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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 Essex Property Trust First Quarter 2019 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC. When we get to the question-and-answer portion, management asks that you be respectful of everyone’s time and limit yourself to one question and one follow-up.
It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Schall, you may begin.
Thank you for joining us today, and welcome to our first quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments and will end with Q&A.
Our first quarter results represent a good start to 2019. Core FFO per share grew at 4.5% year-over-year and was $0.04 ahead of the midpoint of our guidance, primarily due to solid operations, which John will discuss in a moment.
Market rent growth was up 3.1% from the start of the year through March, which was in line with our expectations. As such, we are not making any changes to our full-year rent or revenue assumptions at this time.
We are pleased to be raising our 2019 core FFO per share midpoint by $0.05 following our first quarter results as a result of great execution from Essex team. Angela will provide more detail on the guidance increase in a moment.
Taking a broader look at several economic indicators, we are feeling pretty good about the setup for Essex in 2019. Job growth, both nationally and in our metros decelerated earlier this year, slightly underperforming our annual expectations on Page S-16 of the supplemental. The most significant underperformance was in Southern California, some of which may be attributable to year-end market volatility, the government shutdown, and cost reductions related to the merger of Disney and 21st Century Fox.
Less robust economic conditions both in the U.S. and globally has tempered inflation expectations and reduced the chances that the Fed will raise short-term rates in 2019. In our experience, lower interest rates and steady economic growth generally provide an attractive environment for NOI growth and asset value appreciation.
While we are closely monitoring job growth, we are encouraged by other economic indicators in the Essex markets such as office construction, venture capital investment, job listings, and personal income growth, which are all either accelerating or trending at healthy levels. Major developments of large-scale office projects continue especially in our Seattle and Northern California markets.
Under construction office projects from San Francisco to Silicon Valley aggregate almost 14 billion square feet, while Seattle is adding approximately 8 million square feet both representing greater than 5% of existing stock.
Venture capital investment recently reached a record level in the Bay Area with over $60 billion invested in the region on a trailing 12 month basis supporting continued strength for the Bay Area economy. Several West Coast-based unicorns are expected to complete their IPO in 2019 and much of this liquidity is likely to be reinvested back into the local economy.
We continue to track job openings in the Essex markets for the 10 largest public tech companies which recently reached over 26,000 job postings, representing a 33% increase in the past year and the highest level since we started tracking this information several years ago.
Amazon's job openings in Seattle also reached an all-time high with over 11,000 openings. The competitive environment for talent on the West Coast is driving average income higher. For example, growth in per capita personal income in the Essex markets grew over 6% last year, and is expected to remain strong, growing at a similar level in 2019.
With income growth outpacing rent growth, affordability has improved in all of our markets, as compared to one year ago. Each of our markets rent to income ratio with the exception of Ventura is now within the upper end of the desired range, and San Francisco now has a rent to income ratio of 26.4%, which is below its long-term average for the first time since 2011.
In summary, against the backdrop of low interest rates, several of the most relevant economic indicators in California and Washington suggest healthy demand for rental housing. Fast growing and innovative companies continue to attract top paying talent from across the country, leading to higher average incomes and improved rental affordability.
On the supply side, we've seen no noticeable change from the commentary provided on our last quarterly update. We continue to see delays in development deliveries, which are already factored into supply estimates on Page S-16 of the supplemental. We are aware that other data providers have much higher development delivery estimates for the Essex markets and believe that their estimates will be lowered as we proceed through 2019.
In addition, perspective yields on new development deals continue to decline as the tight labor markets are causing construction cost increases that exceed rent growth. Overall, our delay adjusted supply forecast for 2019 have not changed.
Looking a bit further into the future, we are encouraged by our recent decline in residential permits in our markets as shown on Page S-16.1 of the supplemental. Residential permits which include both multifamily and single-family housing have fallen about 10% from the peak we recorded in the second quarter of 2018.
While we can't be certain the permitting activity will not reaccelerate, we suspect that the recent decline is attributable to financing and other consequences of compressing development yields. The decline in permits is a good indication that capital is responding to lower development returns, which should lead to lower multifamily supply beginning after 2020.
Turning to the investment markets, we've seen no significant change to cap rates for A or B quality properties. As I've mentioned in prior quarters, cap rates generally do not move quickly and are mostly a function of capital flows. As such, we try to create value for our shareholders by arbitrating the differences between public versus private market pricing. We took advantage of this disconnect in the fourth quarter of 2018 by selling 8th and Hope, a Class A, high-rise property located in Downtown LA at an attractive cap rate and buying back the stock at a discount to NAV.
In the first quarter, we saw a nice improvement in our cost of capital and use this opportunity to buy out our partner's interest in One South Market at an accretive yield. One South market is a Class A high-rise property located in the heart of San Jose and can be seen on the cover of this quarter's earnings supplement.
With Google in the early stages of developing over 11 million square feet of office space near downtown San Jose, we are happy to increase our exposure to a high-quality asset and a great long-term market.
Given our improved cost of capital last quarter, we are actively looking for acquisition opportunities and we continue to have an ample preferred equity pipeline. We will continue to underwrite assets with the same diligence and process that have helped us succeed in the past.
Lastly, regarding California regulatory matters, there are many moving parts as a variety of state and local government officials attempt to balance the need for more housing to address chronic shortages with the expanding rental protections. We will continue educating others with respect to the unattended consequences of rent control while helping to create housing at an attractive risk-adjusted return to our shareholders.
With that, I'll turn the call over to John Burkart for some more color on the quarter and our markets.
Thank you, Mike.
We started off the year strong achieving year-over-year 3.1% revenue growth for the first quarter which exceeded our expectations due to one-time other income in March. At the Citi Conference, we published our January and February preliminary revenue growth rate of 2.7% and we noted that are scheduled rent for the same period grew approximately 3%. That trend continued into March 2019 where scheduled rent grew 3.1% over the prior year's period.
