3 month job growth in the Essex Metros of 2.1% which exceeded our initial expectations. The primary drivers of the outperformance were where we saw a We believe this trend over the past year, job openings in California and Washington at the top 10 public tech firms, all of which are located in Essex markets, grew 49% to over 23,000 open positions, the highest level we have seen since we started tracking this data several years ago. While considerable recent attention has focused on the announced expansion of large tech companies in other areas of the country, We'd like to note that these very same companies were pursuing nearly twice as much growth in their West Coast markets during the same time period as demonstrated on Page tight labor markets and low unemployment will continue to push wages upward. In 2018, personal income growth was estimated at 6% in our markets compared to 3.9% for the U S. We believe this outperformance will continue into 2019. As a result of wages growing faster than rents, we continue to see rent to income ratios decline in nearly all of our markets as compared to a year ago from what we published in our third quarter supplemental. Overall, we expect a similar level of supply deliveries in 2019 as compared LA and Cbd Oakland offset by reduced apartment deliveries in Orange County And San Diego. Last quarter, we discussed a change in methodology for estimating apartment supply by factoring construction delays into our forecast. This resulted in pushing the delivery resulting in a supply delivery supply estimates at the beginning of 2018, we overestimated multifamily supply by 8% primarily due to construction delays while 3rd party providers overestimated 2018 supply by as much as 65% The improved accuracy of our multifamily supply estimates reflects several process improvements implemented by our research team who track and frequently visit apartment communities under development. Although we are monitoring several macro related risks to the economy, steady supply levels and healthy job growth in 2019. Turning to investment market conditions. A review of transactions in our West Coast market since the last quarterly call suggests no change to cap rates. The heightened market volatility in December resulted in a few deals being dropped However, conditions have since stabilized. Generally, cap rates do not move quickly and the first indication changing conditions is often lower transaction volumes, with plenty of capital still looking to buy apartments and Keppard fed expectations for interest rates, we expect little change to cap rates in the near future. We continue to view the best risk adjusted returns on our investment dollars will be found in the preferred equity market and we expect to close a few more deals in 2019 given our current pipeline. That concludes my comments. I'll turn the call over to John Burkhart. Thank you, Mike. For the full year, we achieved 2.8% year over year same store revenue growth. Exceeding our original guidance. I would like to thank all our associates for their hard work and focus on achieving these results. Overall, our markets are stronger today than 1 year ago. In fourth quarter, market rents were 3.5% higher at the end of 2018 compared to 2017. Consistent with my comments last quarter related strengthening of the market and our related operating strategy, we expect to continue emphasizing market rent over higher occupancy in 2019. Our 2019 guidance contemplates a reduction of occupancy of about 20 basis points to 96.6% for the full year. Regarding expenses, we continue to see pressure in 2019 in utilities, taxes and wages with offsets in other categories, largely controllables, leading to operating expense, guidance, of 3% year over year The operating team continues to do a great job of identifying opportunities to increase efficiencies in the operating platform. In 2018, they had held controllable expenses to 1.6% year over year growth. And in 2019, they're expected to about the same. Office leasing activity provides insight into future rental demand. We are encouraged by the robust office leasing environment and continued office construction announcement in the second half of twenty eighteen, which we've illustrated for the major public tech companies on page 16.1 of the supplemental. I will provide more regional detail on this leasing activity in my market commentary. In terms of supply, Overall, in 2019, we expect that supply deliveries as a percentage of stock will be 2.8% in the downtown markets versus 60 basis points in the suburban areas surrounding the Cbds of the largest coastal cities. S6's portfolio is not concentrated in the downtown locations and therefore should be less impacted by new supply. Now, I will provide an update on our markets. For the full year of 2018, Seattle had its strongest year since 20 with 3.4% year over year job growth. Although Amazon announced a Second And Third Headquarter location, Amazon's open positions for Washington have increased over 150% from Q4 2017. In Q4 twenty eighteen, there were almost 9000 openings at Amazon and Washington. Other major employers in the Pacific Northwest hit major milestones in their continued plans to expand their Pacific Northwest offices, including Microsoft breaking ground on their 2.5000000 Square Foot expansion in Redfin Costco receiving city approval for their 1,200,000 Square Foot expansion in Ithaca and Facebook's new lease of over 1,000,000 square feet in South Lake Union. Additionally, Amazon and Facebook continue to expand outside of downtown Seattle, pre leasing 750,000 square feet in office in Bellevue, Washington. Moving to Northern California. Job growth in the San Francisco Bay Area average 2.3% year over year in Q4 led by San Jose with 