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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Equity Residential 1Q 2019 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Marty McKenna. Please go ahead.
Thank you, Stephanie. Good morning and thanks for joining us to discuss Equity Residential's first quarter 2019 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; Bob Garechana, our Chief Financial Officer is here with us for the Q&A.
Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
Now I'll turn the call over to Mark Parrell.
Thank you, Marty. Good morning and thanks for joining us today. We are pleased to delivered growth in our same-store revenues, net operating income and normalized FFO that exceeded our expectations for the quarter. 2019 is off to a strong start with demand for our product remaining deep and new supply being absorbed well across all of our markets.
We are also benefiting from a sizable dropping new competitive supply in both in New York and Boston markets. This strong demand across our markets is creating high occupancy which is allowing us to push rate. We're just beginning the primary leasing season, but if these trends hold we would expect to deliver same-store revenue growth and normalized FFO growth near the top end of our guidance ranges.
As is our custom, we'll wait until our second quarter call at the end of July to revise our full-year guidance. After I discuss our investment activity in the quarter, I'll turn the call over to Michael Manelis, our Chief Operating Officer to give you color on our operating performance. And after that we'll open the call up to your questions.
So, switching to investments on the acquisition side on the fourth quarter call, I gave you details on three apartment properties, we acquired early in the first quarter of 2019. We acquired no other assets in the first quarter, but after the end of the quarter we acquired a 366 unit apartment property in Rockville, Maryland that's a suburb of Washington D.C.
This property was built in 2016 and is fully stabilized. The purchase price was approximately $103.5 million and the acquisition cap rate was 5.3%. Our investment strategy for over a decade has been to acquire and develop urban and den suburban properties in our markets, while we have acquired and develop more urban assets of late.
We also continue to seek well located product in the suburbs that share certain characteristics with our urban assets like being proximate to high wage employment and other positive drivers of apartment demand having high household incomes and where the rent to income ratio is similar to our other assets in the market.
By that, I mean that the rent to income ratio is relatively low. Assets that are walkable are very convenient to amenities by car and we're single family owned housing is less affordable compared to rental apartment housing. The Rockville asset checked all these boxes, we owned other assets in this submarket and think this property complements the existing portfolio.
You should expect us to continue to look for opportunities like these in our markets. We did not sell anything in the first quarter of 2019, but subsequent to the end of the quarter, we sold our 800 Sixth Avenue Asset in Manhattan for approximately $237.5 million. This property is subject to the New York 421A program and its sale will reduce our property tax expense growth rate and improve our NFFO growth rate over time.
We continue to look to acquire properties in Manhattan and elsewhere in the New York area that meet our acquisition parameters. Our guidance continues to call for $700 million of acquisitions and $700 million of dispositions in 2019. The number of assets that we're marketing in the first quarter that meet our acquisition parameters were relatively low.
We expect the number of suitable assets for sale to grow as the year goes on. Overall cap rates are holding steady in our markets and values are increasing modestly with growing NOI. There continues to be considerable demand own high quality apartment assets in all our markets.
And now, I'll turn the call over to Michael Manelis, our Chief Operating Officer.
Thank you, Mark. So strong demand, better pricing power, lower turnover and record high levels of customer satisfaction continue to deliver strong momentum on the revenue front. Occupancy and renewals were slightly better but mostly in line with what we expected.
Gains on new lease change were stronger than we expected which was a result of both better pricing power and having fewer units turnover during the period. In the earnings release, we have included a new schedule on Page 13, that shows pricing trends for the quarter.
As I've stated in previous calls looking at these trends for any given quarter will not tell the complete income story, but they assist and understanding the relationship to previous year comp period and the potential momentum of the market. We included our full-year revenue assumptions by market in the March Investor Presentation posted online.
Sitting here today, our portfolio is 96.6% occupied compared to 96.3% the same week last year. April's achieved renewal increase was 5.1% and we expect May and June to be approximately 5%. If our current momentum continues for the next couple of months we would expect our full-year revenue performance to be towards the high-end of our guidance range. This will mostly be due to stronger new lease pricing and a slight gain in occupancy. It is also important to note that our comp periods for the remaining quarters are more challenging than the first quarter.
So let me provide you some color by market. Boston had a strong first quarter which was in line with our rental income expectations with stronger pricing power, gaining steam throughout the quarter. While increases in parking and retail revenue contributed to our results this quarter, our portfolio is benefiting from a pause and new competitive supply with the 2900 units expected in 2019 coming online later this year.
Today the portfolio was demonstrating more pricing power than expected with base rents in Boston being 4% greater than they were the same week last year. The Boston portfolio is 96.6% occupied and the achieved renewal increases for April are 4.7%. So while we expect competitive supply to increase in 2020 the overall demand fundamentals for this market are very strong and the absorption outlook is positive.
Moving to New York, the 2.4% reported revenue growth was better than expected and was driven by strong consistent occupancy at 96.5% and improved pricing power. This market also had a 7% increase in foot traffic for the quarter which was the highest year-over-year gain amongst all of our markets. Market pricing remain disciplined which will allow us to continue to use concessions at a very targeted level.