The variations in revenue growth rates relate solely to other income. March 2019, other income was elevated due to a combination of line items including lease break fees, one-time filming income, and early utility collections related to the spike in natural gas cost in January.
Occupancy for the same-store portfolio in Q1, 2019 was 96.9% or 20 basis points below the prior year's period as expected. We continue to see opportunities to create more value in other income line items.
In the first quarter of 2019, our parking revenue is up 14.2% compared to the prior year's period and we expect that trend to continue. Our expenses came in higher than expected, due in part to one-time costs related to the water and snow damage from the heavy storms in January and February.
Additionally, our gas expense spiked due to both an increase in the use and rates caused by the colder than normal West Coast winter weather. Fortunately, some of the utility cost increases were offset by declines in electricity costs related to our green initiatives, including the installation of PV panels at over 50 properties.
We continue to make progress towards our digital transformation objectives, completing the implementation of work day, a paperless mobile HR platform that will enable - that will eliminate printing and trips to the office to sign documents reducing labor while playing a foundational role in our steps to success program which is focused on growing employees careers and related compensation at Essex.
The rental market was strong as we expect in the first quarter. However, it's slowed down since the quarter end with SoCal being the weakest. It's hard to say what the driver is with such a small sample period although it appears to be mostly supply related as the weakest markets are L.A. and Alameda Counties.
Now, I'll provide an update on our markets. Seattle employment growth continues to outpace the U.S. and other major East Coast markets posting year-over-year growth of 2.2% for the first quarter of 2019. Amazon continues to grow their presence in the East side, announcing plans to move the business division from Seattle to Bellevue by 2023 as well as pre-leasing and potentially buying an additional 900,000 square feet office space in Bellevue.
In Downtown, Apple and Oracle are vying to sublease one of Amazon's under construction towers. Dropbox executed a pre-lease with the potential of adding 5,400 jobs to the downtown market.
The north and south submarkets continue to lead in year-over-year revenues for the first quarter posting 3.3% and 5.3% growth respectively followed by the East side with 2.5%, and Seattle CBD improving with 1.3%. Loss to lease was 1.1% at the end of March.
On a trailing fourth quarter basis, Venture capital funding hit a new 20-year high in the Bay Area. So far in 2019, 3 Bay Area tech companies Lyft, Pinterest and Zoom Video have completed their IPOs and others such as Uber and Postmates filed for IPOs with many more IPOs in the process. The liquidity from the IPOs of some of these uniforms will both free up funds for additional investments and provide capital to certain employees who often create their own startups.
Office expansion has been robust. YouTube kicked off an environmental study for 2.4 million square feet of mixed use development in San Bruno. Facebook revealed plans for the 1.8 million square feet mixed use development in Menlo Park. LinkedIn and Alibaba increased their combined footprint by a little over half of million square feet in Sunnyvale, and in San Jose Google pre-leased another 700,000 square feet office park currently under development.
Our Q1 year-over-year same-store revenue growth was led by our San Mateo and San Jose submarkets with 4.5% and 3.8% growth respectively followed by San Francisco at 3.3%, Fremont at 3%, Oakland at 1.9%, and Contra Costa at 1.7%. Loss to lease at the end of March was 1.9% for the Bay Area.
Continuing South, Southern California posted a weak quarter for employment growth averaging only 90 basis points for year-over-year Job growth or half the national average in Q1 and well below our 1.3%, 2019 estimate on the S-16 in the supplemental.
In 2018, the BLS showed lower employment growth for San Diego, Orange County and Los Angeles and then revised these markets up between 50 and 100 basis points with the March 2019 prior year revision.
Los Angeles actually performed below the Southern California average posting 70 basis points growth for the period. One of the employment categories that showed weakness was Motion Pictures, which was down approximately 10% during the first quarter. It is unclear what impact, if any, the Disney 21st Century Fox Studio merger maybe having a local employment. However, they have stated that they expect to achieve $2 billion in cost synergies, which will include staffing reductions.
At the same time HBO expanded their headquarters in the market adding just over 110,000 square feet in Culver City. Workspace companies such as WeWork, Knotel and Spaces expanded their combined L.A. footprint by over 300,000 square feet. Year-over-year revenue growth in Q1 was led by West L.A. at 4.6%, Woodland Hills of 3.5% and Tri-Cities at 3.2%. L.A. had a loss to lease of 1.1% in March.
Although Los Angeles Q1 revenue growth was very strong, we've seen a reduction in the year-over-year market rent growth rates, which may be related to the combination of lower employment growth, and the aggressive lease-ups in Downtown L.A. with some lease-ups offering concessions that exceeded 8 weeks free rent.
In Orange County, jobs in Q1 grew 90 basis points year-over-year, with the largest gains in professional business services. In January, the BLS posted 2018 benchmark revisions which erased all prior year's reported softness in this market.
On revenues, the South Orange submarket continues to lead with 2.4% year-over-year growth in Q1 and the North Orange at 1.8% for the same period. We ended March with a loss to lease of 60 basis points.
Finally, in San Diego, year-over-year, job growth was 1.4% in Q1. Year-over-year revenues in Q1 were led by our Oceanside submarket with 4.8% growth followed by Chula Vista with 4.3% and North City with 2.9%. Currently, our portfolio is at 96.8% occupancy and our availability, 30 days out is at 4.3% with loss to lease of 1.1% for March, 2019.
Thank you. And I will now turn the call over to our CFO, Angela Kleiman.
Thank you, John.
I'll briefly comment on our first quarter results and increase to the full-year guidance and provide an update on our investment and capital markets activities. I'm pleased to report that our first quarter core FFO per share grew 4.5% to 3.23% exceeding the midpoint of our guidance by $0.04 which resulted mostly from one-time revenue items, as John Burkart highlighted earlier.
