Good day, and welcome to the Essex Property Trust fourth quarter 2018 earnings call. As a reminder, today's conference call is being recorded. Statements made in 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 filing with the SEC. When we get to the question and answer portion, management 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. You may begin.
Thank you. Welcome to the ESS fourth quarter earnings call. John Burkart and Angela Kleiman will follow me with comments. John Eudy is here for Q&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 Eudy, whose retirement was announced last month, for his many contributions to the company's success over the past 30-plus years. Turning to the first topic. 2018 was another solid year for Essex, with 5.5% 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 2018 results into a broader perspective, ESS has generated a 16% compounded annual total return to shareholders since its IPO 24 years ago, ranking us number one in total shareholder return for the REIT industry since the IPO. Over that period, we achieved an 8.5% compounded annual growth rate in FFO per share and a dividend that has grown for 24 consecutive years. Next month, our board will consider increasing our dividend for the 25th year, placing us among a select group of companies known as Dividend Aristocrats. 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 markets has led to a winning formula. To use a baseball analogy, our goal is to get many base hits while minimizing unforced errors.
2018's 5.5% FFO growth is below our historical average, it is consistent with later phases of an economic cycle and the challenges in finding investments that add to per-share core FFO and NAV. 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 three-month job growth in the Essex metros of 2.1%, which exceeded our initial expectations. The primary drivers of the outperformance were the tech markets of San Jose and Seattle, where we saw a strong increase in high-quality jobs during the quarter compared to one year ago.
We believe this trend will continue as tech firms continue to expand in our markets. 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 S16.1 of the supplemental. Turning to 2019, we continue to expect that 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, leading to improved rental affordability. Our supply estimates for 2019 have not changed from what we published in our third quarter supplemental. Overall, we expect a similar level of supply deliveries in 2019 as compared to 2018, although there are significant differences by market. Such as large increases in apartment deliveries in downtown L.A. 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 of 3,000 multifamily units from 2018- 2019, resulting in a supply delivery estimate of roughly 35,000 units for 2018. Looking back to our original supply estimates at the beginning of 2018, we overestimated multifamily supply by 8%, primarily due to construction delays, while third-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 support our expectation that rent growth will be mostly consistent with long-term averages for the Essex markets in 2019. Turning to investment market conditions. A review of transactions in our West Coast markets since the last quarterly call suggests no change to cap rates.
The heightened market volatility in December resulted in a few deals being dropped. Conditions have since stabilized. Generally, cap rates do not move quickly, and the first indication of changing conditions is often lower transaction volumes. With plenty of capital still looking to buy apartments and tempered 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 Burkart.
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 one year ago. In the fourth quarter, market rents were 3.5% higher at the end of 2018 compared to 2017. Consistent with my comments last quarter related to the 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 for 2019 at the midpoint.
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. In 2019, they're expected to do 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 announcements in the second half of 2018, which we've illustrated for the major public tech companies on page S16.1 of the supplemental. I will provide more regional detail on this leasing activity in my market commentary. In terms of supply, the focus of new apartment deliveries continues to be in the downtown locations. 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 suburban areas surrounding the CBDs of the largest coastal cities.
Essex'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 2000, 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 2018, there were almost 9,000 openings at Amazon in 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 2.5 million square feet expansion in Redmond, Costco receiving city approval for their 1.2 million square feet expansion in Issaquah, and Facebook's new lease of over 1 million square feet in South Lake Union.
Additionally, Amazon and Facebook continue to expand outside of downtown Seattle, pre-leasing 750,000 sq ft in office in Bellevue, Washington. Moving to Northern California. Job growth in the San Francisco Bay Area averaged 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 business services and information. Tech companies Google, Facebook, and DoorDash expanded their downtown San Francisco presence by over 2 million square feet . In the South Bay, Google was active in purchasing over $1 billion worth of land and property, while expanding their Sunnyvale and Mountain View footprint by over 400,000 sq ft.
Our year-over-year same-store revenue growth for the same period was led by our San Mateo and San Jose submarkets, with 4.2% 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. We see supply in the Oakland MD increasing to 3,500 units, of which 3,000 units will be delivered in downtown Oakland. Although the total supply in the Bay Area is still relatively low at 70 basis points, it will be impactful in downtown Oakland. Continuing south, Southern California job growth for our markets averaged 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 sq ft in Hollywood. Google and Facebook both completed deals to expand a combined 860,000 sq ft in West L.A. Year-over-year revenue growth for the fourth quarter of 2018 was led by our Woodland Hills and West L.A. 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 L.A. CBD remains 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 2,000 units in 2018 to about 4,000 units in 2019.