3.2% growth. The vast majority of which occurred in high paying industries such as professional and business services and information. Tech Companies Google, Facebook and DoorDash expanded their downtown San Francisco presence by over 2,000,000 square feet. In the South Bay, Google was active in seen over $1,000,000,000 worth of land and property, while expanding their Sunnyvale of Mountain View footprint by over 400,000 square feet. Our year over year same store revenue and 3.2% growth, respectively, followed by Fremont at 2.9%, Oakland at 2.1%, and San Francisco with 1.7% growth for the same period. Supply in the San Francisco and San Jose MDs is slightly lower in 2019 compared to 2018. However, we see supply in the Oakland MD increasing to 3500 units, of which 3000 units will be delivered in downtown Oakland. Although the total supply in the bay area is still relatively low, it's 70 basis points, it will be impactful in Downtown Oakland. Continuing south, Southern California job growth for our market's average 1.2% in Q4, which was negatively impacted by Orange County. Los Angeles remained consistent with the region posting 1.4% growth for the period. Netflix continues to solidify their presence in the market pre leasing an additional 355,000 square feet in Hollywood. Google and Facebook both completed deals to expand a combined 860,000 square feet in West L. A. Year over year revenue growth for the fourth quarter of 2018 was led by Woodland Hills and West LA submarkets with 4.7% and 4.3% growth, respectively, trailed by Long Beach with 2.8% growth and Tri Cities with 2.4% growth, while LACBD remained flat. Regarding supply, I've had similar comment for Downtown L. A. As in Oakland. Although the supply overall in L. A. County is relatively low at 60 basis points, the concentration in downtown L. A. Is significant. We expect deliveries in downtown L. A. To increase from about 2000 units in 2018 to about 4000 units in 2019. In Orange County, jobs in the 4th quarter grew 30 basis points year over a similar situation occurred in the numbers last year, and it was revised with the annual benchmarking in March, which we will review closely this year. Finally, in San Diego, year over year job growth was 1.9% for the fourth quarter of 2018. Most of the job growth is attributed to jobs added in high paying industries. In addition to tech giant Apple's plan for a campus in Austin, The company also announced goals to add over 1000 employees in San Diego, as well as Culver City and Seattle. Military activity will have a moderate impact in the market and the potential of 2 inbound carriers arriving later in the year. Each carrier strike group has an estimated 7500 crew members. Year over year revenue growth in the fourth quarter of 2018 was 4.2% for our north count, North City submarket, 3.9% for Oceanside, and 2.4% in Chula Vista. Currently, our portfolio is at 97% occupancy and our availability is 30 days out is at 4%. Thank you. And I will now turn the call over to our CFO, Angela Kleinman. Thank you, John. Today, I will focus on our 2019 guidance, followed by an update on capital markets and the balance sheet. The key assumptions supporting our 2019 forecast starts on 3% expectation of a steady market rent growth near the long term average and for our West Coast market to continue to outperform the U. S. Average. On core FFO guidance, we are expecting a We mentioned on the third quarter call that there are 2 key headwinds impacting this growth rate. First is debt refinancing. As the effective rate on the debt coming due is below current rates in the marketplace. 2nd is the lease up of our development pipeline When a building first opens, even though it is vacant, we recognize the operating and associated interest expense. This effect creates we anticipate a more Once the buildings are stabilized which typically takes 12 to 18 months per phase, we expect the drag to become a tailwind. Turning to capital markets activities. For the year, Essex was a net seller of assets as we arbitrage between private market yields and our cost of capital. During the fourth quarter, we sold Afeton Hope in Downtown Los Angeles for $220,000,000, which represents a cap rate close to mid-three percent. We purchased this property over 3 years premium to net asset value. Recently using the proceeds from the sale of this property, we have repaid debt and repurchased stock because we had been trading at a discount to net asset value. Since the beginning of 2018, we have repurchased $108,000,000 of stock at an average price of $243.44. Currently, our 2019 guidance does not assume any additional stock repurchase other than what has been completed through January. As always, we remain disciplined capital allocators and are ready to adjust We plan to repay about $880,000,000 of debt in 2019. This includes prepaying a $290,000,000 secure loan that matures in 2020 without incurring any prepayment fees. We generally favor refinancing our maturities with long term unsecured debt subject to relative pricing of course. As for the $290,000,000 loan repayment, we had discussed on our previous call that the average pay rate, and this debt is 5.7%, while the effective rate used to calculate GAAP interest expense is 3.8%. So even though the FFO impact will be negative, we will generate annual cash savings of approximately $3,000,000. In summary, our balance sheet remains strong with only 25% leverage 5.4 times debt to EBITDA and over $1,500,000,000 of liquidity. We are well positioned to take advantage of any opportunities that may arise in 2019. That concludes my comments, and I will now turn the call back to the operator for questions. Thank you. Met. Our first question comes from Nick Joseph with Betti. Please proceed with your