Earnings Call: Q3 2018

Oct 29, 2018

Good day, and welcome to the Essex Property Trust Third Quarter 2018 Earnings Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events or forward looking statements that involve risks risks and uncertainties. Forward looking statements are made based on current expectations, assumptions, and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks, can be found in the company's filings with the SEC. When we get to the question and answer portion, management asks that you be respectful of everyone's time, let me ask myself 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, Mr. Shaw. You may begin. Thank you, Dana. I'd like to welcome everyone to our 3rd quarter earnings conference call. John Burhardt and Angela Climman will follow me with comments and John Moody is here for Q And A. I will discuss three topics on the call today are 3rd quarter results and preliminary 2019 market outlook, investment market conditions, and an update on the apartment industry's campaign to oppose California Prop 10. First topic, Our third quarter results were mostly as expected, reflecting a solid economy and severe shortages of housing on the West Coast. We continue to experience strong demand for multi family housing across the West Coast Metros with periodic disruptions to pricing where multiple apartment lease ups occur within a submarket, often leading to large leasing concessions and often impacting pricing at nearby stabilized communities. Jobroads has continued to up perform our initial 2018 expectations across the Essex portfolio. Job growth is slightly lagging in Southern California, and strong in the tech markets as demonstrated by greater than 3% job growth in both Seattle and San Jose. With tight labor market conditions, income growth continues to outpace rent growth, which is improving rental affordability. Per capita personal income growth in the Essex Metro is expected to average 5.7% in 2018, up almost 1% from a year ago and compared to 4% for the nation. As John Burkhart will discuss in a moment, We've experienced normal seasonal patterns in 2018, which is significantly different from 2017. Same store revenue growth for 2018 troughed in the third quarter, mostly due to revenue strategy and year over year seasonal variations. Overall, market conditions are much better now as compared to a year ago, and our portfolio remains well positioned. Consistent with the strong job growth reporting in the tech markets, job openings for the top 10 public tech companies all of which are headquartered in California and Washington increased 26% year over year to nearly 22,000 open positions as of September. With the dearth of field workers, employers continue to face shortages of qualified personnel pushing wages upward to attract employees from other areas. Turning to our market outlook for 2019. Today, we have a much better visibility into the year ahead compared to last seen of the supplemental. We also provide the primary supply and demand drivers that shape our rent growth expectations. S-sixteen is intended to be a scenario based on the strength of the U. S. Economy. We begin with US GDP and job growth estimates from third party sources. And based on the key assumptions, we estimate job growth and housing demand in the Essex Metros. As to housing supply, we drive each market to gain insight on apartment delivery timing to create quarterly estimates. Using historical relationships between housing supply, demand and rent growth, we established our 2019 market rent growth expectations. For 2019, the U. S. Economy is expected to continue growing at a healthy pace with U. S. GDP and dog growth of 2.5 percent and 1.3% respectively. Unemployment rates for the Essex markets declined 50 basis points in the past year to 3.5%. Over the past several years, falling unemployment has contributed to job growth, although this positive impact will likely diminish going forward. We expect the West Coast economies to outperform the nation as to job growth. Which we estimate at 1.8% for the Essex Metros in 2019. This is about 30 basis points although the September actual job growth of 2.1%, again, reflecting the impact of tight labor market conditions. For 2019, we expect 3.1 percent market rent growth in the Essex markets with California's slightly outperforming Washington and the best results in San Jose and San Diego. Oakland is expected to lag due to increasing apartment deliveries. Reflecting the importance of economic growth in scene.1 of the supplemental to demonstrate the outperformance of the Essex Metros in terms of cumulative nominal GDP growth. Bottom line, the Essex Metros have outperformed the U. S. Average and other major metros in the past 5 years and are well positioned for continued leadership going forward. Turning to supply in 2019, Our preliminary forecast assumes that multifamily supply will be relatively flat in 2019 versus 2018 in the Essex markets, with significant variances in some and Oakland and significant reductions in Orange County, San Diego and San Francisco. Construction labor shortages continued to be a major factor affecting apartment delivery timing and this issue continues unabated. Thus, in 2019, we made a notable change to our supply methodology on page S-sixteen of the supplemental by factoring delays into the estimated delivery timing of newly constructed apartments. Thus, our multifamily supply shown on S-sixteen as a supplemental has pushed roughly 8% of apartment units or around 3000 units from 2018 into 2019 and from 2019 into 2020. For the net couple of years, we see little change in the number of departments being built and the overall construction labor force, and therefore, there's no reason to believe that the delays will abate. With housing demand continuing to receive supply, We believe that housing shortages on the West Coast will continue. Now turning to my second topic, investment market conditions. 2019 is likely to be another year where escalating construction costs, driven by labor shortages and entitlement costs, increased at a faster pace compared to rental revenue and net operating income. Therefore, developer yields are being compressed creating a significant headwind to apartment construction starts. This is a challenging scenario for our direct development activities and therefore, we have not materially added to our development pipeline. Instead, we have focused primarily on providing preferred equity to 3rd party developers in the Essex markets. At the start of 2018, we had a strong preferred equity pipeline and hope to significantly exceed our $100,000,000 target. As it stands now, we will struggle to hit our target in 2018. Andrew will comment on a guidance for a moment. As it relates to acquisitions, we continue to see plenty of capital looking to buy apartments, leaving cap rates relatively flat. Recent increases in interest rates have erased most of the positive leverage tailwind that we have enjoyed since 2007 as long term, apartment financing rates are now comparable to cap rates. A property and locations continued to trade around the 4 to 4 quarter percent cap rate and sometimes sub-four for exceptional property with beef quality property locations generally trading 25 to 50 basis points higher. We'll continue to monitor transaction market closely. And now on to my third topic, an update on California