During the quarter we use 50% fewer concession dollars than in 2018. The new supply and our competitive footprint is approximately 50% lower than an 18% with expected deliveries just under 10,000 units, the deliveries are concentrated in Long Island City and Brooklyn and to-date our operations have not been negatively impacted from this supply. In fact, our Brooklyn submarket delivered some of the best revenue results in the market.
The New York portfolio is 97.1% occupied and April achieved renewal increases are at 3.9%. So Washington D.C. had a really strong quarter strength and occupancy and pricing power during the quarter was definitely greater than what we expected. Although, the rate of job growth has declined from last year, unemployment remains below the national average.
Professional and business services was a bright spot posting a strong gain of 18,000 jobs or 9.6% increase over the same period last year. Our Northern Virginia submarkets are strong which is likely being fueled by procurement dollars being spent on defense as well as growth in technology employment.
We were forecasting very limited pricing power for 2019 due to the quantity and concentration of new supply in our submarkets and potential slowdowns in absorption. We continue to be cautious about further improvement in this market. Today, our portfolio is 97% occupied with April renewals at 4.3%.
Moving over to the West Coast, Seattle also delivered stronger pricing power during the quarter than what we expected. Seattle supply is being absorbed as the deliveries are shifting from the CBD to the suburban Eastside. Recently, several articles have stated that the Seattle area is filling up new apartment faster than any region in the country.
Strong demand fueled by tech employment appears to be keeping pace with the high levels of new supply in this market. Large employers also continue to show strength and commitment to this market. Amazon has over 10,500 jobs posted in Seattle and another 500 now posted for Bellevue. Facebook also started moving into a new South Lake Union location which is directly across the street from one of our recent acquisitions.
Overall, the next several months to present an opportunity to capture the strengthen demand and grow both rate and occupancy in this market. We are 96.7% occupied with April renewals at 5.6%.
Next step in San Francisco, with jobless rates below the 3% mark, companies are running out of workers to hire and it is not a surprise that the pace of job growth is slowing. That being said demand for our product remains very strong. We had a 6.3% increase in foot traffic for the quarter which was the second highest year over year gain amongst all of our markets.
Our Downtown portfolio which represents 22% of our income in this market, delivered the strongest revenue growth amongst all of the submarkets in the Bay Area. This is in contrast to our East Bay portfolio which produced the lowest revenue growth and also had a reduction in occupancy and foot traffic year-over-year, during the quarter. We are confident that whatever short-term pressure may be placed on our portfolio from deliveries in Oakland and the rest of the Bay will more than offset by the insatiable demand for housing in the Bay Area.
Our San Francisco portfolio is 95.8% occupied which is about 20 basis points less than it was last year, with gains in most submarkets being offset by declines in the East Bay. April renewal increases are 6% and we continue to see strong retention results.
Moving down to Los Angeles. LA performed as expected during the quarter. On the supply front, we continue to see delays in new supply deliveries due to labor shortages on the construction side of the business and we expect that trend to continue. The Downtown Metro submarket for us is a large area stretching from the core Downtown area through Mid-Wilshire Koreatown and over to the Hollywood area. With almost 20% of our revenue in this market, we saw over 5,000 units delivered last year and are currently tracking about 5,500 additional units for 2019.
Concessions of 6 weeks to 8 weeks appear to be the norm for projects currently in lease up in the Downtown Metro. Our Downtown Metro portfolio is performing well, but 96.1% occupancy and 3% revenue growth for the quarter despite the pressure from the supply. Many of our Downtown Metro assets have a boutique like feel and are typically at a price point below the new highly monetized assets.
In addition to Downtown we believe that supply pressure will continue throughout the year in both San Fernando Valley with about 15% of our overall market revenue and the West LA submarket with about 25% of our market revenue. The major difference between the two being absorption in West LA will be higher given the strong job growth from online content companies. The LA portfolio is 96.4% occupied as compared to 96.1% the same week last year and our April renewal increase was 5.8%.
Moving to Orange County results for the quarter were slightly better than expected driven by higher occupancy. Base rents in Irvine had been decelerating since January as expected due to the pressure from new supply. Job growth is slowing but the overall outlook for this market remains positive with 3% plus revenue expectations. Today we are 96.5% occupied and have achieved a 5.7% increase on April renewals.
And last but not least San Diego. Military spending remains strong, we experience some supply pressure downtown that resulted in limited pricing power and lower than expected gains on new leases, earlier in the quarter. But we have seen momentum pickup in late March and April and as of today San Diego is 96.6% occupied and achieved increases in April are 6%.
On the initiatives front, we are focused on creating the right overall digital experience for our prospects residents and employees. During 2019, we are launching a number of new initiatives to further enhance self-service and on demand functionality in the sales and maintenance side of the business, including but not limited to a new resident portal, self-guided tours, mobility for our service teams, testing smart homes and introducing our prospects to LA, which is our artificial intelligence leasing a system.