question. Thanks. I was wondering if you can talk about the cadence of same store revenue growth throughout 2019 given difficult occupancy comps seems at least in the first quarter and probably for the first half of the year? The first quarter is going to be a little bit tougher and part of it because of some noise that we had from other income, the benefit of other income last year. So the year over year comps are a little tougher. For example, in January, our rental revenue on preliminary numbers is 3%, but the actual revenue overall revenue is 2.6. So it'll come out looking less than desirable, but the reality is the market is actually stronger this year than it was last year. So overall, we're in a better position, but the first quarter numbers would be lighter and then it'll tick up throughout the year. By a quarter and I recognize that that could be a shift of only a few weeks. So are these projects actually seeing delays or is it a more normal quarterly shift? This is John Yudi. The labor issue delayed a couple of our deals. They're actually only pushed out about a month and a half, but pushed it into the next quarter. So that was the reason behind it. Our next question comes from Trent Trujillo with Scotiabank. Hi, good morning and thanks for taking the questions. I appreciate the commentary on supply in different markets, but it looks like there's a lot of supply that scheduled to deliver in the Bay Area. So how are you thinking about your ability to retain residents, perhaps maintain occupancy and drive rent growth? Believe one of your peers cited recently that the new assets could have rents that are at 15% to 20% discounts to existing products. So, do you think that'll be a drawing point or do you see enough demand that it may not be much of an ultimate impact? Hi, Trent. This is Mike. Thanks for your question. We continue to see the Bay Area as there that has the strongest job growth and the strongest economy. And if you look at overall levels supply, we think 2019 will be somewhere around 1% of stock on the apartment side and 0.7% of stock on total supply in the Bay Area. So obviously when you're growing jobs at 2%, those numbers do not appear to be concerning. And the other point I would make is, there is a sort of a trend toward fewer for sale units being built and a few more apartments being built. And the for sale component is impacted by higher mortgage rates and higher prices. I think California had a median home price increase of somewhere around 5 percent over the past year. So the for sale side is getting more expensive and, I think that that benefits the rental. But when we look based of supply and demand, we think demand significantly outstripped supply as it relates to all housing and apartments well. Okay, great. And then maybe one for, John Eudy, this might be one of the last times we can ask about this with your transition. But you took a lead role in the Prop 10 campaign. So maybe can you provide your latest thoughts on affordability measures and maybe let us know about the efforts you've seen and been involved in and what you think could be a potential resolution to the housing shortage and affordability issues in California? Well, that is a very long winded question. I'll do my best to answer it. First off, as you know, prop 10 was defeated handsomely 50.40 by 20 points. And I think the leadership of the legislature in our new governor understand that repealing cost of Hawkins was not good for California, California housing. So that's good. As far as all the measures that are out there to create more housing, it gets back to the economic drivers and how we're going to make it work. I can't speak to how some of the affordable housing solutions that have been bannered around at the legislature are actually going to get, done, but there is discussion. But as you well know, the economics have to work for anything to be built and it's been tough the last of years to even keep up with the supply, demands that we've had. So I don't see it blowing up, if you will, meaning an unabated amount of construction beginning to occur. It's going to be a long struggle and California is in a deep hole for housing shortage, if you will. It's going to take a long time to get out of it. There is a lot of focus on post Prop 10. What can we do if anything? And I think that's being discussed, if there are any amendments to, or we'll call it, reform to Costa Hawkins, they would be very minor is my expectation. Our next question comes from Shirley Wu with Bank of America Merrill Lynch. Please proceed with your question. Hey, guys. Thanks for taking the question. So going back to your revenue guidance of $25,000,000 to $35,000,000. How comfortable are you with that range? And what do you think it'll take to get upper versus the lower end of the range in terms of rents and occupancy? Sure. This is John speaking. We're very comfortable with our range and obviously with our midpoint at this point in time. The markets right now are stronger than they were a year ago. We mentioned at the last call, we had a better off the lease position, which puts us in a good spot. We shifted our strategy where we're favoring market rent as opposed to occupancy. So all those things headwinds I mentioned. We'll have 20 basis points of occupancy headwinds that'll work against us. What would make things better or worse is really jobs. I would say if the jobs we're watching the Orange County jobs, I mentioned that. And if that turns out unfavorable, that will hurt that market a huge market, but it'll hurt that. We're seeing some stronger job growth certainly in Seattle and the Bay Area. So that would be the upside and the downside would be a Orange County job. Did that answer your question? Yes. It's actually also