Prop 10. As we've highlighted on prior calls, we're part of a broad coalition to impose California 10 would seek to repeal the Costa Hawkins Rental Housing Act on November 6th. We are joined by other apartment companies trade organizations, unions, veterans and a variety of pro business groups. I think it's appropriate to recognize the extraordinary effort of those involved in the no on 10 campaign, especially its executive committee and co chairs, John Yudi and Gary Altschuller. They have successfully united the industry around awarded cause. We believe that PAC in Prop 10 will intensify housing shortages making a bad problem worse. It will likely lead to the expansion of price controls for all types of housing, which will result in less housing being built. Price controls produce longer tenancies, which in turn reduce the number of available rail units for those seeking housing and those with limited means will be at an increasing, decreasing disadvantage competing for housing amid greater scarcity. Finally, apartment, condo and single family owners will have a strong economic incentive to convert rentals subject to price controls to owner occupied housing, thereby shrinking the rental stock. It's important to note the top 10 contains no funding for affordable housing and no requirements of additional housing be built. The state of California directs a process called regional housing needs to set them to plan for sufficient housing supply. However, many cities don't want to create housing because of the related cost of services, including schools, relief, etcetera. Gavin Newsom, a leading gubernatorial candidate, captured this issue on his website with the follow comment, quote, cities have a perverse incentive not to build housing because retail generates more lucrative sales tax revenue, the bigger the box, the better because cities can use the sales tax for core public services. As a better approach, the state has recently passed many laws support the regional housing needs assessment, which we believe are critical to increase housing production, the only viable solution to the crisis today. We also believe that more funding is needed targeted to affordable housing and thus we support California Prop 1. That concludes my comments. And I'll now turn the call over to John Burkart. Thank you, Mike. Q3 was a good quarter. It played out as we expected on historical seasonal pattern with the rental market peaking in July and our operating team shifting our strategy from the focus of now my deposit fee to locking in the seasonally high rental rates. The result was that we allowed de occupancy, our portfolios moved down 30 basis points while we achieved rents on new rentals, about 3.5% above the prior year's quarter. For 2018, a same store revenue growth perspective, Q3 is a low point for the year due to the lower occupancy and the one time payment in the third quarter of 2017 related to the delistency collection from a corporate housing operator, which created an irregular cost. Adjusted for both occupancy and the one time item, same store revenue growth would have been 2.6% for the third quarter of 2018, or 40 basis points higher than our reported results. Overall, our concessions in Q3 2018 were down approximately 20% from the prior year for the same store portfolio. Our renewals in the 3rd quarter grew approximately 4.2% and they are being sent out at approximately 4.5% for the 4th quarter. In September, Our loss lease was 1.7% versus 20 basis points in September of 2017. Due to the stronger rental market we experienced this year, which positions us well for 2019. We expect Although we are not providing guidance at this time, we look to 2019. As we look to 2019, we see the markets slightly stronger than in 2018, and our portfolio is well positioned with the 1.7% loss to lease in September. From a revenue perspective, we will have headwinds related to higher occupancy costs in 2018, and we continue to face wage pressure in our markets which is consistent with the past several years. Now moving on to an update on our markets. The Seattle market continues be supported by strong job growth, posting year over year job gains of 3.7% for the third quarter of 2018. The highest job growth Looking at Amazon, job openings for the company in the market have more than doubled as of third quarter of 2018 to a little over 7 1000 open positions since the end of last year. Check continues to be a major driver for the market during the period. Amazon, Google, and T Mobile leased over 500,000 square feet of office space in Bellevue, but Facebook has a 100 and 50 open jobs listed in Redmond for their virtual reality headset division and is rumored to be the process of signing several expansion leases in the east side. With the light rail expansion into the east side scheduled to begin service in 2023, We will expect to see an increase in office leasing activity in the submarket. Same store concessions increased in the Seattle region from $80,000 in third quarter of 2017 to $197,000 this quarter. The concessions were spread across many assets in each sub market and were largely used as closing tools. Revenue growth in our east side and Seattle C2B submarkets was relatively flat at 1.6% 40 basis points, respectively, While the North And South submarkets grew at 2% and 3.5%, respectively, for the third quarter of 2018. Our loss to lease at the end of the quarter was 1.2% for the entire market. Moving down to Northern California, Job growth in the San Francisco Bay Area in Q3 averaged 2.4% year over year with over 76,000 jobs added. San Jose job growth was robust for the period with 3.2% year over year job growth while Oakland and San Francisco were both up 1.8 percent for the period. Notable office leases this quarter include Amazon and PwC combined 200,000 360,000 square foot expansion in downtown San Francisco. On the peninsula, Facebook LEAP 800,000 Square square feet of under construction project in Burlingame. And in the South Bay, Roku added an additional 250,000 square feet to the Bay Area footprint Well, Splunk signed a 300,000 square foot lease at Santana Row, which plans to hire 2000 additional employees in the Bay Area. Total office leasing activity is over 11,000,000 square feet for 2018. This is greater than the combined total leasing activity this market for the past 2 years. BP funding for San Francisco And Silicon Valley combined with trailing four quarters through Q3 is at a new peak of $41,600,000,000. Same store concessions decreased over 50% in the third quarter of 2018 from the prior year's period, concessions were spread across many assets in each submarket and were largely used as closing tools. Our year over year same store revenue growth for the third quarter of 2018 was led by the San Mateo submarket of 3.4% followed by our Oakland and MSA submarkets with each with which each grew at 2.4% and our Fremont submarket at 1.8%, while San Francisco continued to remain flat to the period. Rest in our Bay Area markets were up approximately 3.3% and lost to lease was 1.1% in September. Continuing to Southern California, job growth in Los Angeles in the third quarter of 2018 averaged 1.3% year over year. Netflix continues to solidify their presence in the market, pre leasing an additional 330,000 square feet in Hollywood, Likewise, co working companies, spaces and WeWork expanded their