Impact from operating efficiencies gained will likely be in 2020 and 2021. These are exciting times for our industry from a technology standpoint and we are confident that redefining the digital experience and leveraging new technology in our industry will create operating efficiencies for the years to come.
Let me close with a huge shout out to the employees of Equity Residential. We continue to have strong momentum as we enter the leasing season and their focus on delivering remarkable experiences to our prospects and residents is greatly appreciated.
Thank you. And operator we are now ready to go to the question-and-answer session.
Thank you. [Operator Instructions] Our first question comes from Nick Joseph with Citi.
Thanks. Mark, you sold the New York City asset in April. As you marketed the asset, what did you learn about the current transaction market in terms of interest or buyer pool given the potential uncertainty surrounding New York rent control?
Thanks for that question Nick. Listen the buyer pools generally have been smaller now than they were a few years ago, but sufficient and certainly this asset cleared with relatively no difficulty, I think the asset underwriting process with 421a is a little bit different, everyone knows what those numbers are and what those increases are. But, I think folks that aren't public reporting companies like us have a little bit of an advantage because they are deals that you have very good IRR on.
I mean between the two 421a assets we sold. So that's the 101 West End deal last year and this asset which together, the 806 asset which together about $600 million of sale proceeds. We've got a 10% annual IRR on those assets unlevered, so we did very well. So I think the private buyers are very happy with those sorts of returns, very comfortable with those escalations because they understand that the assets kind of accumulating value for the mark-to-market at the end, and again the asset, these are generally saleable assets and not with a great deal of difficulty.
Thanks. And you talked about EQR's investment strategy, are you seeing a pricing or IRR differential between urban assets and well located suburban assets that make one more attractive right now?
Yes. I know your questions about IRR, but I'll start by saying cap rates in general across both markets and between markets, between coastal and secondary markets have really collapsed on each other. I mean a lot of stuff is trading in the forces that didn't trade in the forces before. So there's just a real compression of cap rates going on. I do think that some of the urban product trades at a lower IRR because it has a lower cap rate because it's got less risk associated with it.
But generally speaking, the value add trades again our trading continue to trade well, but maybe a little bit less demand there. But between urban and suburban right now again it's so competitive that there's not a great deal with difference between IRR demands. But I do think IRRs are still generally lower on the buyer side when you're buying an asset in an urban center city location.
Thanks.
Thank you.
Thank you. Our next question comes from Shirley Wu with Bank of America Merrill Lynch.
Good morning, guys. Thanks for taking the questions.
Good morning.
Good morning. So given the political climate around housing affordability, I think I'd want to carry it back to what you're hearing regarding, let's say, rent stabilization in New York and even other housing markets across the country, like California. So just your latest thoughts on those prospects?
Sure. Thanks for the question Shirley. So just generally, I mean there is rent control discussions going on in many of our markets through various trade associations we belong to we're very active. We're able to discuss these things with policy makers and just get the point across that solving affordable housing – the affordable housing crisis in our various markets is not about limiting new supply of workforce and affordable housing, but encouraging that sort of supply whether it's through zoning reform, regulatory reform programs like the old New York 421a deal.
So we feel like we've got some real traction in that conversation and we'll continue to press it. As it relates to New York which was part of your specific question, that's a very complex rent control regime and there are a lot of things going on. It does need to be reauthorized by mid-June and so we're in the middle of those conversations again through the various trade associations. But we just have to try and get the point across that continuing to limit the incentive for the private side to create new housing will not solve this problem. So that's the message the industry has that we continue to sort of advocate.
Got it. And so on the other side, I'm going to switch to supply. So on your previous calls, you've mentioned that it’s safe to say, Oakland submarket as well as downtown and West L.A., there's been markets that are probably a little bit more challenging and that could potentially impact your production. And we're hearing is that there's been some weakness in overseas as well. How do you balance this in your revenue projections, again, let's say a stronger markets like New York that's outperforming. And how do you think that's going to impact the projection going into 2Q?
I want to make sure, I understand your question does it get a little garbled, but you're talking about supply production in Orange County as well as in the bay area specifically in East Bay and sort of comparing them to the performance in some of the East Coast markets. Did I catch that correctly?
Yes. And how you think, let's say, the rest of the year is going to play out?
Sure.
Okay. So this is Michael, I think I can address that. So I think on the last call, we talked about slowness that we were seeing kind of in Orange County and our full-year projection actually had lower revenue projected for 2019 versus 2018. We kind of see the supply that we're tracking. I think just under 4,000 units for Orange County in 2019 and a very consistent competitive standpoint of what we experienced last year, we actually did a little better than what we thought in Q1. But again, that was off of a reduced kind of run rate knowing that we were going to be facing the competition.
Moving over into the Bay Area, I guess I would say, we're seeing pressure on East Bay. I don't necessarily point that to the deliveries coming online in Oakland yet. I think that's still TBD as to what that poll is going to be whether that's going to attract from downtown San Francisco. But when we built our full-year, we kind of anticipated and we look at when are these deliveries coming to market. So I don't really see any kind of change right now.