For the full year, we are raising the midpoint of our core FFO guidance by $0.05 per share to 13.08. This is primarily driven by a more favorable capital markets conditions as the pricing of our first quarter bond offering was better than originally contemplated in our guidance. Overall, this revised midpoint equates to a 4% growth in core FFO per share for 2019.
Moving on to investment activity, during the quarter we originated two new preferred equity investments which comprised of a $24 million investment fully funded at close, and a $36 million investment funding in July and will not before we funded until the end of September.
Year-to-date we had early redemption in two preferred equity investments totaling $27 million. The typical term of these investments is three years, but the timing of our pay-off is often tied to the developers, ability to obtain long-term financing or sale of the projects which can result in lumpy repayment and can be difficult to anticipate.
Turning to capital markets activity. During the first quarter, - our cost of capital improved as the tenure dropped by over 50 basis points since last November. We took advantage of these favorable conditions by issuing $500 million of unsecured bonds at an average rate of 4%. The proceeds were used to repay secured debt that has matured through April over this year.
For the balance of the year, we plan to repay approximately $400 million of debt, which consist of $110 million maturing this year plus $290 million maturing next year, but can be repaid early with no prepayment penalties. The reason for making early repayments is the cash benefit, although the effective rate on this $290 million debt is 3.8%. The cash rate is 5.5%, which will allow us to generate over $3 million of additional cash savings on an annual basis. We have access to a variety of capital sources, and we'll continue to monitor the capital markets to optimize the refinancing. With over $1 billion in availability on our line of credit, 22% leverage and net debt EBITDA of 5.5 times, our balance sheet remains in excellent shape.
That concludes my comments and I will now turn the call back to the operator for questions.
[Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
With respect to guidance, you mentioned that the first quarter, you had a one-time benefit. So just curious how we should expect the cadence of same-store revenue growth now through the balance of the year?
Hi there, it's Angela here. The cadence given the first quarter performance on same-store, we had originally anticipated that first half was going to be much lower than the second half and now they're going to be about the same. So we're not changing our same-store guidance and, but because of the first quarter revenue though just end up being more comparable.
And then, you guys talked a little bit about some softening trends. Subsequent to quarter and you highlighted Alameda in LA. I was just curious if this is being offset by strength in many other submarkets?
Well, this is John. That's a great question and the answer is yes. We are seeing other parts of the Bay Area that are a little bit stronger and certainly Seattle is a little bit stronger. So there is an overall balance there, the whole portfolio performed a little bit better in Q1 than it started out to perform in April, but again, there is clearly a little bit more strength in some of the tech markets.
Our next question is from Nick Joseph with Citigroup. Please proceed with the question.
You mentioned improving affordability, there continues to be a broad push for rent control nationally and specific to your markets, Governor Newsom in California appears to be supportive of some additional rent control despite the defeat of Prop. So how do you think about portfolio positioning and capital allocation going forward given the current political backdrop?
I guess I want to take a step back from that and to talk a little bit about the overall discussion, and that because I think it's much more balanced than it was a year ago. And by that I mean, I think that there is more recognition that if you push too hard on the rent control side that will have a pretty dramatic impact on the housing production within California and Governor Newsom has been part of that discussion and part of his campaign was trying to produce 3.5 million new homes between now and 2025, which would be somewhere around 500,000 to 600,000 per year versus about 80,000 per year that we produce for the last 10 years.
And so we also noted that he wanted to protect letter. So striking that balance, I think is what the legislature is grappling with and lot of the things that are happening we are focused on that. I think that what we've done is tried to identify the best long-term growth markets for multifamily property. We think in those markets and it seems like other potential places that we might be interested in investing say Oregon or Colorado or Florida or some of the bigger East Coast cities are having some of the same issue. So I don't think this the California thing, I think it's a broad movement and so I think that we are pretty comfortable with our existing geographic focus.
And then just how do you think about underwriting the preferred equity deals versus more our acquisition or development deal? And I recognize there, the risk profile is different, but how from FX at this point you underwrite them?
We underwrite them much like we underwrite our development deals, our direct development deals. And so, in other words, we look at costs and the spread between what acquisition values are and what the development yields are in order to get comfortable with that and what we are trying to do is we're trying to find the best let's say development oriented strategy for the company. And the reason why it focuses us on preferred equity investments is because we don't take that upfront risk between when we are financially committed to a land purchase. Yes, because we step in those transactions at the point that the deal is closing in construction is beginning, so we've eliminated that front end risk element. So we think it's just a better risk reward equation for the company.
Our next question is from Trent Trujillo with Scotiabank. Please proceed with your question.
Just looking at Seattle. Real quick, I think your midpoint in guidance calls for similar growth in 2019 versus 2018, despite some new supply and we've seen some areas in the Seattle if they get zoned, so how are you thinking about the potential to continue rate growth trends in that market?
And maybe I'll start. This is Mike and John might want to comment more directly on the market itself. But as to the up zoning, I think it's going to be several years before you really see the impact, the potential impact of that and it's not as quite as simple as hey, there's going to be up zoning and therefore this going to be more units produced because there are affordable unit requirements and construction costs, as you go up in density can increase. So I would say it's not just a slam dunk that we're going to see it significant increase in the amount of developed departments in the Seattle market. So John can I turn it over to you?
Yes, absolutely. As what we're seeing right now in Seattle is overall continued strength, which was consistent with the end of last year. The supply is getting absorbed as I mentioned previously, the job growth is strong and it continues to absorb that supply. So we'll see what may happen is maybe were a little stronger in Seattle and little weaker in LA overall with our guidance but Seattle is certainly performing well the tech markets are performing well. Does that answer your question?