combined footprint by almost 200,000 square feet during the period. Year over year revenue growth for the third quarter of 2018 was led by Air Long Beach and Woodland Hills submarkets with 5.4% and 4% growth respectively. Trailed by the West LA submarket with 2.8% growth and the Tri City submarket with 2.4% growth. September lost lease in LA County was 2.4%. In Orange County, just in the 3rd quarter grew 60 basis points, for the year over year. This situation is similar to 2017, and the BLF showed 30 basis points of job growth for the third quarter, which was increased to 2.2% and the revisions were completed. We will continue to monitor job growth in this market. Foreign County Lost Elite was 1.7% in September. Finally, in San Diego, year over year job growth remained at standard the San Diego Tech hub by 85,000 square feet with plans to add 300 tech workers. It's worthy to note that High Pain Industries have accounted for more than 50% of the job growth in the San Diego market. Year over year revenue growth in the third quarter of 2018 was 3.4% for our Northern San Diego submarkets, while Chula Vista grew at 4.1%. Loss delete in the market was 2.2% in September. Overall, same store concessions are down in the Southern California region about 30% from the prior year's period. 65% of concessions in the 3rd quarter related to Downtown L. A. And assets impacted by the supply in South Orange County. Currently, our portfolio is at 96.5 percent occupancy and our availability 30 days out is 5.1%. Thank you. And I will now turn the call over to our CFO, Angela Simon. Thank you, John. I will start with a brief review of our third quarter results, then discuss the full year guidance and conclude with an update on capital markets and the balance sheet. In the third quarter, core FFO grew 5.7 percent, exceeding the midpoint of guidance by $0.03 per share. Details of the record relation to our original guidance are included on page 4 of the earnings release. Our favorable 3rd quarter enabled us to raise our core FFO per share This represents a 5.4% year over year growth, which is 90 basis points higher than our original guidance of 4.5%. Turning to our 3rd quarter investments and funding plan. We closed a $104,000,000 acquisitions in the WestcoFi joint venture, and originated an 18,600,000 preferred equity investments, which brings our total structure finance commitment to approximately $305,000,000. We plan to fund the new investments through dispositions that are on track to close at the end of fourth quarter. As for guidance on investment activities for the full year, On acquisitions, we expect to achieve the low end of our range. On our $100,000,000 preferred equity target, We currently have $45,000,000 closed through October and believe that the majority of the remaining balance could close by early in 2019 with funding up to 6 months thereafter. This is consistent with Mike's earlier comments on the headwinds regarding apartment construction starts. On dispositions, we have several properties in various stages of the sale process in anticipation of funding needs for 2019. Depending on the timing of the sale, some properties must transact by year end. Therefore, we are increasing the high end of our dispositions range from $300,000,000 to $400,000,000. Use of proceeds may include potential buyout joint venture partner interest development funding, stock buyback, and debt repayment, depending on market conditions. As we have done in the past, We will seek to redeploy the proceeds into the most attractive investments in order to maximize the total return. Consistent with our original guidance this year, did not start any new developments. As it relates to our existing $940,000,000 development pipeline, our share of unfunded obligation is 384,000,000 most of which will be funded in 2019, which means over 85% of our development pipeline will be completed and in lease up by next year. Keep in mind that lease ups are FFO dilutive until we approach stabilization. Consequently, our preliminary forecast anticipate a potential FFO per share impact of up to $0.10 for the next year. Lastly, on capital markets and the balance sheet. Our capital needs for 2018 remains imminent. We look to 2019 as we plan to repay approximately $590,000,000 of secured debt, which was assumed from the DOE transaction. And has an effective rate of 3.4 percent, but the cash rate is 5.6%. Therefore, with refinancing, we'll give you an economic benefit to the company, but we'll create an FFOS headwind of between $0.05 to $0.00 per share. Depending on timing and market conditions. As the current rate on a 10 year unsecured bond offering will be in the mid-four percent range. However, we have a good amount of flexibility with access to multiple refinancing alternatives, and our balance sheet remains strong. A 25% leverage with 5 and a half times debt to EBITDA, and virtually full availability on a 1.2 That concludes my comments, and I will turn the call back to the operator for Q and Thank you. A confirmation Our first question comes from the line of Juan Sanabria from Bank of America. Please proceed with your question. Hi. Good. Good. Good afternoon. Just, wanted to follow-up on the supply data where you mentioned you, changed up your methodology Could you just give us a little bit more details around that? What would the numbers have been had you not assumed delivery delays or should've been pretty consistent, like you said, from 'eighteen into 'nineteen and 'nineteen into 'twenty, just to get a sense of comparing that to 3rd party providers. Hey, Juan, it's Mike. Thanks for joining the call. Appreciate it. You know, it's going to be difficult for me to reconcile these exactly because the supply estimates from the vendors have changed a lot. And, I think there's some procedural issues what we're trying to do is take a longer look at supply. So we have, we have gone back to 2017 and projected forward to 2020. And what we found in that analysis is that the total number of units produced in the Essex Metros have ranged from $34,000 to $36,000 per year in all of our, again, in all of our metros. And you know, essentially what we conclude from that is that construction labor is the main constraint. And, you know, even though construction labor can vary by submarket to submarket. In other words, it can be transit. Some construction workers can go from LA to some other metro. What we think is happening is basically there is a cap on the amount of construction that can get done. And so we're seeing pretty consistent total apartment units being delivered in each of those years. And that caused us to essentially take our best estimate at trying to guests will estimate how much was going to lead from 1 year to the next. And as I said in the prepared remarks, we think it's around 3000 2018 into 2019 2019 into 2020. And, again, within the context of that leads to about 36,000 units plus or minus in each of the last 4 years or the 4 years preceding 2020. Okay. Great. Thank you. And then I was just hoping you could talk a little bit about the expense side. I don't know if this question is who who's best to answer it, but Angela gave some data points on kind of how to think about some FFO impacts from occupancy, sorry, from developments in some of the jet stuff you're trying to do. But any color you can give on the expense side, particularly