I will tell you the momentum in Q1 in San Francisco outside of the East Bay may mitigate any impact we're going to have from that supply. And as you move over to the East Coast and you think about New York, we see the reduction in supply in New York. We thought we were going to have better pricing power. We were expecting that the momentum is stronger than what we thought.
So I think as we play out for the balance of the year as I alluded to in the opening remarks, if these trends continue that we're seeing in these markets for the next couple of months as we start writing more and more leases that is going to put us to the high end of our income range.
Got it. Thanks for the color Michael.
Thank you. Our next question comes from Nick Yulico with Scotiabank.
Thanks. Good morning, everyone. I understand waiting until the second quarter to adjust guidance, but perhaps you can just tell us what would be the negatives that could reasonably happen between now and then that would prevent you from raising same-store guidance. I mean which markets are the risk here?
Sure. It's Mark and then Michael may supplement this. I mean over the next few months as you know with leasing season, we have approaching half of our leases turning over in the span of a few months. So you've got variables in rate, you got certainly variables in occupancy that are very relevant. So it's just there's and we're talking about pretty fine numbers. When you start talking about whether your growth rate is – the midpoint of our guidance being 2.7, 2.8 those are very small differences in the level of precision we're talking about here.
So what I'd say to you is what can change push you up or down there's things as simple as a temporary occupancy blip maybe some undisciplined supply in one of our submarkets things like that that could push those numbers down. That don't mean that anything systemic has happened in that market, but that Nick you're going to miss – we're going to miss the very, very top end of the range by something, by some factor. So what I would say is you've got all of that that you need to consider and that's effectively impossible for us to predict at this early point in the leasing season.
Nick, the only thing I guess I would add to that is just from a downside risk perspective, it's really watching southern California just to see if there's any additional softening. Because to me that's where the risk sits right now. The other the trajectory of these other markets, it will be remote that all of a sudden we see a very sharp pause that then dilutes our occupancy so quickly. But I think in Southern California right now it's where we need to kind of keep our eyes on it.
And just falling up on Southern California, I mean I think you said that labor shortages in LA are leading to some construction delays. Can you just talk about that because I know you're all kind of worried about the supply impact in LA.? I mean is this a scenario were some of that supply maybe gets pushed later this year into next year.
I think that is what we will see, right. So we saw a shift from – in 2018 what we were projecting for 2019, we saw a shift occur a lot of the 2018 deliveries got moved into 2019 and it pushed the number up through I think 14,000 units expected in the market. We expect that trend is going to continue. I think in the first quarter we saw about 15% of the expected completed shift and get deferred out. So I guess is, every quarter we are going to keep seeing some of that shift occur.
Okay. Thanks. And just last question on the new data you are giving on new lease and renewal rates. It's helpful. On the new lease numbers, I guess, I’m wondering would those numbers be that much different including concessions.
No. I guess that would be better right now in New York as we are doing about 50% fewer concessions in the first quarter of 2019 versus 2018. I mean we really don’t do a lot of concessions in the portfolio. And so I look at this and outside of New York, New York would be performing a little bit better than what's on the page.
Yes. I think new lease concession for us are like $0.50 million or something. I mean, it's just not a material number on $2.6 billion in revenue.
Okay, great. Thank you.
Thank you. Our next question comes from Steve Sakwa with Evercore.
Hi. Just a couple of quick questions. I wanted to just talk about the margin opportunity and some of the, I guess tech initiatives that you're sort of doing the self-guided tours and some other things like that. How big or how much of a benefit do you think that could be to margins and sort of over what timeframe do you think we could expect to see that?
So I think it's probably too early to know the exact impact from all of these initiatives put together. You need to remember that we've done a lot of centralization and eliminated roles onsite in previous years. So for us our opportunity is figuring out how to leverage this technology to create new operating efficiencies. What's probably most exciting for us and we'll probably see the bigger return is that we got an amazing portfolio of assets that are highly concentrated in very desirable locations.
So this close proximity when we start thinking about self-guided tours, where we start thinking about kind of potting our kind of onsite folks. We will have less windshield time, which is going to allow us to have greater staff efficiencies in both sales and service. And it's also going to allow us to reduce our reliance on contractors for many of the tasks that are getting completed today. So I think the benefit really comes more like 2020 and 2021, as we start deploying this technology and start to see the compounded impact of all of them coming together.
I guess, how much beta testing have you done on the self-guided tours and what sort of pluses and minuses have sort of come out of that?
So we've done a lot where we have concierges, right, where you don't need the technology in place. And remember a lot of our buildings we have concierge so we have staff there. We're now just getting ready to deploy the technology in place so you have the locks in place. You can do self-guided tours at properties after hours where you don't have kind of onsite personnel. We've been testing for, I would say probably about nine months.