on supply. You mentioned that right now you have to flip the into 'nineteen. But it seems like the British is this consistent theme. So have you accounted for slippish from 'nineteen '20 into your projection? Yes. This is John. What we made a shift last year because you're right. It is a fairly consistent theme where we go out and we drive all of the assets and look and make an assessment as to where they're at come up with our best judgment as to the timing, but even then there's errors just because of the labor shortage and the slippage. So what we adjusted is We continue that process of driving every asset, but then we made a more of a macro adjustment, based on our experience that we've that we have over the last several years to modify that. So we're more confident this year than in the past, as it relates to our supply expectations, but yes, I acknowledge it. It's, the last couple of years have been tough because of the delays. Got it. Thank you. Our next question is from Austin Wurschmidt with KeyBanc Capital Market Please proceed with your question. Hi there. Question, when you look at your forecast for supply versus 3rd party forecast, for 2019? Are there still material differences? And do you think they've got a handle on the timing of completions at this point? Hi Austin, it's Mike Schall. As John just alluded to, we spent a lot of time on the supply estimate And that's largely because there are such high degree of variation out there in terms of estimates. As I noted in my comments that some of the vendors had 65% more supply in 2018 than was actually delivered. And typically that just moves into the next year and then the next year appears to be overstated. So without making a systematic adjustment like the one we made to move 3000 units from this year to next year and then do the same thing from 2019 to 2020, you end up with these huge numbers that are out there that are well beyond reality in our opinion. So We think that similar to 2017 2018, there will be around 35,000 units per year that are delivered in our West Coast markets unless something changes in the construction labor market which candidly we don't see. It was a point we made last time on last quarter's call that I don't know how you could expect a significant increase in the amount of within the construction labor market because there are more people retiring than going into the trade. And you also have maybe as an anecdote, people construction workers diverted to some of these fire destroyed areas that are taking people out of the labor markets in some of the metro areas and moving them into the areas that have these fires. So without a fundamental change in construction labor, I don't see how you could possibly produce a tremendous number more homes. Makes sense? Yes, that's an interesting anecdote. Thanks for that. Do you think once we pass peak construction or peak supply deliveries in a specific quarter and that pipeline begins to slow that there's if you call it a greater risk or greater likelihood that projects are completed on time? Yeah. I think I go back to what John Yutte just said. It's all about the economics. So, for the past couple of years, we've had rents growing at somewhere around 3%, 2% to 3%. And construction costs have been growing at the high single digit to low double digit rate. And so the net effect of those two numbers is to compress development yields. And this is why I think it's unlikely that you're going to have a significant increase in the number of units developed from a from the perspective of just economics in terms of development economics. And really this underlies our switch from direct development where we're buying land and for future start and concern therefore about that construction cost increase between when we commit to land and when we start, And rather than that focus on our preferred equity portfolio where we're financing someone else's development deal. And we are coming in at the point that we know the cost because they have a construction loans. They are signing contract with the general contractor, etcetera. So we think that's a lower risk, more appropriate way to approach development at this point in time. I appreciate the thoughts, Mike. And then last one for me is, you talked about Downtown L. A. Significant concentration of supply. Doubling in 2019 versus 2018. Can you just speak to the concession trends you're seeing as well as what your guys' exposure is in the market now following the sale of Ethan Hope? John, do you want to do that or not? Sure. I'll grab that. Yes. So what we're seeing now as far as concessions in that market is pretty consistent with what we typically see in the fourth quarter, because again, reminding everybody a lower point in the season. So concessions are up a couple of weeks. They're now roughly 6 to 6 weeks to 8 weeks in the downtown L. A. Market specifically as it relates to lease ups, not same store, but lease ups. And that's fairly normal. We, one might expect with the new supply coming on this year that it might get more aggressive. We'll watch that carefully. As it relates to our exposure, the downtown market for L. A. Exposure is pretty small. It's right now a couple of percent of the whole portfolio. It's really not very big at this point after that sale. Does that answer your question? Yes, absolutely. That was very helpful. Thank you. Our next question comes from Sander Goldfarb with Sandler O'Neill. Please proceed with your question. Hey, good morning out there. So two questions. First, On the operating expense, you guys talked about your ability to really make headway on the controllables to offset the payroll utility and taxes but it certainly seems, Mike, to your, to your comments on labor shortage, it certainly