around some of the bigger ticket items like real estate taxes as we think about 19? Sure. On the, real estate taxes, I think, you know, with California, that piece is pretty straightforward. Seattle continues to be more of a wildcard. So for example, we had expected 2018. Seattle had taxes coming around say, between 10 to 13%. It came in at 16%. And so next year, we're going through that process right now, still looking through it. But, you know, it's probably gonna be consistent in debt. It'll be high and over 110% you know, but probably below say 16, if you will. So that's our current thinking. We expect, utility costs to continue to one at around that 4% or 5% range. And I think those were some of the largest non controllable items. Our next question comes from the line of Austin Wurschmidt from KeyBanc. Please proceed with your question. Hi, good afternoon. Mike, you talked about cap rates haven't moved, but you mentioned that positive leverage has started to be eliminated. Historically, you've mentioned that as being kind of one of the, supportive metrics of sustaining low cap rates. So just curious, when you look back historically, what does your research tell you about the lag between perhaps when cap rates could begin to move higher? As a result of eliminating the positive leverage? Sure, Austin. You know, I think in our experience, cap rates are pretty sticky. They don't change quickly overnight. Buyers and sellers need time to adjust to a new environment. I think that there is an enormous amount of money out there looking for investments and looking for yields specifically. And I think that that is a one of the forces that is keeping capital to relatively low levels. So I wouldn't expect any significant change in cap rates in the near term. I think what happens is you will see buyers and sellers not agreeing, and that will essentially cause a freeze in the transaction markets for some period of time before cap rates would change. So again, we haven't seen that now because there's so much money in the market, chasing deals and, it'll we'll see what happens going forward. I guess it's gonna take several quarters for this to play out. I appreciate the thoughts there. And then can you just give us a sense how, 2019 supply delivery stack up? Is it more heavily weighted in the first half of the year or back half of the year? Sure. Overall, we think, 2019 is again, as I said in the prepared remarks, roughly the same as 2018. There are some regional variances, you know, supply, for example, pretty significantly, let's say, in LA and Oakland, and been down in some other places that are essentially off setting those numbers. In terms of quarter to quarter, I think it's been so challenging to get the timing right But going into that level of details, probably too far into the weeds, you know, what we have right now for 2019 is the 3rd and 4th quarters are a little bit higher. Actually, you know what, no, they're pretty pretty consistent throughout the 3rd and 4th quarters are heavier in Northern California, but, lighter in Seattle and Southern California. So we have pretty even supply quarter to quarter throughout 2019. Our question comes from the line of Nick Joseph from Citigroup. Please proceed with your question. Thanks. How do you think about capital allocation and non organic growth given the current stock price? You've been active in the past either issuing equity through the ATM to fund growth or repurchase in shares when you're trading at large discount, but right now you're somewhat in between those two scenarios. So how do you think about adding value in today's environment? This is Mike, and that's a very good question. And we think it's pretty darn difficult to do that to add value in this market. So obviously, we have, tried to focus on preferred equity investments. And, I think that will continue to be, something that we focus on going forward. We also, at this point in time, in prior cycles have lean more toward joint venture or co investment type transactions. However, with different price up, they're becoming more challenging to make work as well. And then finally on the development side, you know, Mr. Judy's here, anything coming on this or follow-up on my comments, and we were seeing a lot of, you know, low to mid for cap rates measured today untrended. So measured on rent to own place today throughout our portfolio, we just don't think that's a high enough cap rate to get get us excited about development. John, do you have anything to add to that? I would say we're keeping our power dry from when a time comes that, that will change. Yeah. It would be interesting. And so I would conclude by saying, you know, I've learned in this business that don't try to make something work that just fundamentally doesn't work. And so, you know, essentially focusing on the balance sheet, state you're making sure it's in pristine shape and being ready for opportunities when they arrive, We don't know when or where they're going to be, but when that happens, we want to be ready. So I think that's our focus now. Thanks. And then you mentioned Agwan too and compression and market development yields. Do you think that will have an impact on rent concessions through lease ups through the product that is underway now? You know, I think that we're expecting pretty consistent concessionary activity going forward. John, do you wanna handle that one, concessions going forward given development? Yeah. No. Absolutely. In Q4, we see a little bit more supply coming at us, for the year. And so there would be the normal Q4 softer market. And I'm sure we're going to have some more concessions. But overall, our expectations are concessions are in check across each of the market, you know, again, as Mike said, L. A. Downs in L. A. Is going to have more product. And so there'll be isolated cases with more concessions. But overall, as a company, our concessions are down on same store portfolio, and we see things generally in pretty good order 4 to 6 weeks, limited situations where there's 8 weeks and oftentimes, concessions are going going back even back down to 3 weeks. Thanks. Thank you. Our next question comes from the line of John Kent from BMO Capital Markets. Please proceed with your question. Good morning. On proposition 10, some of the calls seem to be working in your favor as far as the net passing. I'm just wondering how confident you feel about this load going in your favor versus a few months ago. And is there a particular pull that you pay attention to more than the others? I'll try to hang out. This is John Yudy. We are cautiously optimistic that we're in a pretty good spot and where we tell you they're gonna be at this point in time. But you never know if polls have been wrong in the past. You know, the messaging that I think you're referring to is the PTIC public poll that came out a week ago. That has it at a 60% no, 25% yes, the balance undecided. We see that in our internal phone as well. But, you know, the last 8 days can can train, but right now, we believe that we're in a pretty good spot to learn. We're going to push that on the deal. You know, I'm going to add one thing to that and that is Mr. Beauty does not give up and he is very focused on really pushing hard right through Election Day to make sure that, you know, the campaign is very focused on the ultimate result. And, again, I