On the smart home technology, we've done probably a little bit over a year. We’ve narrowed it down. We'll have about 2,000 units up and running. On the self-guided tours, we've done this at a handful of properties. We really need to kind of market it better to really see the upside potential of it. But it's big, right because a tour takes 30 minutes of time. So you start eliminating those tours that equals a huge efficiency in your staff.
And just last on the smart home technology. Can you just sort of give us a rough idea of the cost to put all of the things in the home and the sort of the returns that you might expect on that?
Yes. So I mean that's a tough one. I guess, I'll just throw out an average per door of about $800, but it does swing depending on what kind of lock you're putting in. If you've got a mortise lock, it's more costly than if you just have a standard lock. As far as the return goes, I think we've been out in the industry the $30 a month premium getting charged. On yield management, it's hard to say that that's really a sustainable kind of return that you're getting on that. So I think we need to get more concentration of these in the portfolio to really be able to answer that question to tell you what we expect from it.
Yes. Steve, I’d add some of this stuff is going to get to be table stakes in some of these markets where people just demand this sort of stuff. So it's really hard to tell what it is and it'll vary a little bit. And some markets will install one thing and some will install another. But it's certainly an opportunity for us to the positive.
Okay. And then last question for Mark, maybe just on strategy I mean as you kind of hear about these coastal markets and these rent control initiatives. I know you've tried to move back in the places like Denver and some other markets, do you sort of think about the footprint of the portfolio any differently moving forward?
Rent control is a risk, just like climate change just like the financial strength of our various municipalities we operate in, Steve that we have to take into account. We've managed that risk very well. New York’s had rent control the entire time we've been in that market. So it's certainly something we're aware of.
But again we hope to have these and continue to have really good dialogue with policymakers and hope to have a conversation that really involves more workforce housing, not just regulating prices and ending up with less workforce housing, less housing in general and kind of a worse problem. So do we take it into account? Absolutely. It’s compelling us to move in other markets. The reasons we're not in those other markets and a lot to do with the quality of demand and the type of customer you have and the ability to build in those markets, and the fact that rent control maybe isn't a threat in those markets. I'm not sure offsets the other disadvantages we see.
Okay. Thanks. That's it for me.
Thank you.
Thank you. Our next question comes from John Pawlowski with Green Street Advisors.
Thanks. Just sticking with New York rent control, curious your political contacts there in Albany, what's your base case scenario for what does change on the ground come middle of this year.
Yes. Thanks, John. That's really hard for us to guess that. There are so many proposals that are active right now. The governor's talked about a number of things, other legislators have talked about a number of things. Just to be honest with you, impossible for me to tell you that we have a good handle on the exact proposal that's likely to be enacted. When something does seem close then we'll have a firm review.
My pushback is it's getting close and I mean there's hearings this week and I know legislation can change. But there are details being crystallized. So just curious maybe not base case, but is there any risk to your portfolio NOI these next three to five years as you see things playing out today?
Well, not only does it depend on the category of the change because there are broad – I don't disagree with you there are broad things being discussed some of which like capital improvement changes aren't particularly relevant to us, but if you change the preferential rent scheme, it depends how you change it. And I've heard so many different variants that it's really hard for me to react and give you a view.
I'll tell you that a good portion of our portfolio in New York City isn't rent controlled at all, it's market rate units. Those units maybe benefited from all this additional controls. So I appreciate the desire to get to some underwriting number right now, but until we have more certainty, it's just hard for us to give you that kind of answer.
That's fair. And then Michael on D.C. and just the supply dynamic across various submarkets, permitting is starting to pick up meaningfully which I won't hit for another few years, but as 2019 and 2020 unfold where are the pockets of oversupply come in and where are the pockets of relief coming for your portfolio?
So I think really we're looking at this supply kind of concentration on top of us in these submarkets in the district and in Virginia. And really this market is delivered almost 4,000 units a quarter. And we kind of anticipate that to continue. So from a concentration standpoint, I would say, it still sits on us in the district, it still sits on us in the Northern Virginia. We expect that to continue. We're performing better than what we thought despite the supply sitting there.
I don’t know John was your question only D.C. or was it broader than that, I apologize.
Sorry, D.C. I know there's a bunch of waterfront revitalization project. And just wondering, because permitting is accelerating, where are the big supply shocks hitting. Not necessary 2019, but beyond this year where the big supply shocks hitting across the metro?
Well, D.C. is a market that has the ability to deliver rapidly in new areas. I mean again you talk about the waterfront in this Union Market area is certainly going to get a lot of supply as well. So these new areas are terrific in the sense that they're making the district so much more livable, much more dynamic place, there are a lot of reasons for people to live there more reasons than even before, but these areas do draw these new areas.
So I'll tell you, it could spring up in a lot of places and I wouldn't be surprised if we're not talking in two years about the amount of supply in Union Market, because of all of the stuff going on there. I also think you can deliver in Arlington pretty easily and you may see a little bit more delivered in and around the concentration around HQ2 at Amazon. So, I exist everywhere. I mean honestly.
Yes. Thanks so much.
Thank you.
Thank you. Our next question comes from Richard Hill with Morgan Stanley.