seems like payroll wages is going to be a continuing pressure point So can you just talk ongoing? You said that you could manage it this year. Do you think that's sustainable or do you think that expenses are going to rise in the future if you guys are unable to further control the controllables? Hey, Alex, this is John. I'll take a stab at it. I know you said my but I'm got the controllables in my bucket here. So as it relates to wages, you're right. There's significant pressure out there. Let's not forget that one of our issues is affordability. And so as wages go up, it does help the overall picture much, much more So if this was a long term trend, that would actually be very beneficial for affordability and therefore rents. But getting back to your specific question, Sure. If in the end of the day, it goes up forever, we'll run out of potentially run out of opportunities, but we continue to find ways to leverage the asset collections that we have with sharing of personnel to reduce total labor, while we're still paying our people significantly more. So everybody's winning in that equation. We're also finding opportunities to leverage technology to automate various processes. And in doing so, improving the customer experience, making things much faster as well as our employee experience and again, reducing labor or vendor costs. So what we see for the foreseeable future is a lot of opportunity, but it amendous amount of work with change management to try to implement the different things that we're looking at. Did that answer your question there? Yeah, yeah, it does. And I was referencing Mike's comment on wage with construction labor. But and, actually, now I'm gonna turn to Angela. On the guidance page, it looks like, capitalized interest is expected to be higher if I'm if I'm reading the guidance page correctly. And it, so if you could just talk, are you guys anticipating increasing the development pipeline mean, it didn't sound that way, but if you could just walk through why capitalized interest looks to be higher in 'nineteen than 'eighteen? Oh, sure. And I'm happy to Alex. That's really just a function of our current development pipeline. We still have about 2 $50,000,000 a little over $250,000,000 of spent this year. And because of that, capitalized interest is going to naturally increase. So it's nothing more than just how those numbers work out. Thanks, Alex. Our next question comes from John Kim with BMO Capital Markets. Please proceed with your question. Good morning. I think, Mike, in your prepared remarks, you mentioned preferred equity as your most attractive risk adjusted returns for your dollar spent. Your guidance for this year anticipates only $50,000,000 to $100,000,000, which is less than what you've invested last year. And on top of that, do you to gain that dollar this year. So I'm just wondering if we should read into that most investment opportunities beginning Yes, John. It's a good observation. Thanks for that. I think it has to do with the other point I made a minute ago, which is construction costs increasing faster than rents. And a lot of these deals are being pushed back. In fact, most of our pipeline in 2019 represents the deals that we thought were going to close in 2018 and have just essentially been pushed back. So, they require typically more equity than than some of the sponsors originally thought they would and otherwise need to be reworked. So basically it's taken us a longer period of time to get the preferred equity deals to the closing table. And so we remain optimistic in 2019, we actually have a very good pipeline right now. And so perhaps there's a little bit of upside to the guidance assumption But again, given the inherent uncertainty, we are, we want to make sure we had a level that we could, we could for sure close. Okay. And then John mentioned Orange County in the slight loss of jobs that occurred in December. It doesn't sound like you're concerned about it too much at this point, but you're still maintaining your 20,000 jobs forecast for the year. I'm just wondering if you had to reduce that job forecast, how sensitive would that be to your market rent to forecast? Yes, John. This is Mike and John will follow me. Job growth there is 1.2%. And job growth in Southern California is about 1.3%. So I don't think that we have been aggressive on jobs. I think we're being thoughtful and realistic. So all of these assumptions can vary to some degree. And, but I think if you look back historically, we've been pretty close on virtually everything and if anything, maybe a little bit conservative. Yes. And I would just add, remember last year with Orange County, the jobs were pretty flat and then the revision came through and they revised back a whole bunch of jobs. We're watching that situation. I'm not sure if if that'll happen again or not, but we're watching that closely. We're not seeing signs that the market is having great struggles. I just want to bring it up on the on the call so people are aware and seeing what we see that there was a negative print in jobs in December. Our next question comes from Drew Babin with Robert W. Baird. Please proceed with your question. A question going into next year, obviously there were quite a few markets where you had a pickup in kind of the 2nd derivative of leasing in 2018. In your guidance, are you assuming that any markets have another 2nd derivative improvement in pricing power for 2019 guidance purposes? Wouldn't say it that way. I would look at it and say, we expect the markets to continue to stay strong. We had a really a shift in the market and it goes all the way back to 2017 when things were slow and in the first half of twenty eighteen and then they shifted clearly shifted. We see a continued