had watched John do this for the last couple of months, and, he's been incredibly focused and incredibly effective. Best of luck. On your repairs and maintenance, the costs were down 1% year over year. And I'm wondering how much of this is due to low turnover versus capitalizing more or maybe some other factors? Yeah. This is John. It's not really capitalizing more. It's, the turnover is a factor for sure. There's also some timing issues there as well. I think it will, it'll pickup in Q4, but all was according to the original plan for the year. So we are finding opportunities to create efficiencies and and lower our costs to offset some of the wage pressures that that we, face and, are coming in, again, with another good year as it relates to our controllables. Our next question comes from the line of John Kearney from Stifel. Please proceed with your question. Oh, great. Wonderful quarter. Very impressive. Angela, I was just noticing in your guidance, and this may be old news, but just clarify it for me. Insurance, reimbursements, legal settlements, etcetera. You've recognized a negative 2,000,000 year to date, but you've got a budget or you have 6.2 for the year negative. Is there a one time charge you're expecting to get in the in the fourth quarter? Yes. That's all related to our Prop 10 campaign efforts. And so that is a one time charge. And it will, occur in the 4th quarter. Okay. So $4,200,000 hit to FFO in the 4th quarter? And that's in your not that's in your guidance or not? It it is in our guidance. Great. Okay. It is on yeah. Perfect. Thank you. Sure. Thank you. Our next question comes from the line of Drew Babin from Robert W. Baird. Please proceed with your questions. Hi. Good afternoon. Quick question on occupancy. I was hoping you could clarify how my I think it was mentioned before just where see was at the end of the 3rd quarter kind of where it is today and, you know, should we necessarily expect that, things get back on par, year over year, during the fourth quarter? As you kind of move into a less favorable season with maybe some more supply coming in at some unfavorable times. Just curious how to model that. Sure. Our our occupancy, at this point is 96.5. And last year, we were a little bit higher. We were about 30 basis points higher. At this point in time exactly. I think this year, we will again be or continue to be a little bit under last year. You know, going back to the year, we started well above an occupancy. And then as the market shifted, we shifted our strategy to favor achieving market rent over occupancy. And so we do have that headwind that we're facing in Q3, as I mentioned, Q4 will continue will actually continue into the first half of twenty nineteen. So my expectations is our occupancy. It's a little tough to tell. We're obviously finding it out in the marketplace. And as I mentioned, with more supply, it's going to hit Q4 during that low demand period. Like I said, we'll probably stay close to where we are right now, maybe up 10 basis points or something like that. Okay. That helps. And then quickly on Seattle, kind of the characteristics of supply for next year. It looks like you're expecting less multifamily supply growth in Seattle next year versus this year. Is that construction delay impacting noticeable there? And I guess as you go on the next year, is the supply just is kinda pounds concentrated as it was this year? Is it a little more spread out? Hey, Drew. It's Mike. We think it will decline a little bit, maybe around 10%. Seattle will still have plenty of supply in 2019 relative to 2018. But yes, to be your second question, which is it would be more spread out. And the more spread out it is, the less we see that phenomena of multiple lease up competing against one another and offering very large concession. So the fact that it's spreading out should help us in 2019 relative to 2018. Okay. And then one more for Angela. The, you mentioned the nickel to, about a dime dilution potentially from paying down debt maturities next year. Does that include just the 2019 secured maturities, or is there some component of a 2020 maturities that might be prepaid as well on the contributes to that number you provided. That's a very good question. And so, yes, it does include, a component. So that $590,000,000 of the debt approved from the DOE acquisition, $300,000,000 to this year, I mean, I'm sorry, in 2019 290 is due in 2020 because we can prepay it without any penalty, that's the right economic, thing to do. And that's why. So in total, we actually can, and and are planning to pay about $900,000,000 of debt of which 290 2 or 90s optional. Okay. Very helpful. That's all for me. Thank you. Our next question comes from the line Kunt Trujillo from Scotiabank. Please proceed with your question. Hi, good afternoon. Thanks for taking the time and all the questions. I appreciate the commentary in your prepared remarks about this, but what are your latest thoughts on voter support for prop 10 and how it is or has been impact the transaction market. You mentioned cap rates are broadly unchanged. There's still healthy liquidity and capital chasing multifamily product. But what kind of depths and buyer pools have you seen? You've heard that there's been less institutional interest in California multifamily recently. Yeah. This is my That's another good question. I'm not sure I have a perfect answer for it. I think that the greatest sensitivities are the transactions that are hitting the market in some of the cities with the most extreme forms of rent control, I know that there was a transaction, for example, in Berkeley, that had very extreme form of direct control. And I think that, the market is reacting to those by pushing the bids for them past, November 6. And so you'll know the answer before people commit to us. I think there's been somewhat of a, of a, showing the fact in the marketplace as people wait for, Prop 10s, you know, ultimate outcome. But, I don't get the sense that, it's had an overall impact. In other words, some parts of the market areas, that have, less severe forms of rent control. I think it has a smaller impact on the market. Okay. Appreciate that. And you alluded to, I have any handful of assets on the market as a source of funds. Can you perhaps speak type of product you're looking to recycle and if these are perhaps in those submarkets that are, being subject to the most extreme versions of rent control potentially? You know, no, not necessarily. Again, this is Mike. You know, we we follow the same basic methodology with respect to both sides of, you know, our portfolio, we try to rank our submarkets by, longer term job growth, I'm sorry, longer term rent growth, and that's a function of job growth and supply growth. And then we try to identify the areas that will are the weakest level of that. And, try to cull the portfolio as a result of that. The domain disposition earlier this year is a good example of that. Also, it seems like we're getting more unsolicited offers. And, when we get unsolicited offers, we will take them on a case by case basis. And sometimes we will act on them if we get the right, right value. So I'd say those are the 2 driving forces of, our dispo program. Alright. Thank you very much for the detail. Appreciate it. Thank you. Our next question comes from the line of Rich Hightower from Evercore