In Orange County, jobs in the fourth quarter grew 30 basis points year-over-year and actually turned negative when looking at December 2018 over the prior year's period. 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 1,000 employees in San Diego, as well as Culver City and Seattle. Military activity will have a moderate impact in the market on the margins, with one carrier having departed at the beginning of the year and the potential of two inbound carriers arriving later in the year.
Each carrier strike group has an estimated 7,500 crew members. Year-over-year revenue growth in the fourth quarter of 2018 was 4.2% for our North City submarket, 3.9% for Oceanside, and 2.4% in Chula Vista. Currently, our portfolio is at 97% occupancy, and our availability 30 days out is at 4%. Thank you, and I will now turn the call over to our CFO, Angela Kleiman.
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 page four of the press release and S-14 of the supplemental. We are guiding to a midpoint of 3% for both same-property revenue and expense growth. The revenue growth assumptions is primarily driven by our 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 growth rate of 3.7% at the midpoint. We mentioned on the third quarter call that there are two 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. Second 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 a temporary drag on cash flow. Since over 85% of our development pipeline will start lease-up this year, we anticipate a more meaningful FFO-per-share drag of between $0.05-$0.10 in 2019. Once the buildings are stabilized, which typically takes 12- 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 arbitraged between private market yields and our cost of capital. During the fourth quarter, we sold 8th and Hope in downtown L.A. for $220 million, which represents a cap rate close to mid 3%.
We purchased this property over three years ago for $200 million, which we funded with common stock when we were trading at a large premium to net asset value. Recently, using the proceeds from the sale of this property, we have repaid debt and repurchased stock because we have been trading at a discount to net asset value. Since the beginning of 2018, we have repurchased $108 million 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 our plans depending on market conditions to maximize shareholder returns. Lastly, on the balance sheet, we plan to repay about $880 million of debt in 2019.
This includes prepaying a $290 million secure loan that matures in 2020 without incurring any prepayment fees. We generally favor refinancing on maturities with long-term unsecured debt, subject to relative pricing, of course. As for the $290 million loan prepayment, we had discussed on our previous call that the average pay rate on this debt is 5.7%, while the effective rate used to calculate GAAP interest expense is 3.8%. Even though the FFO impact will be negative, we will generate annual cash savings of approximately $3 million. In summary, our balance sheet remains strong with only 25% leverage, 5.4x debt to EBITDA, and over $1.5 billion 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. 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. 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 while we poll for questions. Our first question comes from Nick Joseph with Citi. Please proceed with your question.
Thanks. I was wondering if you can talk about the cadence of seeing similar revenue growth throughout 2019, given difficult occupant comps, at least in the first quarter and probably for the first half of the year.
Yeah, sure. This is John. The first quarter's going to be a little bit tougher, part of it because of some noise that we had from other income, the benefit of other income last year. The year-over-year comps are a little tougher. For example, in January, our rental revenue on preliminary numbers is 3%, but the actual overall revenue is 2.6%. It'll come out looking less than desirable. The reality is the market's actually stronger this year than it was last year. Overall, we're in a better position, but the first quarter numbers will be lighter, and then it'll pick up throughout the year.
Thanks. Just on development, it looks like two of the projects were delayed by a quarter, and I recognize that that could be a shift of only a few weeks. Are these projects actually seeing delays, or is it a more normal quarterly shift?
This is John Eudy. The labor issue delayed a couple of our deals. They're actually only pushed out about a month and a half, but it pushed it into the next quarter. That was the reason behind it.
Thanks.
Our next question comes from Trent Trujillo with Scotiabank. Please proceed with your question.
Hi, good morning, thanks for taking the questions. Appreciate the commentary on supply in different markets, but it looks like there's a lot of supply that's scheduled to deliver in the Bay Area. How are you thinking about your ability to retain residents, perhaps maintain occupancy and drive rent growth? Because I believe one of your peers cited recently that the new assets could have rents that are at 15%-20% discounts to existing products. 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 the area that has the strongest job growth and the strongest economy. If you look at overall levels of 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. Obviously, when you're growing jobs at 2%, those numbers do not appear to be concerning. The other point I would make is, there is sort of a trend toward fewer for sale units being built and a few more apartments being built. 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% over the past year.