Yes, sure it does. Thank you. And I guess touching on theme from earlier in terms of capital allocation, you've been opportunistic in buying back shares. And since your repurchase the stock has rebounded out 15% and you're now trading above consensus NAV. So, at what point do you consider issuing equity as a source of funds for the acquisition opportunities that you cited in your prepared remarks?
Well, keep in mind that for our investment activities we balance the cost of capital or the spread. And so it's really gone through driven by that. We haven't issued yet so far, because we had proceeds excess proceeds from the sale of 8th & Hope and our preferred equity investments have been funded by the redemptions and so until we have a need for that capital, we'll take a look at that point in time, what are the best opportunities are, whether it's issuing over the market over the broad market or via joint venture or dispositions and that relate to also on the divestment side what yield that we producing to get the best spread possible.
Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.
With affordability improving in all of your market and all these tech IPOs coming out, can you just discuss what that means for the housing market and your ability to push rents, above the 3% market rental growth per cap?
John, this is Mike. And that is the key question. I think affordability is, has been a key constraint over the last couple of years, plus I'd say peaking development pipelines and when development deliveries occur in essentially several properties being delivered at one time you start seeing these concession levels increase which is, -- our ability to push price to this point. So we see those we see those force is changing somewhat over the next couple of years and not to a huge extent but on the margin, and as a result of that, we think that there will be more pricing power go in a few years down the road.
On your acquisition of the joint venture stake at One South Market. Can you just remind us if that was partner led or your decision. It sounds like it was more years and remind us how you to derive purchase price?
Yes, on the One South Market transaction, our partner had a life on their fund that was coming to an end. So the timing was driven by that. We normally wouldn't have choose to say market and asset in the fourth quarter in the midst of on the tailwind of Prop 10 Vote. So it's really driven by them.
And the purchase price was it – were there a lot of bidders for that stake?
Yes it was broadly marketed and the we end of purchasing it at, at the growth of $179 million and we ultimately - it makes sense to transact with us on several level because we already own the assets, and it was a certainty of execution as well and the pricing makes sense to us.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
Two questions for you. Mike, just first one going back on the regulatory front, there have been some articles about certain municipalities are going, putting in rent caps or different sorts of right controls subsequent to the defeat of Prop 10. So can you just provide a little bit more perspective on this? And are you guys seeing any impact in the markets in your markets? Or is this more of a localized bank that doesn't seem to be spreading?
Yes, Alex. Good question. I would say that we are at the beginning of the process and so it's going to take some time to work through all the different regulations that are out there. Keep in mind that we have concentrations really four cities in California whereas there we operate in about 80 cities. So we're pretty diversified within California as it relates to this rent control issue and there isn't, it isn't like a change in any one municipalities going to have a huge impact on the company.
So I think that's important to keep in mind, but there has been increased regulation proposals on the local area, a lot of them had to do with these just cause of evictions and higher cap. So, in the case for example of Glendale capping rents at 7% and again over long periods of time we grow rents at somewhere around 3%, 3% plus or minus, so some of these caps are set at a point it should not have a dramatic impact on our longer-term results.
And so, we're cautiously optimistic. We've left the California for responsible housing entity in place so that we can have a coordinated industry response to all these various proposals and, but we're working through and there is, we can speculate about what might happen, but it's so early on that I think it would be may both challenging and in precise to do so. So we're going to avoid, we trying to look into the future, because at the end of the day, we don't know what exactly is going to happen.
And then the second question is for Angela on the guidance , and maybe it's continuing on with the legacy of Mike Dance. But if you look at your NOI, your NOI expectations for the year are higher but you left the NOI, same-store NOI range unchanged, your interest expense is now higher. So you know just thinking about it, is it the fact that it's just too early in the year we don't want to be changing your NOI guidance or are there other things that are going to sort of push back on the NOI, because otherwise it - it sounds like both should have moved up commensurately with your performance in the first quarter versus, you know, is there a reason that you're sort of holding back on growing the same-store NOI range?
It's a good question and you're right, it's a fine line to try to block, but in terms of, let's just make sure that Tom that you understand one - on the NOI, it looks like there is a change the midpoint on our guidance page. But that is really because of the One South Market consolidation. It was off balance sheet and so, rolling that that to consolidated NOI and then as you know, and then we have our partial offsets to that. And so at the end of day, it's not a meaningful change to NOI at this point and nor do we see a meaningful change on a trend line basis.
So it's it and as you know, we've always make sure that there is of course a level of conservatism. So we don't miss. Having said that, we certainly are seeing anything so compelling right now that it makes sense to try to get ahead of the numbers and move guidance.
Our next question is from Rich Hightower with Evercore. Please proceed with your question.
So a lot of my questions have been asked already, but I guess just to follow up on the guidance question and what you're seeing currently. Are you able to tell us where you're sending out renewals over the next 60, 90 days at this point in April? And what you're achieving?
I can answer that. I think that's an important to understand is we really, we send our renewals out like six days in advance. So our Q2 renewals have gone out largely almost all of them at around 4.9%. So very strong, but again, realizing that I also mentioned in the opening that the market little bit weaker at April, so those may get negotiated down a little bit, but they are up from where they were in Q1 was about 4.1 and Q2 that about 4.9 at this point where they were set out.
That is helpful and that's in aggregate, I mean can you break that down quickly maybe across the three sort of bigger markets?
Yes, absolutely. So that is an aggregate and so we have at about 4.3% for SoCal overall about 5.4% for Nortel at about 4.9% for Seattle.
Our next question is from Drew Babin with Robert W. Baird. Please proceed with your question.
Question on, your deliveries coming in later this year in San Mateo and Santa Clara. I was hoping you could kind of talk about the specific submarkets in the Bay Area. Obviously supply coming into the Bay Area is very some market specific and markets are kind of all over the place in terms of their performance. But I guess, can you comment specifically on where development through achieving first occupancy in 2Q and 3Q?