Hey. Good morning guys. Maybe just following up on that question in a broader context, recognize that you're focused on so-called near-term, I want to see how that plays out until you do take any action and guidance.
It sounds like New York City is rebounding pretty nicely here, but as you look out over the next two to three years, what markets get you the most bullish in and maybe what markets do you have a little bit of maybe more caution on either because of supply versus demand technical?
Hey, Rich. It's Mark. So sort of three inputs demand supply and I'll call it other. When you think about the supply picture, it's probably I would say slightly more discouraging in Washington, D.C. and the ability as we just talked about in the prior question and deliver in many submarkets and in brand new submarkets, large amounts of supply in relative short order, makes that market a little more difficult than some of our other markets on the supply side.
Most of the other markets have – I think a little bit more in terms of structural limitations or land limitations on supply. In terms of demand, we like the picture across all the markets New York feels very good. We feel very good about very bullish on New York long-term. I mean the financial services employment sort of headache is over we think. I think that the city has reborn with an emphasis on technology and new media
And we see that it costs our resident base and the amount of demand we like New York a lot. We like Boston, a great deal. We're building a big tower there. So we feel terrific. The West Coast markets have done very well. We like the demand picture across the board including in D.C. A lot of our better D.C. numbers are because frankly the supply was there and we knew it would be, but the demand is just terrific.
And then other which I define as both the rent control concerns, we've discussed on the call and then just thinking about whether our jurisdictions are investing in their infrastructure. And that point, the D.C. is to be commended because they just got a new package of reforms in place to fund the renovation of the Metro system, which is badly needed and now they have you know funding assured funding from the three governments to do that. So again we see a lot of good things in our markets across the board. And I would say that the picture and supplying in D.C. is just a little bit more challenging than any other markets.
Got it. And one follow-up to that on the demand side. There's obviously been a lot of talk about the aging millennial population. We've been talking about the Gen Z population that’s coming behind that's even bigger. Do you have these thoughts on the millennial and disease propensity to rent versus own and do you expect that they're going to rent more than own or is it too early to tell at this point?
Well, I've got a couple Gen Z living with me so I speak something to that. I think we continue creation of jobs in dense and dense suburban and urban settings in these cities that we operate in. I don't know why that dynamic changes. I don't know why people don't want to live there like I can't see what that inflection point would be again provided these cities continue to invest in this attractive infrastructure of parks and transit and the like.
So, I mean we're very optimistic. I'd point out that our average resident is a little bit older at 33. So, we haven't even seen the height of the millennials yet through our system. I think the biggest core. It might be 28 years older, so now, so we're going to continue to feel good tailwinds from the millennials, and no reason to believe that the Gen Z wouldn't act similarly. But they are just entering college when they're just coming out of this is a young group yet and I guess to be fair, we haven't really seen their preferences in housing expressed very well yet.
Got it. Okay. That's very helpful guys. Thank you. Congrats on a good quarter.
Thank you.
Thank you. Our next question comes from John Kim with BMO Capital Markets.
Thank you. Michael gave some pretty interesting data on foot traffic by market. I'm wondering if you found this to be a good indicator of new lease growth rates historically. And then specifically to New York, what is driving the 7% increase, do you think? Is it broad based or is it specific to some of your submarkets?
No. So, I would say it was pretty consistent across the submarkets just the being strong. I think foot traffic by itself is not the only thing you would look to see demand, because there's things that we could do based on how many available units we have to sell how much advertising dollars we're putting in there that can influence those numbers.
I think for us we were fairly consistent in our marketing strategy and you can see these areas that had the kind of strongest growth on a year-over-year basis allowed us to kind of get in a position where we can grow occupancy versus the prior year and then start pushing right, a leading indicator.
Okay, a couple of questions maybe for Bob. Was your same-store revenue this quarter or this year will there be any benefit from the accounting change as far as unelectable least revenue being moved up to revenue.
Yes. So there's no change. We've always accounted for our bad debt expense as a contrary avenue. So, the lease accounting implementation didn't impact the income statement in any regard.
Okay. And then looking at your second quarter guidance, this is more like the area in FFO not the normalized, but the narrowed FFO is coming down the second quarter versus first quarter. Is there any one-time items or debt extinguishment cost like respecting the second quarter?
Yes. There's one debt extinguishment costs, which is fairly sizable. Its non-cash, it actually relate to the payoff of some tax exempt bonds on the sale of 806. We acquired that property as part of our stones so that that was mark-to-market. So there is a fairly sizable discount that had to be written off when we paid off that debt in conjunction with the sale.
And then finally, I know it sounds like revenue is going to come out at the high end of your guidance for the year, expenses have also come in at high-end of your guidance range in the first quarter. Do you expect that to continue for the remainder of the year?
Yes. So we're comfortable with the kind of call at the midpoint of our guidance range on expenses. We always assumed that the expense growth would be front end loaded in our original forecast. So we're comfortable kind of where the range that's kind of around the midpoint right.
Thank you.
Thank you. Our next question comes from Rob Stevenson with Janney.