The for sale side is getting more expensive, and I think that that benefits the rental. When we look basically at supply and demand, we think demand significantly outstrips supply as it relates to all housing and apartments as well.
Okay, great. Maybe one for John Eudy. This might be one of the last times we can ask about this with your transition. 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, 60/40 by 20 points, and I think the leadership of the legislature and our new governor understand that repealing Costa-Hawkins was not good for California housing. 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 bantered around at the legislature are actually going to get done, but there is discussion. As you well know, the economics have to work for anything to be built, and it's been tough the last couple of years to even keep up with the supply demands that we've had.
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's in a deep hole for housing shortage, if you will, and 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? I think that's being discussed. If there are any amendments to, or we call it a reform to Costa-Hawkins, they would be very minor, is my expectation.
Great. Thank you very much.
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. Going back to your revenue guidance of 2.5%-3.5%, how comfortable are you with that range, and what do you think it'll take to get to the upper versus the lower end of the range in terms of rents and occupancy?
Shirley, 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. All those things lead to a stronger market. At the same time, though, there's some headwinds because of the occupancy headwinds I mentioned. We have 20 basis points of occupancy headwinds that'll work against us. What would make things better or worse is really jobs. We're watching the Orange County jobs, I mentioned that, and if that turns out unfavorable, that'll hurt that market. It's not a huge market, but it'll hurt that.
We're seeing some stronger job growth, certainly in Seattle and the Bay Area. That would be the upside, and the downside would be Orange County jobs. Does that answer your question?
Yeah. Actually, also on supply. You mentioned that right now you have a bit of slippage into 2019, but it seems like the slippage is this consistent theme. Have you accounted for a slippage from 2019- 2020 into your projection?
Yeah. This is John. 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. Even then, there's errors just because of the labor shortage and the slippage. 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 have over the last several years to modify that. We're more confident this year than in the past, as it relates to our supply expectations. Yeah, I acknowledge it. 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 Markets. Please proceed with your question.
Hi there. Question: When you look at your forecast for supply versus third-party forecasts 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 estimates, and that's largely because there are such a 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. Typically, that just moves into the next year, and then the next year appears to be overstated. Without making a systematic adjustment like the one we made to move 3,000 units from this year to next year and then do the same thing from 2019-2020, you end up with these huge numbers that are out there that are well beyond reality in our opinion.
We think that similar to 2017 and 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 can expect a significant increase in the amount of supply when the labor market hasn't fundamentally changed. In fact, I would say that there are demographic issues within the construction labor market because there are more people retiring than going into the trade. You also have, maybe as an anecdote, 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 had these fires. Without a fundamental change in construction labor, I don't see how you could possibly produce a tremendous number of more homes. Make sense?
Yeah, that's an interesting anecdote. Thanks for that. Do you think once we pass peak construction or peak supply deliveries in a specific quarter, that pipeline begins to slow, that there's a, I don't know if you'd call it a greater risk or greater likelihood that projects are completed on time?
Yeah, I think I go back to what John Eudy just said. It's all about the economics. For the past couple of years, we've had rents growing at somewhere around 3%, 2%-3%, construction costs have been growing at the high single digit to low double digit rate. The net effect of those two numbers is to compress development yields. This is why I think it's unlikely that you're going to have a significant increase in the number of units developed from the perspective of just economics in terms of development economics. Really, this underlies our switch from direct development where we're buying land for future start and concern, therefore, about that construction cost increase between when we commit to land and when we start.
Rather than that, focus on our preferred equity portfolio, where we're financing someone else's development deal, we are coming in at the point that we know the cost because they have the construction loans, they are signing a contract with the general contractor, et cetera. We think that's a lower risk, more appropriate way to approach development at this point in time.
I appreciate the thoughts, Mike. 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 8th and Hope?