Drew, this is Mike just make a couple of quick comments. First is that they are, we've had a pretty severe winter here. And so they are, from a timing perspective being pushed back somewhat given rain delays and that type of thing, so that's the first comment. The Station Park Green development is about a mile from our corporate office here in San Mateo and it's a very strong sub-market effect I think is that the strongest region. I think John within the portfolio right now.
Yes, that absolutely has the strongest region, rents are up over 6% year-over-year, and haven't seen so seems like we've time that well and then Milo is in Santa Clara and that market has a little more concessionary activity, but it still seems like San Jose and tech markets are doing so well from an employment perspective that we think that those markets are well positioned, both properties well positioned and timing is good.
And then on downtown LA, would you say that the bulk of the supply that you're expecting there this year has hit or is hitting now as you mentioned the weakness kind of so far in 2Q or is there more to come as we get through later into the year?
We have about -- our estimate is about almost 12,000 units in 2019 and actually increasing a bit in 2022 to almost 13,000 units in downtown LA or LA, which is the downtown is the primary component of that. And it really doesn't slow down until Q4, 2012, so I think we're going to have continued supply deliveries for the next - at least the next year.
And then one for Angela, would you say that your preferred investment I guess aggressiveness maybe increases given the redemptions in the first quarter. You may be looking to do more preferred investments as was implied in the original guidance this year, or might the proceeds just be spread among other investment opportunities as well?
Good question. Generally speaking for on the preferred equity investments, we would like to do more than we have always targeted on the pipeline just because the yield is so compelling and as Mike mentioned earlier and the risk adjusted return also makes a lot of sense.
So that’s just a general statement, but as far as what we're expecting we had guided, between $50 million to $100 million and we're not at this point ready to go outside of that guidance and because primarily we do have redemptions to offset that. And so, but to the extent that we can ramp up, we were certainly not to do so. But at the end of day, we still have a very disciplined underwriting process. And so even if there are a lot more opportunities, it doesn't mean that work to us adequately to more deals.
We’re pushing that.
Our next question is from Rob Stevenson with Janney. Please proceed with your question.
Are you seeing any difference in rent growth between your assets at the high-end price point wise within the specific market versus those that are sort of in the middle or somewhere in between?
Yes and no. Certainly, if you're talking Downtown LA, where we're competing head on with supply, the high-end is, if we're talking in other parts of the portfolio, it's not necessarily that way. We love the portfolio we have. It's broad in the sense of geography and as well as in the sense of As and Bs. And it performs very well. But there, if you're competing head on with supply again say Downtown Oakland, Downtown San Diego, Downtown LA those areas, the newer assets are finding more challenges with rents for sure.
So no unless competing with supply, there is no sort of drag on A and A+ assets in terms of rental rate growth?
No, I mean it wouldn't in those submarkets. Yes, definitely but outside the sub-market. Yes, no it depends, it's really a function of the concentrations of lease-ups and especially those that are offering large concessions that's what really impacts price.
And you guys haven't started to do development. I think roughly 18 months or so. Can you talk about where you are in the process with your current land parcels and anything that you might be thinking about doing there and then what's the potential for additional redevelopment projects starting in 2019?
Yes, Rob. That's another good question. On the direct development side, again the dynamic that we talked about a couple of times over the last year or so where construction costs are growing faster than rents in general are essentially pushing back some of those potential starts.
We do have a couple of relatively small direct development deals that we could start, we're trying to find a window that sort of optimizes there, the cost structure on them. And so we've again had a preference for preferred equity investments. As a result of that, we're again, someone else takes those risks and we step in at the last minute before construction begins and earned a very decent yield.
So from a variety of perspectives, I'd say direct development is the third most interesting investment opportunity at this point in time, given that that headwind behind preferred equity investments number one and acquisitions either in a joint venture or on balance sheet would be number two. So we're going to continue to be cautious, but we don't have a huge land inventory, as you know. And so we're just going to sit back and wait for their optimal time to start.
That redevelopment starts?
Sure, I'll answer that. We are looking at several assets in the same-store portfolio currently. But I would say there's other assets that we've started redevelopment programs on that are not in the same-store portfolio. So they're not outlined in our financials, the newer acquisitions or joint venture transaction. So we continue to find opportunity in the portfolio, continue to monitor that. We’re also balancing that watching the regulatory environment and making sure that the program is going to work for all constituents.
And then, out of the 17 preferred equity investments, you have currently. Are you expecting to own any of those or you expect to get repaid on all of them at this point?
Rob, no we don't know. We don't have an option on any of them and we always try and get an option, but we find that our developer is typically more aggressive in terms of what he thinks of values are, than we are, and therefore it's not worth it to us to negotiate an option.
Having said that, we always have the seat at the table when it comes time to refinance or sell these properties and there's been a couple of cases where we have actually bought the properties and-or in one case Stadion is a preferred equity provider after stabilization has occurred . So we like the optionality of the preferred equity investments, because both upfront. In some cases, we've chosen to be a part of the ownership group and at the back side, we have potential for buying the property and we're remaining involved in some way like in a preferred equity type of format. So we try to look at that portfolio as part of our opportunity set.
Our next question is from Hardik Goel with Zelman & Associates. Please proceed with your question.
I wanted to ask about the parking fees and maybe other ancillary revenue opportunities that you see and how substantial that could be in the longer term like the runway you see longer term and also whether that was concentrated in a few markets or whether that was broad-based initiatives if you could just talk through some of the details there?
Yes, I'm glad to. We do see pretty good amount of opportunity in the other income line item, line items and they include some of the initiatives we have right now, which include renting out amenity space to non-residents. The same thing, renting out parking to non-residents also looking at our parking space with current residents in the light of revenue management you might say, recognizing the different values of the different spaces and charging it accordingly.