ISI. Please proceed with your question. Good afternoon, everybody. Hey, Rich. So most of my questions have been answered already, but quickly with respect to 4th quarter expenses, I think the guidance implies maybe high 3s upwards of 4% of same store growth in the fourth quarter. Is that driven by the uptick in in repairs and maintenance? I think John referenced, or is there something else going on there that we should be aware of? No. I I think it's, it's what you are, anticipating. And so on the expense side, we are expecting to land for full year at 2.6%. And, it's not atypical for us to run high, in expenses in the fourth quarter. And so there's definitely timing elements with that. In conjunction with what John broke said earlier. So related to repairs and maintenance. Okay. Thanks, Angela. That's helpful. And then, just backing up to the occupancy headwind, you know, 3rd quarter, 4th quarter, and then in the next year, can you help us understand I guess the word for it would be the the cadence of the headwind as we as we kind of progress through 2019. Is it, you know, the the impact is more impactful in the first half of the year and then kind of getting to a normal seasonal occupancy in the third quarter 4th quarter next year, just so we kind of understand the the quarterly sequential element there as we model it? Yes, you hit it exactly. It's the greatest back is in Q1 and Q2 where we were running at, significantly higher occupancy. You know, our our Q1, we're looking at the numbers, January 97.1, 97.2, 97.2, very high occupancy, Q1. And I don't expect to match that. As we as we move forward into, you know, through Q3, it's less. And then we get into, I'm sorry, Q Q2, it's less. As we get into Q3, we're probably right on point, and and our Q4 will probably be right on point. So the headwind is really largely related to Q1 and Q2 occupancy. And that's at this point. We're still in our in our budget planning process and giving you big picture. To the extent we see greater opportunities or reasons to be more aggressive, we certainly will be. But at this point, those are the most obvious headwinds. Does that help? That is perfect. Yeah. Thanks, John. Our next question comes from the line of Rob Tearson from Janney Montgomery Scott. Please proceed with your question. Good afternoon, guys. How significant is your current redevelopment opportunity across the portfolio? And how comfortable are you that you could achieve targeted returns for new projects at this point in the cycle given market supply conditions? Sure. So big picture, we're renovating somewhere in the neighborhood of 2500 units a year. And that, that implies a life cycle of over 20 years, considering the size of our portfolio. So we are pretty comfortable that that process can continue. We, it moves around a little bit depending upon, of course, the rental market strength and we constantly are looking, making sure we're achieving our expectations, but there's no reason to believe that our unit turn program would slow down in the coming years. As it relates to larger projects, we have, you know, several going that are listed that are doing well. And again, there's probably what four properties that are specifically outlined and that pipeline should continue as well. It's the assets age. We look for opportunities to do more robust upgrades to the asset systems, etcetera, and create value. So I don't see our renovation program changing materially over the next couple of years. Okay. And then what's the current expected stabilized yield on the 6 properties in your development pipeline? In the mid 5 lane. Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please proceed with your question. Oh, hey, and good afternoon. Thanks. Thanks for taking. It's two questions here. First, Angela, if we think about the comments that you guys spoke about on the, on the outlook for next year, there's $0.10 of lease up drag potentially from the deliveries There's another 5 to 10¢ of drag, from refinancing, but you guys are always, you know, pretty good on growing earnings But in total, it sounds like there's upwards of 20¢ of drag for next year. Is that the correct way to think about it, or am I not looking at that? Or did I not hear correctly? I think you're you are thinking of it correctly. That's first what you're thinking of, the same way I'm thinking of it. And so although, you know, to the team's comment, the operating fundamentals are, coming in as we expect, you know, there are other factors impacting SFO and financing and dilution as it relates to timing of development and Aviso are to, important factors. Okay. And then, Mike, on the on the supplemental page where you provide 2019 outlook, I don't know if that's, you know, markets in general or you're specifically providing, ethics, revenue or rent projections, but So suffice to say if you're looking at 3 call 3 percent rent growth for next year on that page, and this year, rents are up 2.3revenuesup2.8 it sounds like, you know, the environment for next year isn't going to be too dissimilar revenue wise to this year given that Occupancy sounds like on the whole, it will be flat. Is that a fair way to think about it that revenue next year is really that 3% level? Or could we see occupancy improve that you might exceed that 3% level? Alex, This is Mike. And, we're not going to look into a guidance conversation here, but let me just clarify what we mean in our market forecast. So F-sixteen, our economic rent growth represents in these submarkets, not for Essex, but for the broader submarket, what we think market rents will do, in each of these areas. So our portfolio can vary from that by some amount and, depending upon where it is, depending upon its competitive position within the marketplace, etcetera. And so our our actual revenue result can be different. And again, this is for the entire year. So you know, how it breaks down the rent growth curve. It's not a flat line straight up during the year. It tends to be strong in the earlier part of the year and weaker end of the end of the year. And so there can be variations in these numbers. And so I think I'm going to leave it at that. We'll see, given guidance at some point in time or, you know, late January, February, and we'll talk about it in much more detail at that time. And I would just add, Alex, I think you said that occupancy would be flat that's not what I'm saying. I'm saying occupancy will be a headwind. So the greatest headwind will be Q1, Q2, with Q3 and Q4 pacing be flat. But for the year, there will be a headwind overall. Okay. That's helpful. Yeah. Thank you. Thank you, John and Mike. Thank you for clarifying 60 and that's helpful on your comments. Thanks, Alex. Our next question comes from the line of Rich Hill from Morgan Stanley. Please proceed with your Hi, everyone. Just a quick one for me, recognizing that you want to stay away from giving guidance, but if you could think about if you could consider the impacts of higher anticipated supply or slower than anticipated job growth as maybe the biggest risks to your market forecast or economic rent growth, which one is that, both maybe to upside and the downside? Yes. It's Mike. And that's a very good question. I think we have to supply pretty well locked down. Now we'll be we'll be wrong from quarter to quarter. Like everyone, and I know everyone has been frustrated