Good morning guys. Turnover was down pretty meaningfully again year-over-year. Anything in particular driving the continued decline overall and how much of an impact is that having on an NOI versus 100 or 200 or 300 basis points higher?
So yes, I mean it was 9.9% for the quarter, it was roughly just over 600 fewer units turned over in Q1 of 2019, over Q1 of 2018. So from an NOI perspective, I mean the cost – the actual physical cost to make ready a unit is not significant.
So I don't think that's a big driver to the NOI. The benefit for us is we reduce our vacancy loss on those units. And we also right now you have more people renewing right and renewals were coming in at a 4.9%.
So that to me is a lift that we're seeing kind of into the NOI contribution from that. Of the drivers to that, I think is very consistent to what we've said in the past, which is we are delivering strong customer service to our residents.
Our satisfaction scores are at the all time company high. And that's being fueled with people out there deferring life changing decisions for later years and marrying later having children later. So, I think we're benefiting from all of those things coming together. How much lower it goes. I don't know.
Okay. Orange County was the one exception was up. Anything that sticks out about that market or is it just noise at this point.
Yes, it was up and it equated to 27 more move outs during that first quarter versus the first quarter of last year. It's something that we're watching right. We knew we were facing some pressure into that market. We forecasted that in our guidance but it was down and it's something we just need to walk.
Okay. And then San Francisco and L.A. had positive new lease growth in the first quarter as per your new schedule. What markets, I assume that those markets are likely to have positive rent growth for the full-year. What other markets besides those two could flip and be positive for the entire year. When you when all is said and done on a new lease basis?
Yes. So we've put the guidance out there for in the March Investor Presentation for the full-year. So you kind of get a sense. I will tell you sitting here right now. San Francisco, New York and D.C. are probably the three that have really outperformed the first quarter from a new lease change perspective and I think you could just look at the March guidance and kind of understand that would impact those full-year numbers, the rest of this stuff. Its call it 20 basis points, 30 basis points better than what we expected in the quarter. And when you stretch that out over the full-year and you put in all of the quantity of new leases that we're getting ready to write, it's just not as meaningful.
Okay. Thanks guys.
Thank you. Our next question comes from John Guinee with Stifel.
Great. Thank you. A few quick questions, first is the $800 new unit digital and digital experience are smart tech spend included in your 2,600 per unit CapEx guidance.
Yes.
And then second, any…?
Yes.
Okay, great. Then second any change in asking or taking rents in your assets contiguous to Amazon HQ to headquarter location yet?
No. I think they actually – they just announced that they're going to start putting some employees in there in June and some temporary office space. To me that HQ2 and I think what we're seeing it's a psychological lift right. It's good for long-term fundamentals for those submarket and I think what you're going to see as the year progresses and more and more jobs you're going to see the demand number go up and you'll probably see pricing power strengthened from that.
Okay. And then last Boston tower under development 850,000 per unit refresh our memory as to expected yield and then rents on a per square foot basis needed to hit those yields.
Right. There with me for a second here. Yes, so the tower where we expect to stabilize that is about a take a little over a 6% yield. The current yield on current rents and current construction costs would be bit over 5%. But just to give you a sense of that. I'm not sure I have here the actual rent I don't have the underwriting for that asset here with me and we could certainly talk through that with you at a later points.
Great. Nice job. Thank you.
Thank you. Our next question comes from Hardik Goel with Zelman.
Hello? Do you guys hear me?
Yes, we can.
Hey thanks, Mark. Thanks for taking my call. I just had a question on some of the comments you made on D.C. and L.A. supply. So we know that D.C. hasn't typically an issue with delays and supply comes on they're pretty healthy clip and at the same time we have markets in California where supply is really difficult even ones that started to kind of deliver on time and what's driving that difference really? How much of that is just people looking at construction costs and having to revise the capital stack versus labor and just if you could add some color and insight into what's going on?
Sure. Well a couple of different things are going on. One is similar. There are new neighborhood, I mean Downtown L.A. is a new destination of sorts so you see a lot of construction there and there's not as much entrenched opposition. When you go to DC, there's a lot less effective entrenched opposition to these new neighborhoods like again the area by the ballpark and you see very significant amounts of construction. It’s relatively easy to build in Northern Virginia.
Maryland is a little more difficult, but it is relatively easy. So I would say to you that generally speaking in terms of governmental restrictions land availability in D.C. of a good sized subcontractor base all of that is easier. I would say to execute on in D.C. than it is on the West Coast, we have maybe more limitations in terms of local government rules and regulations you need to work through. We have more significant land limitations, maybe a more effective NIMBYs view on additional units. So I think it's a combination of all those things.
What about just to the quick follow up. What about wants to use already approved and started. Is there a difference in how long it takes to just complete the unit and get it done on time? Does the regulatory environment affect that as well you think?