John, do you want to do that, or you want me to-
Sure. I'll grab that. Yeah. 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 that it's a lower point in the season. Concessions are up a couple of weeks. They're now roughly six to eight weeks in the downtown L.A. market, specifically as it relates to lease-ups, not same store, but lease-ups. That's fairly normal. 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 in the downtown market for L.A., our exposure is pretty small. It's right now 2% of the whole portfolio. It's really not very big at this point after that sale.
Great.
Does that answer your question?
Yeah, absolutely.
Sure.
That was very helpful. 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. 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. It certainly seems, Mike, to your comments on labor shortage, it certainly seems like payroll wages is going to be a continuing pressure point. Can you just talk? 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 Mike, but I've got the controllables in my bucket here. 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, as wages go up, it does help the overall picture much, much more. If this was a long-term trend, that would actually be very beneficial for affordability and therefore rents. Getting back to your specific question, sure, if in the end of the day it goes up forever, we'll potentially run out of opportunities. 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. Everybody's winning in that equation.
We're also finding opportunities to leverage technology to automate various processes, in doing so, improving the customer experience, making things much faster, as well as our employee experience, again, reducing labor or vendor costs. What we see for the foreseeable future is a lot of opportunity, but a tremendous amount of work with change management to try to implement the different things that we're looking at. Does that answer your question there?
Yeah, it does. I was referencing Mike's comment on wage with construction labor.
Sure.
Actually, now I'm going to turn to Angela. On the guidance page, it looks like capitalized interest is expected to be higher, if I'm reading the guidance page correctly. If you could just talk, are you guys anticipating increasing the development pipeline? It didn't sound that way, but if you could just walk through why capitalized interest-
Looks to be higher in 2019 than 2018.
Oh, sure. No, happy to, Alex. That's really just a function of our current development pipeline. We still have a little over $250 million of spend this year, because of that, capitalized interest is going to naturally increase. It's nothing more than just how those numbers work out.
Okay. Thanks, Angela.
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 spend. Your guidance for this year anticipates only $50 million-$100 million, which is less than what you've invested last year. On top of that, you expect to be net seller this year. I'm just wondering if we should read into that most investment opportunities are getting pricey.
Yeah, 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. They require typically more equity than some of the sponsors originally thought they would and otherwise need to be reworked. Basically, it's taken us a longer period of time to get the preferred equity deals to the closing table. We remain optimistic in 2019. We actually have a very good pipeline right now, perhaps there's a little bit of upside to the guidance assumption.
Again, given the inherent uncertainty, we want to make sure we had a level that we could for sure close.
Okay. John mentioned Orange County and 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-job 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 forecast?
Yeah, 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%. I don't think that we have been aggressive on jobs. I think we're being thoughtful and realistic. All of these assumptions can vary to some degree, but I think if you look back historically, we've been pretty close on virtually everything, and if anything, maybe a little bit conservative.
Yeah. I would just add, remember last year with Orange County, the jobs were pretty flat, and then the revisions came through, and they revised back a whole bunch of jobs. We're watching that situation. I'm not sure 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 wanted to bring it up on the call so people are aware and seeing what we see, that there was a negative print in jobs in December.
Got it. Okay. Thank you.
Our next question comes from Drew Babin with Robert W. Baird. Please proceed with your question.
Hey, good morning. A question. Going into next year, obviously there were quite a few markets where you had a pickup in kind of the second derivative of leasing in 2018. In your guidance, are you assuming that any markets have another second derivative improvement in pricing power for 2019 guidance purposes?
I wouldn't say it that way. I would look at it say we expect the markets to continue to stay strong. We had really a shift in the market, it goes all the way back to 2017 when things were slow in the first half of 2018, then they shifted, clearly shifted. We see a continued strength in the market, not necessarily something really taking off. We do see continued strength in the market, 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, expect that things will continue pretty good over the next year, again, with supply is generally in check overall in the larger markets.
Okay, that's helpful. I guess kind of converting that over to loss to lease language. It would seem, based on your market rent forecast for 2019 as well as some of the comments on loss to lease towards the end of 2018, that revenue growth would maybe be a bit higher than 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 cost by overall maybe deceleration in property fee income growth? What's the drag being created by that?
Let me kind of walk through big picture the way I look at it. Typically, again, thank you for referencing loss to lease. To Essex, it's one of the key metrics along with market rent and, of course, occupancy adjustment is how we look at it. 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. At that point, we had about 1.6% for the portfolio loss to lease. 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 S16, it's 3.1%.