strength in the market, but not necessarily something really taking off but we do see continued strength in the market. And we look at factors like the Northern California job growth the Seattle job growth and the consistency in the SoCal region, again, with the exception of Orange County, and expect that things will continue, pretty good over the next year. Again, with supplies generally in check overall in the larger market Okay. That's helpful. And I guess kind of converting that over to lost lease language. It would seeing based on your market rent forecast for 2019 as well as some of the comments on lost lease towards the end of 2018 that revenue growth would maybe be a bit higher as it implied by the midpoint of guidance. I know you talked about the 20 basis points of occupancy decline. I guess, can you quantify the piece of that kind of caused by overall deceleration in property fee income growth or kind of what's the drag being created by that? Let me kind of walk through big picture the way I look at it. Typically again, and thank you for referencing lots to lease. Essex it's one of the key metrics along with market rent and of course, occupancy adjustment is how we look at it. And so when looking at loss to lease, we typically like to look at it in September. It's after peak leasing and before things slow down in the normal seasonal slowdown. So at that point, we had about 1.6% for the portfolio lost to lease. And again, on average, with 12 month leases, you're going to figure you're going to get all of that over the next year. Then if you look at our rent in S-sixteen, it's 3.1%. And if you look at that and say, we're going to take a midyear convention on how that hits the market. That gets you about another 155 basis points And then if you take the 20 basis points of occupancy and subtract that out, that gets you into about the 2.95 range revenue, and we're pretty darn close to that at 3%. So that big picture, how we kind of look at it and see it the year. So I think we're pretty spot on with our 3% midpoint guidance. Okay. The explanation is very helpful. And lastly, just in Seattle, it would seem based on some of the data out there and some commentary that supply is beginning to kind of directionally shift from downtown out more towards the east side and also some news about tech firms possibly getting behind the creation of additional kind of lower and middle income housing on the east side. I guess, are you seeing anything in the market at this point in time? Any kind of disruption? And what kind of visibility could you provide about some of those eastside submarkets around Seattle? Well, yes, I think you're right, Drew. There is more development on the east side than there was. It was, development was very focused on downtown Seattle first and then downtown Bellevue. And then now it's moving more into the suburban areas of Seattle. And, but I we see an overall trend of reduced supply in the Seattle area more broadly. So, in 2018, We had 9700 and 50 units in Seattle being delivered in 2019 and then about a little over 6000 in 20 20. So we think actually, that the supply side is actually going to the right direction. And then the other side is obviously the demand side, which continues to be very robust. So, and maybe the other piece, which is affordability, which we're a bit concerned about more in the California market, Seattle is much more affordable. So we still view Seattle as being an appropriate area to invest. And as you can tell from our 2019 expectation is just a small bit below our expectation for market rent growth compared to Southern Cal and Northern Cal. Great. I appreciate the explanation. Thank you. Our next question comes from Wes Golladay with RBC Capital Markets. Please proceed with your question. Yes, good morning everyone. I'm going to look at that 8th and Hope transaction. Was described as an arbitrage. And I'm just wondering, it looked like you bought all the stuff in the last week of the quarter. Is it was it conceivable that you guys could actually sell the asset and buy the stock in a 1 week period? Or were you contemplating that maybe throughout the entire quarter? Hey, Wes, it's Mike. Yes, and I guess, we hope to buy the stock if we could. If we didn't buy the stock, We thought that debt rates had increased to a point that there was still positive arbitrage, just kind of smaller refinance, for example. So it was going to be positive arbitrage no matter what happened in our view. But obviously the opportunity to buy the stock back was the better outcome and we're pretty excited about it. Yes. Well, congrats on buying the bottom. Big picture though, when you saw an asset that's at a 3.5% cap rate at which I believe you cited. Do you think eventually if there's more transactions like that developers will start to lower their hurdle And then maybe this whole low interest rate environment could just be maybe negative long term for overall rent growth? Well, it's pretty challenging on this side to respond to hypothetical type of questions, but because our view is it's all a matter of looking at the landscape, a variety of different points of view. So in that case, I guess what your talk about is, higher valuations of apartments are going to increase. The next question I would ask you is, Hey, does that mean that the stock is going to increase too and our cost of capital is going to decline because again, we are constantly looking at what's better the real estate portfolio or the value implied in the stock and trying to understand that so we make good capital allocation decision. So to ask a question that just focuses on one variable without the other variable, is challenging to answer. Does that make sense? No, that's fair point. And I definitely