with the supply forecast over the past couple of years. But I think that, Now we're looking at it over a broader period of time, and, it seems to make a reasonable sense to us. So I would say the greater risk is on the job side. And I would say again, this is our forecast on S-sixteen is a scenario. It begins with what's going on in the U. S. And then we have a lot history with respect to the U. S. Does 2.5% GDP and 1.3% job growth. This is what would typically happen in the Essex market. So we try to make the jump from what the U. S. Does into what our markets do. But, as you know, given all the geopolitical issues and a variety of inter rates rising and other things, the U. S. Assumptions can change pretty significantly over time and it can change at any time, really. So intended to be a scenario that begins with the strength of U. S. Economy and it rolls down into what that means for the assets in my Does that make sense? Yeah. It does. That's helpful. And are there any markets where you might have greater variability than another, either to the upside or the downside? Well, I think that Seattle has always been challenging. I think that we have beat up Seattle historically over the last several years much greater. It's now longer than our expectations have been, but it is more challenging, just because if you look at the amount of supply that it produces 1.8% versus about 1% in Northern California in Point 77 California, there's a greater degree of variability there And, so we could be we could be wrong. The higher the supply number, typically, the more wrong you can be. So I'd I'd point to see how Great. Thank you guys. That's helpful. Thank you. Our next question comes from the line of Hardik Goel from Zelman And Associates. Please proceed with your question. Hey guys, thanks for taking my question. Your supply outlook, you guys noted that if you're adjusting for delays at this time, could you give us some insight into your process, just bottoms up what it was before and how it's changed and how you're actually accounting for those delays in the supply. Sure. This is John. So on a process from process perspective, we drive every single site and we benchmark where it's at, what we think is going to happen. We do this on a regular basis. And we're obviously looking at all the other information that out there. And so we feel we have a great database of the various sites and where they're at. What's been a challenge is really trying to understand, where they're at, when they're going to actually finish complete when they're going to come to completion. And part of that issue relates to the fact that if you look on the building from the outside, you can't tell exactly where things are, how far along the building is. And so we're reliant to some extent on conversations we have with developers or other people to try to gather information to really focusing on that side. What we've done in the sense of our adjustments is we looked at, how often we were right and where the how well the delays actually have been on an asset by asset basis and came up with the track record. And it's that track record that we've been slides, all these deals. And so we looked and said, if on average, we're missing it by several months, which is really the case, we made those adjustments. And so that's what's going on. Based on our track record, as we drive all the sites and then looking back and seeing how accurate have we been on the timing, what's the normal delay then? Have we applied it equally across the board? Does that make sense? That makes a lot of sense. Let me add one more thing to that. And I think that what has typically happened and we're seeing out there and some of the data providers is when something doesn't get delivered in Q1, it gets pushed to Q2 and Q2 to Q3, and you end up with this lump of supply that is going to ultimately get done in Q4. And then of course, that doesn't happen to get pushed to the next year. So that's been sort of the process. It started what John just talked about. In that, you know, you end up, it ends up being very confusing because you have a very large number in Q4, which doesn't get delivered, which then makes the next year start out with a very large number, and it confuses the entire picture. So we're trying to cut through all that and create something that is, hopefully more sustainable and more accurate. Oh, that's really helpful. We can certainly appreciate the challenges. Just one follow-up to that. What is your radius like? I hope, John, you're not having to drive around, you know, all of a sudden in California and only California. How do you decide this asset is, you know, within our comparability set? So, yes, so although we do a lot of driving, there's a whole team of people in the research department that do specifics and they have a actually a mobile database that they log into to check things out. So what they're doing is they're actually driving the entire MD. So they're looking at everything out in that area, to understand exactly what's going on. Again, we don't look at it and say, here's an asset that, we're going to go within three miles. I mean, different people have different ways of doing it. We look at the whole supply demand picture in and we make an assessment according to that. So we're looking at all assets that are 50 units and up, driving those assets in the MD seeing where they're at and factoring that in. Obviously, from an operational perspective, we have individual operational asset reports that our research department create enables us to better understand what supply is going to impact what assets and therefore adjust pricing strategies. But from a big picture from the economic perspective, we're looking at the whole MB, each of the NDs. Team does a lot of work in this area. Got it. That sound that sounds great. You guys should tell that data. That's all for me. We've talked about it. We've talked about it. You're you're looking at it right now for free on our S6 seeing. So we might start going. Thank you very much. Appreciate it. Yes. Our next question comes from the line of Anderson from Mr. Ho Securities. Please proceed with your question. Thanks. Good afternoon. Hey, Mike, have you given any thought to a plan B say Costa Hawkins gets repealed, or you're not even going there right now? In other words, if you do, if you do, if you do, if I can't. We always have a plan b, but but keep in mind that we operate in 70 different cities in California. So were more diversified than you might think. And as you know, probably the greatest risks are in the more urban type locations And we are a mix of urban and suburban, I think, somewhere around 10% of our properties actually in the urban core. So we think that there's just an inherent, sort of safety in the portfolio. And I commented previously about you know, concentrations. There's only four cities where we have more than 2000 units. And so again, we're pretty diverse. And so we'll not hugely impacted under any scenario, although, we do look at, we do have a contingency plan that might you know, target a few cities we're most concerned about. So I wouldn't say we wouldn't do anything, but I would say that our feeling is we're pretty well positioned overall. No home properties, in your future, and I'm gathering. Use that as an example. Well, probably not. I mean, we we do track