I don't. I've not heard that to be the case, it's more what you're building a high rise or you're building a mid rise wrap product, you're building garden what are you constructing. So if you're building a high rise it's going to take longer. And so a lot of our supply numbers, we think they're pretty accurate when we have markets like New York where everything's high rise and when markets like D.C. where there's a lot of garden, a lot of mid rise it takes less time.
So, I have not heard that there's a material difference once construction starts, in say the completion of a mid rise in the L.A. area and the completion of the mid rise in D.C. If there is it's probably whether related or those sorts of things, but I've not heard a great deal of difference.
Got it. That's very helpful thanks.
Thank you. Our next question comes from Alexander Goldfarb with Sandler O'Neill.
Good morning. Mark, just going to New York for a minute, you mentioned that the majority that most of your New York assets were market rate not rent control but could you just maybe on a percentage basis, your New York portfolio that's either for 21 a or you know pre 1974 Brent rent stabilized units. What percent of your New York portfolio would fall into either bucket?
Sure Alex, I give some general numbers and I'll admit that this is all very technical, it's a little bit subject to correction here as we some of these properties are shifting for example, they're completing their rent stabilization period and they'll move in the market rate. So, we have 9,500 units in metro New York, call it 3,500 or so aren't even in New York City proper.
So, they're not part of this conversation we're having right now, call it 30,300 units and that number is going down shortly because we have some deals moving out of the rent stabilization category, so maybe 30,300 units or so, our rent stabilized in one fashion or another. You know as a New York or there's a lot of variations on what that means and whether those restrictions are very significant or less so but effectively 30.300 and the remaining call is 3,000 odd units.
Our market rate units, and the number of market rate units from now to call at 23 is going to keep increasing as we burn through some of these rent stabilization periods and its 421A assets go through their cycle.
Okay. So just to clarify the 3,300 includes units that are subject to preferential rate rents, the legal caps as well as the rent stabilized units correct?
Yes.
Okay. And then second question is I don't think I've heard you guys talk about the new energy initiatives that were just passed in New York, but maybe if you could just talk about I know they're recent but how you view your portfolio is measuring up against towards the city council in the mayor assigned both on the 2024 mandate and then the 2029.
And then just reading the way it looks is that buildings with regulated units are exempt, but the market rate units – market rate buildings are not. So maybe you could just talk about sort of how your portfolio lays up again against for 2024 in the 2029 threshold?
Sure. So, let me just get a little bit of context. So really the bill is trying to measure those greenhouse gas intensity. They've come out with a calculation that has kind of a mandate for 2024 and then another decline really beginning in 2030 I believe. So, I think just looking at the portfolio and thinking about where we have properties rolling off kind of the 421A that won't be subject to this stuff we're anticipating about 4,500 units or about 70% of our Manhattan and Brooklyn unit.
In 2024 we will only need to take prescriptive measures as they will still be subject to some form of kind of rent stabilization. So that being said, I would say the company we've always been focused on energy consumption and efficiency. So we're not – we're still working through with a consultant to understand our baseline but we're not as concerned about this 2024 requirement. But it looks like it's about a 40% reduction in their calc as to where this benchmark is for 2030.
And I would say that reduction is going to take some work to achieve, but we're just we're up for the challenge but we're not really sure yet how much work we're going to have to do to be able to hit that benchmark.
Okay. But basically for the initial part 70% of your portfolio is effectively shielded because...
Yes. I mean, but you still need to take prescriptive measures in there. So yes, you're shielded from the actual calculation or the penalties from it but there are still things you're going to need to do. But we have a lot of confidence just given our focus over these years that we've already done most of those.
Yes, we've got a lot of cogent that we do in New York we've got a lot of – with the sustainability and efficiency initiatives we've done a lot of work on these assets already that you know is gone well for us. You'll see us do some work. A lot of that Alex, I bet you we would have done anyway.
Okay. Thank you, Mark.
Thank you.
Thank you. Our next question comes from John Pawlowski with Green Street Advisors.
Thanks. One quick follow-up on the New York City disposition. The 4.4 disposition yield, could you share the like the sellers cap rate what the impact from burn offs of 421A would be on a cap rate basis?
Yes. We try to based on what the sellers or buyer pardon me is willing to tell us John. Understand what their cap rate is. We think it's about the same as ours initially that there might be you know about the same thought process. Again, we all know what the renovation thought process is. So I don't know – I don't have right now with me the step up schedule for that specific asset. We certainly could have that conversation with you later. Bob, you got any detail on that specific asset?
Yes. The only thing I can say is as it relates to our own kind of rate of growth from 2018 to 2019, it was about $900,000 was the step up from the real estate tax piece, but that's all the color I have at the moment.
Okay. That helps. Thanks.
Thank you.
Thank you. At this time, I'd like to turn it back to our presenters for closing remarks.
All right. Before we end the call, I want to give a very special thank you to John Lennox, our Senior VP of Financial Planning and Analysis who is retiring today after 35 years with our Company. John has been a valued friend, colleague and teacher to so many of us in our Company and a mentor to both me and Bob Garechana as CFO's. We wish him the very best in his retirement. So thank you all for your time today and have a good day.
Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.