So we do see many opportunities, we're working on some smart unit pilots right now and a variety of other items. There are some offsets as well certainly have cable cutting and some other line items that are offsetting that. As far as for the magnitude of this, we're pretty focused on it. We think there is a good future there, but we're not at a point where we were putting up enough results to then translate that into numbers. I don't think you'll have a material impact on 2019 and we'll see an update as time goes, but we have quite a few things going in the other income line items.
And just as a follow-up to that, do you have considered looking at assets that might have excess parking in your view to maybe add Snap-on units, maybe like 100 units snap-on development sort of deal that some of your peers have done, what kind of opportunities exist across your portfolio there and have you considered them?
Yes, we're looking at the real estate every which way you can to try to drive the most dollars per square foot, we can. So there again we’re not in a position to say this is the, this is the future that we've summed it up, but we are evaluating many, many options and there is some units, there were some parking that's being converted into units at some places, there's all kinds of things that are happening, and we’re evaluating the options across the portfolio.
Again, the biggest thing for us though is to be very clear, is we're always focused on good real estate in the right locations, the right markets that's always number one and that is what we have as a great portfolio, but as far as optimizing it, we're working very hard at this point, to optimize our revenue.
Our next question is from John Pawlowski with Green Street Advisors. Please proceed with your question.
John, just a quick follow-up on the leasing spreads in 1Q, you sent out renewals at 4.1 But what did you actually achieved in the first quarter on renewals and as well as new lease spreads?
Yes, that was fair enough. So we actually achieved 4.1 in Q1 and that number will move around some. But we did achieve 4.1 in Q1 and the new leases in Q1, and again to be clear, this is light kind leases which typically are basically 12 month leases and we provide information this way to be insightful into the marketplace. So the new leases on light kind were about 3.6% year-over-year in Q1.
And then Mike, certainly back to the political conversation. I don't want to focus on rent control. I want to focus on regulatory barriers to supply I guess like some comments from your lens, the next 5, 10 years, how will that the backdrop be different, when the Governor is setting higher regional housing in targets. And then you have legislation like Senate Bill 50 gaining traction. I guess what markets could see change in supply and what markets would probably be a non-event under different regulation?
Yes, John, that it's a good question and I know you guys have written extensively on this topic. Again I go back to what I said before, which is we are at the beginning of this process and trying to understand exactly how these things are going to roll out and what they will mean will be something that we will spend a lot of time on to try to understand and to ultimately benefit from it.
SB 50 which is greater densities near public transit is something that California has talked about a lot and it makes imminent sense if they can figure out how to work through some of the logistical issues. Notably, for example Huntington Beach has been sued by the State and is counter sued over who has the right to dictate housing policy and I expect that some of that type of activity will continue as we work on our way through this process.
So I think unfortunately, it's a little bit too early to tell what the impacts are in the case of Seattle, for example, I think you guys suggested that maybe it be 1% of stock. I think that's probably a bit aggressive, there could be some impact and candidly, there are markets that really need the housing and Seattle would be one of them, given it's incredible job -- San Francisco would be another one for example the different allowing greater office and residential construction is probably a net positive to have additional housing in that area given the amount of office supply that's coming in, and that's why we spend some time talking about the amount of office that is under construction, because if you have, as we said before, if you have somewhere around 5% under construction on the office side and you're producing about 1% on the residential side, it seems like there is an embedded imbalance in favor of demand oversupply embedded in those numbers.
So the short answer is, we don't know, but we are engaged and studying it carefully and we will stay abreast of what's happening.
Our next question comes from Omotayo Okusanya with Jefferies. Please proceed with your question.
Given that you still have an interest in development and fairly limited land bank. Just curious about interest in doing mixed use development maybe working with a retail REITs or someone under retail side on moderate densification projects, what would get you interested in doing things like that?
Hi Tayo, this is Mike. We have actually worked with a number of retail organizations trying to determine whether we can provide the housing and I would say those conversations are though interesting and they've to some extent you've gone pretty far.
But we haven't been able to actually strike a deal on those transactions. And so over to we're trying and you're right there. There is a natural I guess synergy between the two of us, if we can figure out how to get the economics right. The challenges, the same challenges that we have elsewhere, which is construction costs are too high and to some extent your retail partner looks at it and it goes well, it really cost that much to build that, but when you get through the numbers. That's what, that's what happens.
I'd say it isn't necessarily the will isn't there, I'd say it's more a function of cost and yields and essentially the land valuation when you start looking at a spin-off of a part of a property from a retail company. So it's complicated, but it's possible. Our general view, again is we need cost to settle down a little bit here so that we have more certainty, because development cap rates measured today untrended in the high 4s. I just don't think that's enough of a risk premium to justify direct development.
Now if we, if we found transactions that were in the low 5s on trended basis again, yes, that would represent maybe 100 basis points of cap rate over acquisition transaction that would be more interesting, but we have not been able to find those transactions.
Angela, I just wanted to go back to your comments about the preferred equity program, if rate you end up kind of staying lower for longer. Should the natural outcome for that program be just less origination simply because the yield may not end up not being as attractive anymore and also because you probably end up with more redemptions as you start to refinance?
Tayo it's Mike, I'm going to take that question from Angela, if you don't mind. I think that it's been interesting because there are, there is more money in the direct development side as it relates to some of the merchant builders out there and in cases, for example, last year where we didn't hit our guidance range on the preferred equity side. What we found was in some of the sponsor is willing to ride an additional check to put more equity into the transaction to get it moving ahead.
So, in our experience there are limits to the amount of equity that the merchant builders can put into transactions to make them work when costs go up faster than rents and it compresses the yield. And but it's hard to tell which transactions are going to move forward and which are not. So I would say there probably are some headwinds there, but keep in mind that our pipeline for preferred equity, we have about $400 million outstanding and we probably are 25% of the capital stack. So that you're talking about $1 billion to $1.5 billion of development. It's just not that big. So I think that we given the size of the West Coast, I think that the opportunity is still pretty substantial.