If you look at that and say we're going to take a mid-year convention on how that hits the market, that gets you about another 155 basis points. If you take the 20 basis points of occupancy and subtract that out, that gets you into about the 2.95 range for revenue, and we're pretty darn close to that at 3%. That's big picture, how we kind of look at it and see it, the year. I think we're pretty spot on with our 3% midpoint guidance.
Okay. The explanation's very helpful. 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 out on the east side. I guess, are you seeing anything in the market at this point in time, any kind of disruption? What kind of visibility can you provide about some of those east side sub-markets around Seattle?
Well, yeah, I think you're right, Drew. There is more development on the east side than there 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. We see an overall trend of reduced supply in the Seattle area more broadly. In 2018, we had 9,750 units in Seattle being delivered, 9,000 in 2019, and then about a little over 6,000 in 2020. We think, actually, that the supply side is actually going the right direction. The other side is obviously the demand side, which continues to be very robust. Maybe the other piece, which is affordability, which we're a bit concerned about more in the California markets, Seattle is much more affordable. We still view Seattle as being an appropriate area to invest.
As you can tell from our 2019 expectation, it's just a small bit below our expectation for market rent growth compared to Southern Cal and Northern Cal.
Great. Appreciate the explanation. Thank you.
Our next question comes from Wes Golladay with RBC Capital Markets. Please proceed with your question.
Yeah. Good morning, everyone. Going look at that 8th and Hope transaction, it was described as an arbitrage, and I'm just wondering, it looked like you bought all the stock in the last week of the quarter. Was it conceivable that you guys could actually sell the asset and buy the stock in a one-week period? Were you contemplating that maybe throughout the entire quarter?
Yeah. Hey, Wes, it's Mike. I guess, we hoped 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 if kind of smaller refinance, for example. It was going to be positive arbitrage no matter what happened in our view. Obviously the opportunity to buy the stock back was the better outcome, and we're pretty excited about it.
Well, congrats on buying the bottom. Big picture, though, when you sell an asset at a 3.5% cap rate, 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, because our view is it's all a matter of looking at the landscape, a variety of different points of view. In that case, I guess what you're talking 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 price is going to increase too, and our cost of capital's going to decline? 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 decisions. To ask a question that just focuses on one variable without the other variable, is challenging to answer. Does that make sense?
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 Hardeep Goyal with Delmond & Associates. Please proceed with your question.
Hey, guys. Thanks for taking my question. I was just wondering on the supply, and your adjustment there. Obviously, you guys have the best tune to the market. You guys drive around, you view these assets. I'm just wondering what's causing the delay beyond just the labor issues. 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 the delays specifically?
This is John Eudy. I'll try to answer that. The more complicated the structure, obviously, the higher likelihood that there could be more delays, because everything stacks up on itself. The general labor issues that the industry's faced 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 is part of the answer. It's a little bit of everything.
Hardeep. Yes, the more complex the construction, the higher likelihood there would be delays in this environment for the next 12 months, say.
Is that just on a construction basis or also complexity on the capital structure side that you noticed?
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 once you've started, so it's in the pipeline. 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 24/7.
Oh, darn. We're not going to let John go that easy.
Yeah.
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. Boy.
34, just to be exact. Not that I'm counting.
34. Wow.
34.
You started there when you were 16. Wow.
I wish it was.
Any 1031 exchange requirements on 8th and Hope? Other two questions, any promote income identified in 2019? 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 8th and Hope, there is a small piece of 1031 exchange, but it's not such a meaningful impact on the gains because we had sold back then. It was the last piece of Sharon Green, so it was just a small piece. It really doesn't impact the ultimate gain numbers in a material way. We certainly have the ability to absorb that without impacting our dividends. As far as the Costa-Hawkins and the G&A impact, we pull that out of core, and we actually disclose that separately. I think it's on page five or six in the press release. In any event, the total cost, which is also public information for Costa-Hawkins, is about $5.8 million for the full year.
Great.
We don't expect, of course, such a significant one-time item to reoccur in 2019, 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 conversations with the joint venture and market conditions, and there's a lot more conversations that goes into just factoring getting a promote.
Great.
We certainly have a good embedded pipeline on the promotes.
Great. Thank you very much. Thank you.