other other metros because we wanna make sure that the West Coast is competitive with some of the Eastern metros for sure. And like it's like strong growth in certain of the Eastern metros or pretty appealing of late. And, but, you know, it's, it's really trying to confirm whether, our existing, property profile is appropriate given the broader U. S. Landscape. So it's sort of confirmatory. And based on that, looking at supply and demand dynamics, we feel good about the West Coast. Okay. Yes. And then, what just related what percentage of your portfolio is condo maps, just as a reminder, and is it concentrated in some of those urban areas where perhaps, should Casa Hawkins get repealed that certain municipalities would be inclined to you know, followed the, the the rent control sort of mentality. Can can you comment on on how and where Yeah. I I can. You know, roughly 8600 units in California or common app and then common mapping in Seattle is, is easier than it is in California. In California, if you don't have a common map coming out of it, out of the gate, you're unlikely to get 1 unless, you know, may take you many years in order to get 1. And so 8600 of our California portfolio would be, the comp of 15%. 15%, 16%. So yes, they tend to be in more of the urban core. Okay, that's the question. Okay, great. That's all you got. Thank you. Our next question comes from the line of West Galade from RBC Capital Markets. Please proceed with your question. Hi, everyone. I'm just looking for an update in San Jose. More in particular that large lease up Santa Clara Square, has that impacted the market? And how do you model that delivering throughout the next few years? This is John Udi. We open that right after the 1st the year as I was probably aware. And It's a pretty deep market. A lot of the Sunnyvale product burned off in the inventory, this year. And we think it's well positioned to have a pretty good start coming late in Q1. Okay. And then going back to that condo mapping question, would you look to convert the condos as more of a for potential refill or top 10? We have maps on, like Mike said, roughly 86 units, most of which are the urban core units that we developed in the last 15 years. And we're always looking at the metrics between, you know, NAV value common conversion versus, as an apartment. So then optionality is there. Exactly. Okay. Thanks a lot. Our next question comes from the line of Paul Pawlowski from Green Street Advisors. Please proceed with your question. Thanks. Mike, I understand your comments about the transaction market. Only seeing a slowdown of volume, no impact on pricing in high risk cities of rent control. There's a very real chance this comes on cost to high on the 2020 bell as well. So any conversations you and John are having that suggests that the transaction market slowdown could be more multi year. In nature and not exactly, you know, everything continues unfettered after November 6. Hey, John. Yes, it's Mike. It's it's a good question and honestly, you know, we don't know the answer. As you guys actually pointed out, There's a lot of money in private hands looking for yield. And, it's, you know, it's there it's not going away probably anytime soon. So, how much will trend back given the amount of money that's searching for quality apartment deals obviously remains to be seen. I guess I wouldn't be as maybe Dyer as you're suggesting as it relates to the transaction market. I mean, conditions can go on a lot longer than we might think before, you know, pricing or you know, you see that, that freeze. So it would be a guess and I'd be speculating. So I think I'll probably just leave it at that. I think that, you know, there's no reason to believe that things will change overnight. They generally take significant amount of time to change. And, you know, I would guess that it would be at the very early of some time, a year from now or something like that. On, on Seattle, and I know, this is a market rent forecast. The acceleration you're calling for, in terms of economic rent growth from 2% to 2.9%. Are you seeing any leading indicators within your portfolio in Seattle that suggests market rent growth is stabilizing, because the pace of deceleration, we're seeing Seattle across you and your peers reports have been pretty persistent deceleration. So wondering what really causes the conviction of a 100 bps acceleration in market rent growth next year. Sure. This is John. And what we're seeing to start with on the supply side is We see the fourth quarter is being pretty heavy with supply. So that'll be a tough 4th quarter for us now. And then Q1 and Q2, also significant a little bit less and they're lightening up quite a bit in Q3, Q4 in Seattle. We also, when we're looking at where we were for You're talking about the acceleration we have in the rent growth this year in F-sixteen, which is projecting into 'nineteen, We're sitting right now on job growth that, as I mentioned earlier, is up 3.7%, very high job growth this year, for the third quarter. Compare that to last year. Last year was a low point. Last year, we were down about 50 basis points, sorry, 17. We were down about 50 basis points in job growth. And that impacted our 'eighteen numbers. At this point, being up in job growth in 'eighteen and doing very being very strong, that will actually benefit the 2019 rental market. There's a little bit of delay between job growth and the rental market. So it's really that combination of a better employment picture with declining supply that will get us, to our our rent growth numbers. Does that make sense? It does. Thanks, Sean. It'll be a little tough in the middle, though. The 4th quarter is going to be challenged. I'm sure that it'll be noteworthy. Our next question comes from the line of Tayo Okusanya from Jefferies. Please proceed with your question. You may have lost aya. Hi. Your line is now live. Our last question comes from the line of Karen Fores from S MFG Securities. Please proceed with your question. Hey, good afternoon. I know we focused a lot on the occupancy comps for but I just wanna make sure I understand, the rent growth that's earned in, from this, from the past lee leasing season, You said new leases were up 3a half and renewals were up 4.2, I think, in the 3rd quarter. Is that correct? And if so yeah. So we're looking at a high 3, I guess, kind of level of earned in rent growth from the peak leasing season heading into 19. Is that correct? Well, Q3 was strong and that's just trying to articulate that. And part of that relates to the curves changing. 2018 was a normal seasonal pattern and comparing that to 2017, gave us kind of a big pop in Q3. As we go to Q4, we'll face more pressure and our lost lease will largely dry up. And so when you look at, 'eighteen, obviously, or 'nineteen, you're not giving guidance, but, we're not in the in the high numbers that you're talking about. We'll have the headwinds from the occupancy with a a solid rental market and, you know, we'll we'll give guidance later later on. And can you just remind us what percentage of your leases you sign in 3Q? Yeah. I think we had a roughly 14% turnover, my memory is right, 6500 weeks is something like that overall. It's big. It's the big, the bigger percent. It's meaningful, but it's not it's, you know, we still signed quite a few in Q1 and Q4. Got it. Thank you very