agree with the way you look at it from the relative value of your stock. That's it for me. Thanks. Okay. Thank you. Our next question comes from Harteek Goel with Delman And Associates. Please proceed with your I was just wondering on the supply and your adjustment there. Obviously, you guys have the best view into the market. You guys drive around. You view these assets. I'm just wondering what's causing the delay beyond just the labor issues. So if you look at assets that are maybe high rise versus something that's more mid rise, Is the high rise more likely to be delayed than the mid rise? Are there certain kinds of projects that are more likely to be delayed? What kind of color can you add on Elaine specifically? This is John. I'll try to answer that. The more complicated structure, obviously, the higher likelihood that there could be more delays. Everything stacks up on itself. The general labor issues that the industry space over the last year specifically has been the driver and the out migration of the older construction folks that are no longer there like they were 10 years ago as part of the answer. So it's a little bit of everything, Pardeep. But yes, the more complex the construction, the higher likelihood there would be delay. In this environment for the next 12 months say. And is that just on a construction basis or also complexity on the capital structure side that you noted? Well, I was just referring to construction, but on the capital, obviously, the numbers have to work to want to do a deal, but you've already committed when started. So it's in the pipeline. So I was only referring to the pipeline when I responded. Well, thanks so much, John, and best of luck as you retire. Well, I'll never retire, but I'm not going to be working 20 fourseven. We're not going to let John go that easy. Our next question comes from John Guinee with Stifel. Please proceed with your question. Great. Thank you. First, John, we are going to miss you. It's been a great 30 years, Boyd. 34 just to be exact, not that I'm counting. 34. Wow. You started there when you were 16. Wow. Any 1031 exchange requirements on, Eighth And Hope. And then other two questions, any promote income identified in 2019. And then refresh our memory, and if you already did this, and I missed it, I apologize. How you handled the Costa Hawkins costs, that you incurred in 2018? Sure thing, John. On the Ethan Hope, there is a small piece of 1031 exchange but it's not such a meaningful impact on the gains because we had, we had sold back then. It was the last piece of share and grade. So it's just a small piece. So it really doesn't impact, the ultimate gain numbers in a material way. And we certainly have the ability to absorb that without impacting a dividend. And as far as the cost Hawkins and the, the G and A impact, we pulled that out of the core and we actually disclosed it separately. And I think it's on page 5 or 6 in the press release. But in any event, the total cost, which is also information for Costa Hawkins is about $5,800,000 for the full year. Great. And we don't expect, of course, such a significant one time item to reoccur in 2019. And so we don't have a forecasted number. Angela, any promote income expected in 2019? At this point, not yet, we're still reevaluating the platform because that involves conversation with the joint venture and market conditions. And, and, there's a lot more, conversations that goes into just factoring getting a promote. So we certainly have a good embedded pipeline on the promote. Great. Thank you very much. Our next question comes from Tayo Okusanya with Jefferies. Please proceed with your question. Yes, good morning over there on the West Coast let me also add my congratulations, John, on your semi retirement. Adam, also, congrats on the promotion. A couple of things on our end. I think we've talked, about the cap rate on 8 and you just give us a sense of kind of some of the other cap rates as well as the acquisitions you did during the quarter as well as dispositions? Sure. This is Mike. As I mentioned in the prepared remarks, I don't think cap rates have changed a whole heck of a lot. For a quality property and locations. It's around a 4% cap rate. Sometimes you have very well located, very high quality, let's say A plus, A plus plus type property that will go sub for cap rates. And then for B quality or let's say, let's say, from A minus to B minus you have a you would add probably from 30 to 60 basis points to the, the A cap rate. So again, very consistent with what we've said in the past. Okay. That's helpful. And the second question, given the viewpoint on cap rates. Is that one of the main reasons why you still, forecasting the net seller of assets in 2019, similar to 2018? Yeah. Again, it's it's what I said earlier. It really is a relationship between the stock price and net asset value of the company and the different components that go into each of those, notably, for example, our debt on balance sheet is lower cost than if we go and incur debt tomorrow, which gives our balance sheet a reason to buy it versus just transact in the marketplace. So, we're looking for the appropriate arbitrage and add value, on from the transactional side. We also need to fund our development by line. Our next question comes from John Pawlowski with Green Street Advisors. Please proceed with your question. Thanks. I'd like to go back to Orange County a bit and contrast it to, I think it was a year ago in the Bay Area where you saw a similar scary BLS job growth trajectories, and that were restated. So I understand the concern with brief statements. Is it that you're on the ground trends, which I'm guessing could be better predictors of job growth in BLS. Those on the ground trend a year