Thanks, John. 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 from our end. I think we talked about the cap rate on 8th and Hope. Could you just give us a sense of kind of some of the other cap rates as well, the other acquisitions you did during the quarter, as well as the positions?
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+, A++ type property that will go sub-four cap rates. For B quality or, let's say, from A- to B-, you would add probably from 30- 60 basis points to the A cap rate. Again, very consistent with what we've said in the past.
Okay, that's all. The second question, given the viewpoint on cap rates, is that one of the main reasons why you're still forecasting a net seller of assets in 2019, similar to 2018?
Yeah. Again, it's what I said earlier. It really is the 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 transacting in the marketplace. We're looking for the appropriate arbitrage and add value from the transactional side. We also need to fund our development pipeline.
Got it. Okay. That's it from my end. Congrats. Thank you.
Thank you.
Our next question comes from John Pawlowski with Green Street Advisors. Please proceed with your question.
Thanks. Let me go back to Orange County a bit and contrast it to, I think it was a year ago in the Bay Area, where we saw similar scary BLS job growth trajectories and that were restated. I understand the concern with restatements. Is it that your on-the-ground trends, which I'm guessing could be better predictors of job growth than BLS, those on-the-ground trends a year ago corroborated BLS-type numbers, at least as they stated, and this time, they're kind of telling you a different answer, that on-the-ground trends in Orange County are actually a lot stronger than the BLS numbers?
No. This is John. Last year, it really wasn't the Bay Area, it was Orange County that was revised up pretty substantially. 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. It was not consistent with BLS. I would go back and say this year it's a similar situation. We're seeing Orange County, say, the fourth quarter rents in Orange County were 2.9% year-over-prior year, yet the BLS has basically flat job growth for that quarter. We also expect lower supply deliveries going forward. The BLS 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.
We'll watch the revisions, but we'll continue to 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 of the trend into this year?
Sure. That is up from where it was earlier in the year. 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 one month, there's a movement that can go on within our portfolio, and certainly it's the low-demand period. Not really a good reference point. That's why I used the whole quarter, but we only have January. January is down a little bit from there.
Okay. John Eudy, on 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, big ifs, 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, four to seven years is a cycle from identification of site till you actually have a stabilized asset. Some of the ambitious things that he has said sound good, but the execution in reality, by the time you go through the process and CEQA, even if there is some CEQA reform, you're not really going to accelerate the timing that much. The economics drive the decision anyway. I don't see a near term, over the next three to five 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. I don't know if you saw, you're right 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 35.
Right.
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.
NIMBY attitudes in California are not going to change easily, is what I think Mike's saying.
That's the point. Yeah. Exactly.
We will take our last question from Karin Ford with MUFG Securities. Please proceed with your question.
Oh, hey. Good morning out there. It doesn't sound like you're underwriting a recession in your 2019 outlook. If we do end up going into one 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 forecasts?
Hi, Karin. 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, et cetera. I have a hard time responding to it exactly. I would expect at the end of a cycle, conditions continue to change. Jobs will trail off. The development pipelines will continue to be delivered because once you turn a spade of dirt, they will be finished, and you'll end up with a supply-demand mismatch. Quantifying how that looks and exactly what that means, I think is virtually impossible to do at this point.
Okay. Fair enough. My second question is just on the preferred equity pipeline and book. You said in the third quarter press release that you had originated, I think, an $18 million or $19 million investment in Burlingame, but the number of investments stayed at 17 from September to December. Just was wondering, did something get paid off, or did that deal just not happen?
Yeah.
We had-
The typical duration of these preferred equity deals are three to four years, yes, we're constantly having redemptions or repayments.
Okay. Can you just give us a sense for what was repaid and what was the rate on it?
Yeah. It was a small deal, $6 million. The pay rate, from memory, was around 11%. At this point, if you look at our total preferred equity commitment, it's still pretty darn close to what we had in quotes last time. It's close to $400 million. There's some inflows, there's some outflows, net-net, we're still around that $400 million, and we're well under our maximum capacity of $900 million.
Is there 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.
Okay. Thank you.
Thank you, Karin.
At this time, I'd like to turn the call back to Michael Schall for closing comments.
Thank you, operator. Thanks everyone for your participation on the call today. We look forward to seeing 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. We thank you for your participation.