Our next question is from Rich Hill with Morgan Stanley. Please proceed with your question.
Quick question, it looks like there is some disclosure on lease accounting changes. I was wondering if you just maybe provide us some high level thoughts and how that maybe might have impacted any numbers if at all during the quarter?
Sure thing. Actually for us is simple. On the lease accounting changes, on the P&L side, there is no impact because we've already been disclosing our bad debt in our contra-revenue. And so the only new disclosures that you will see is really at the balance sheet, we break out operating leases and liabilities and so it’s just a new disclosure item and thus far -- they end up net each other out essentially. And so once again, no impact on FFO either.
And then just one quick question, I'm sorry this been asked before, but it looks like expenses were pretty elevated in Seattle. Could you just recap maybe why that's the case?
Happy to. On Seattle, it's really driven by property taxes and it's because in Q1 of last year, we had a disproportionate amount of refunds. Having said that, this is actually the numbers came out as expected, we had expected that Q1 the sale it was going to trend this way. And so that's another reason why we didn't need to revise our operating expense guidance either.
Our next question is from John Guinee with Stifel. Please proceed with your question.
First, Mike you mentioned severe weather last winter, this past winter in California. Is that a little bit of an oxymoron?
It is. I know I felt very uncomfortable using that as an excuse.
Okay, yes two questions quickly. You're coming down the home stretch on some of your development deals that you started construction couple of years ago. If you look at something like Station Park, looks like you have cost per home about 715,000 unit they 500 Folsom of about 750,000. What do you think it would cost you to build these products today if you're bidding out the GC work et cetera?
It's a good question. We do have a Phase for Station Park Green and we have to John Eudy is not here with me today, I know that the costs are up. I don't know what the magnitude is.
So it's higher in both cases?
But I can't tell you again it goes back into that comment I made earlier which is construction costs going to somewhere between, let's say, high single-digits, which is down from low-double digits over the past couple of years versus rent growth, which is in the three plus-minus percent range. So that's how badly, and that's been the problem on the development side.
No, we understand. Second question, any updated yield on cost for these projects as you get close to initial op leasing and occupancy?
We have mentioned our yields in the past, it's kind of there Tom. The size range upon stabilization, which usually you know is another at least a year out from initial occupancy so that only hasn't changed, the rents are coming in at plan on our development.
And then the last question. This is your redevelopment portfolio and I think somebody asked a few questions about it. But the net-net, is it looks like you haven't put any projects into redevelopment idea $25,000, $30,000-$35000 per unit. Overhaul and a lot of years, at least on the East Coast people who doing that more and more. Anything that you just aren't quoting in your sup that our kitchen and bath renovations are things that others might include in our redevelopment pipeline?
Yes, again with let me just talk broadly about our redevelopment program. So right now we're typically doing 2500, 3000 units a year which roughly with 5%, it implies a 20 year life, so that's just taking care of the units. And then on the major renovations, we look through the portfolio and look at opportunities. There are several opportunities we are studying right now that are in the same-store portfolio. It's also common for us as we acquire in assets to see opportunities along those lines. And those are not called out specifically in the supplemental. They're not in the same-store portfolio. So they're not pulled out of it or otherwise identified.
So there are some other assets that we have, we are renovating right now that are outside of that realm. I suspect over the next year. Again, we will add a couple more assets into that, into that bucket that are coming from the same store. The current same-store portfolio. But again, we are working through the opportunities we had we are near completion and those will be coming out and we'll probably be adding a few more, but there's others that are going on right now. That just start, they just starting the same-store portfolio, so that called out specifically.
Our next question is from Rich Anderson with SMBC. Please proceed with your question.
So I don't know if you ever seen this commercial AT&T Wireless commercial when guys going to get surgery and nurse that surgeons just okay or kind of sushi dinner and they said the food is just okay except the Cook went home sick. The reason why bring up that commercial because you started off this conference call by saying things fueled quote pretty good. And I know you're tying that to the job growth discussion decelerating underperforming your expectations, but they're – you also lobbed a lot of other things that sort of paying a relatively good picture for you guys. So I'm just curious, am I over reading your sort of your body language? Or are you really thinking that things could decelerate from here just judging from the way you described it right at the outset.
Well, that's an interesting feedback. That was, I don't think that is our desired goal to be negative on the call at all. We feel pretty good about things, and again, we're off to a good start this year. Yes, I would say, having said that jobs are the locomotive of rent growth. And so if we see any pickup in on the job front, I think it would be it's appropriate that we bring that up.
A lot of those seem like it happened in the first quarter again, there was a huge amount of disruption, stock market, government shutdown, et cetera and so I guess our inclination or hope would be to believe that things will get back to normal as seems like the U.S. economy is doing pretty well and things will be in good shape. So we don't know and we're just trying to make sure we do a good job of essentially shown what we know with you.
All okay guys, you always do a great job about – just seeing it - called away states that I meant as a complement really but just wanted to judge or bigger picture view of things. And second is this Q2 not in New York, a good thing for Seattle or the non-event for Seattle?
I think it's a good thing for Seattle. I mean Amazon –hey, I would say all of these tech companies that have these incredible growth rates, they're going to find ways to grow within the cities that are headquartered in or nearby or else if they can if they can't grow there. So I think all of them have similar perspectives and what are we going to do, how we going to grow, how we're going to pursue our opportunities and they're either going to be successful in working with the local political structure. All they're going to move elsewhere, if that's my view and in this case the political structure elsewhere turned out to be maybe more challenging than the Seattle marketplace and some others. So it led to a different decision.
I would just add that it may turn out to be a lot better for Bellevue as well. We are seeing more and more and getting more indications in the broker channels that there's a lot more interest in the East side, which does make sense. I think they have acknowledged that there have a tremendous supply concentration in downtown Amazon does in the downtown Seattle and they're looking to expand and it seems like the side is the beneficiary part of that.