ago corroborated BLS type numbers at least as they stated and this time they're kind of telling you a different answer on the ground trends in Orange County are actually a lot stronger than the BLS numbers? No, this is John. So last year, it really wasn't the barrier. It was Orange County that was revised up pretty substantially. And last year, we saw market rent growth in the context of everything that's going on in the sense of supply being delivered and everything else, which was pretty good. And so, it was not consistent with BLS And I would go back and say this year, it's a similar situation. We're seeing Orange County, say, the 4th quarter rents in Orange County were 2.9% year over prior year, yet the VLS has basically flat job growth for that quarter. We also expect lower supply deliveries going forward. So the VLS is one number that's out there. And we watch it, but we look at many numbers and we're trying to make sense of it right now on the ground. We're not seeing significant deterioration. And so we'll watch the revisions, but we'll continue stay more focused on what's really going on in the rental market. Okay. Could you share that 2.9% growth in 4Q, what's it look like in January? And what was that trend? What's the trajectory to trend in this year? Sure. The debt is up from where it was earlier in the year. And in January, it's down a little bit from there as is San Diego. Both of those markets are down a little bit, but that's not unusual at this point in time. That's why I quoted the fourth quarter number as a whole because 1 month there's a movement that can go on within our portfolio and certainly it's the low demand period. So not really a good reference point. That's why I use the whole quarter, but we only have January. So January is down a little bit from there. Okay. John Yutte on the, Governor Newsom's recent steps or planned steps to address the regional housing need allocations in certain cities. From your experience, if he is successful and he does have bipartisan support biggest, how quickly could we see starts starting to pick up in some of these cities that are forced to increase their allocations? Well, as you know, John, in California, not taking that into consideration 4 to 7 years cycle from identification aside till you actually have a stabilized asset. And some of the ambitious things that he has said sound good, but the execution in reality by the time you go through the process in SQL, even if there is some SQL reform, you're not really going to accelerate the timing that much and the economics drive the decision anyway. So, I don't see a near term over the next 3 to 5 years, massive increase from what we're expecting to see. Hey, John. John, it's Mike. I just have one more thing to add to that. And I don't know if you saw your Spright in your backyard, but I think it's notable that the city of Huntington Beach is suing the state over some of these new requirements SB-thirty five right? So I think that's something that we're going to be keeping our eye on as it relates to these matters. Right. Okay. Thanks, guys. Nimvi Attitudes in California are not going to change easily. It's what I think Mike said. That's the point. Yes, exactly. We will take our last question from Cameron Ford with MUFG Securities. Please proceed with your question. It doesn't sound like you're underwriting a recession in your 2019 outlook. If we do end up going into 1 nationwide this year, how do you think the West Coast will fare and what do you think the downside risk could be to your job growth and market rent growth forecast? Hi, Karen, it's Mike. Not sure exactly how to respond to that because obviously it depends on what type of recession, how steep it is, what happens to employment, etcetera. So I have a hard time responding to an exact exactly. I would expect, at the end of a cycle, conditions continue to change jobs will trail off. The development pipelines will be will continue to be delivered because once you turn a state of dirt, they will be finished. And, you'll end up with a supply demand mismatch, but to what that means. I think it is virtually impossible to do at this point. Okay. Fair enough. And then my second question is just on the deferred Equity, pipeline and, book. You said in the 3rd quarter press release that you had originated, I think, in 'eighteen or $18,000,000 investment in Burlingame. But the number of investments stated 2017 from September to December. Just was wondering, did something get paid off or did that appeal just not happen? Yes. The typical duration of these preferred equity deals are 3 to 4 years. So yes, we're constantly having redemptions or repayment. Okay. Can you just give us a sense for what was repaid and what was the rate on it? Yes. It was a small deal, a $6,000,000 and, the pay rate, I'm just, for memory, was around 11%. But at this point, I mean, if you look at our total preferred equity commitment. It's still pretty darn close to what we had disclosed last time. It's close to 400,000,000 So there's some inflows, there's some outflows, but net net, we're still around that $400,000,000 and we are well under our maximum capacity of $900,000,000. And is there anything, any new investment that you think is imminent in the first, say, closing in the first quarter? That's really hard to say because we do, as Mike said, have a good pipeline and that we're working through, but the timing of the close is just difficult to predict. At this time, I'd like to turn the call back to Michael Shaw, for closing comments. Thank you, operator. And thanks everyone for your participation on the call today. We look forward see many of you at the Citigroup Conference in March. Have a great day. Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.