Our next question is from Karin Ford with MUFG Securities. Please proceed with your question.
There was an article this week in the New York Times about the 2020 presidential candidates courting Renner's. It sounds like a few of them are supporting tax credits on rent. Do you think something like that could be impactful on demand and propensity to rent?
It's a good question and I think anything that helps with the affordability issue will continue to spill more production housing and increased demand and all those types of things, because I think when you start pushing affordability start having more double absent and other things that destroy demand. So I think it would help incrementally but I think that again the broader political discussion is one that is continuing to evolve.
And I think it's a healthier discussion as id said earlier in my comments that it's a more balanced discussion between the need for housing on the one hand and how to have protections and a pretty high level with respect to the residents and the tradeoffs are being I think appreciated by politicians to a greater extent than they have in the past. It's a good thing.
And then my second question is with all the IPO money coming into Northern California, do you think we might be nearing a tipping point on condo conversion economics?
It's another good question and it's interesting in the past year, the price of a for-sale home has not really moved a whole heck of a lot. So we've continued on the perfect side to have rents grow which of course gets capped out and home prices really haven't done that much. Having said that a year ago we had incredible, incredibly large increases in for sale prices. So in the past year actually condo conversions became less appealing when you compare the value of the building. As an apartment versus the value of the building as a condo. So no help there.
Our next question is from Shirley Wu with Bank of America Merrill Lynch. Please proceed with your question.
So Mike, coming back to Amazon and in your further remarks, you mentioned that they have around 11,000 job postings and with news of I'm moving from the operation in terms of that. Now, have you, would you think of, do you think there'll be any changes fundamentals in those, in those markets on supplier demand side, especially in relation to your asset?
Yes, I'll grab that. Clearly Amazon is a major force in downtown Seattle and we don't see that changing. We think they're continual will have continual demand pressure there, but we do see the benefit of some of these movements to Bellevue. We're seeing more than Amazon there's other companies that are expanding out into Bellevue and recognizing the quality opportunity out there.
So we think that will benefit our portfolio, which frankly most of our portfolio is outside of downtown, it's on the east side and a little bit north and south. So yes, we do see the benefit of that in the Belvieu area.
And so on job growth, obviously you mentioned in January. That was at 90 basis points and you're maintaining job growth at one, two. So is that due partially to the conservatism originally baked in that number or do you how comfortable you feel with that number? And I guess what could change that would make you change your mind to either provide that up or down?
Sure. The numbers are pretty volatile to begin with. And last year, as I mentioned in the Orange County, San Diego and LA had benchmark revisions between 50 and 100 basis points, pretty substantial benchmark revision. So, we all focused on what's going on. It's the only number we have and we look at that, but then we look for other checks and balances and that's in part why we look at office space, we look at absorption, rents and other factors and try to triangulate and make sense of it.
Our belief was last year that Orange County was it falling apart and then with benchmark revisions came out. It showed it wasn't falling apart. It actually had solid job growth. We expect the same thing for this year and we don't have any particular reason to change the expectations at this point in time. I think it will kind of come together nicely. We do see some weakness and that's why I pointed out to LA, because we're seeing a little bit of weakness in the rental market. And then that does tie to the jobs market and it kind of becomes a confirming item there, if that makes sense.
Our next question is from Wes Golladay with RBC Capital Markets. Please proceed with your question.
There seems to be a little bit more moving parts heading into the peak leasing season. I am just wondering if you can update us on the strategy for the broader portfolio, as I recall, it was to push rate this year. Is that still the case?
Yes, that absolutely is again our, our position is, again we try to communicate clearly and transparently so, April was a little bit weaker. We don't expect that to be the year, we expect it to be a good year and we are continuing with the strategy we started with and that is to continue to favor rental rates over occupancy, we expect that in 2019, our occupancy will be about 20 basis points below the prior year. And that we are moving forward. As Mike mentioned, it's probably more or less some noise that's going on, but we do want to be transparent in what we see.
And then looking at going back to that preferred equity investment portfolio. Do you have a set repayment schedule or do these things have extensions, those -- that you really baked into the guidance?
I know they have, they have a maturity date. All of them do. And again, as Angela said, potentially can change, it can be moved up or back dependent upon conditions. we received several that have had early repayments given our refinance and completion of construction and some others where we've carried on with a preferred equity investment at a lower outstanding balance for years following the completion just depends. So we’ve - seat at the table is really the key point as it relates to the yield to maturity of the preferred equity investment but on all of them, there is a maturity date.
And then I guess maybe I'm not sure if you have it offhand, but should we model like 19, 20, 21 a breakup 50 to 100 million a year repayments, or is any sort of sense you can give us on how we should look at, we know the investment level, we just don't really have the repayment level.
Yes, I guess you have - the challenge of course from our perspective is to not take something that's inherently a good thing and make it a headwind down the road. So we're trying to size the program, so that our essentially origination will offset the maturities. So to the extent that we do a good job of that that I think that, everything is everything is good. The reason why we don't want to grow the program to a huge level is because we don't want to be in a position that we're rolling it down over time. So we want to keep going, as long as we can. Angela, do you have a comment on what the typical maturity is for that program?
Well, I mean, I think if you want to target. So let me step back, I mean, our program is about $400 million. They tend to have a three-year term. So for modeling purposes, 1/3, 1/3, 1/3 is probably reasonable. Having said that, keep in mind that we also guide to every year at the midpoint somewhere else. 75. So there will be an offset and so if you are going to have roll off, you don't want to say a whole 1/3 of them roll off because then you'll have pretty odd numbers.
Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to your host, Mr. Michael Schall.
Thank you, operator and thank you everyone for joining us on the call today, we are looking forward to many of you to seeing many of you at NAREIT. Have a good day. Thank you.
This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.