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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 Fourth 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 on the Company's filings with the SEC.
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 everyone for joining our fourth quarter 2019 call. John Burkart and Angela Kleiman will follow me with comments, and Adam Berry is here for Q&A.
Today, I will review our 2019 results, summarize our expectations for 2020 and provide an update on the West Coast investment markets.
Beginning with our results. 2019 was a successful year for Essex as we generated 6.4% core FFO per share growth, representing over 50% better growth than contemplated in our original guidance. Same-property NOI grew 3.9% in 2019, which was at the high end of our original guidance, reflecting stronger job growth than we had assumed. For example, Q4 2019 job growth averaged 2.3%, 50 basis points above our initial 2019 estimate. Once again, the tech dominant markets in Seattle and Northern California are leading the way with recent job growth of 3.3% and 2.6%, respectively. Southern California, where economic growth generally resembles the United States, recently added jobs at a rate of 1.5% on a trailing three-month basis.
In addition, continued apartment construction delays resulted in less competition in 2019. We estimate that approximately 33,000 apartments were completed in 2019, about 7% less than expected. We continue to believe that tight construction labor market conditions will prevent significant acceleration of supply deliveries. John will provide more color on fundamentals in a moment.
Our initial outlook for 2019 did not assume a significant improvement in the cost of debt and equity capital. In early 2019, we eagerly bought back our stock at a significant discount to consensus net asset value. As volatility in the capital markets abated and our cost of capital improved, we altered our business plan and began actively pursuing investment opportunities. As a result, we are pleased to report that we exceeded the high end of our acquisition and preferred equity guidance ranges from the focused effort of our investment team.
In 2019, we added ownership interest in eight properties for $856 million, as further detailed on Page S-15 of the supplemental. These communities are mostly located in the tech centers along the West Coast and submarkets we know well and expect to be added to the portfolio’s growth profile. We also committed to over $140 million to new preferred equity or subordinated debt investments, significantly better than our production in 2018.
In summary, 2019 demonstrated how we attempt to add value throughout the economic cycle.
2019 was also an important milestone for Essex as we celebrated 25 years as a public company with some notable achievements, a 17% compounded annual rate of return for our shareholders since the IPO through the end of 2019. In other words, $100 invested in our IPO would be worth over $5,000 today, with dividends reinvested.
Through several economic cycles, our business model has generated an 8.4% compounded growth rate in FFO per share and a 6.4% rate of growth in our cash dividend, which has increased every single year. We were very pleased to learn that Essex was recently added to the S&P 500 Dividend Aristocrat index. I'd like to thank all of the longstanding partners, the Essex team and shareholders who’ve contributed to the Company's achievements over the last quarter century.
Turning to our outlook for 2020. We continue to see healthy demand for rental housing. Recent job growth for our West Coast markets continues to exceed the 1.7% forecast for 2020, on page S-16 of the supplemental. However, we continue to believe the job growth will likely decelerate in 2020, given tight labor market conditions and a low unemployment rate, which was 2.7% in the Essex markets as of November, down 50 basis points from a year ago.
Turning to slide S-16.1 in our supplemental. We highlight a central theme of our West Coast focus. The chart on the right of this slide demonstrates that job growth has remained strong on the West Coast, and reaccelerated in 2019, diverging from the rest of the nation. On the left side of the chart, we note that multifamily permit activity in our metros peaked in 2018 and has declined about 14% from that peak, again, a divergence from the recent trends outside our markets. Rising construction costs and a challenging regulatory environment continue to compress development yields in most of our markets, which should lead to fewer supply deliveries in the future.
Our delay adjusted supply estimates for 2020 have not changed from our original estimates last quarter. Notable changes year-over-year indicate about a 30% reduction in Seattle apartment supply in 2020 and about a 45% increase in Northern California. Tight labor market conditions on the West Coast continue to push incomes higher. Per capita personal incomes are estimated to have increased 6% in our markets in 2019, significantly higher than the U.S., average of 3.9%.
Personal income growth has outpaced rent growth in most of our markets since 2016, which is leading to improved rental affordability. Consistent with this trend, the percentage of customers who moved out for financial reasons or a rent increase, was almost 16% in 2015. In the fourth quarter of 2019, this factor accounted for less than 8% of those moving out. Despite last year's outsized media coverage of the failed IPO of WeWork, or the disappointing stock performance of other unicorns, the outlook for economic growth and new jobs in our markets remains favorable in 2020.
Having closely followed Silicon Valley for the past four decades, we're not surprised to see volatility with respect to VC-backed companies. The venture capital model assumes many failures, which are more than offset by the hyper growth of the most successful investments. Bay Area venture capital investments dipped in the second half of 2019, but remained at healthy levels, well above this cycle’s average pace of investment.
We continue to track over 26,000 job openings listed in our markets by the top 10 largest tech firms, a 12% increase compared to a year ago. The largest tech companies continue to add commercial square footage at a rapid pace, which John will comment on in a moment. Overall, we are tracking over 38 million square feet of office construction in our core market, which is almost 70% pre-leased and underlies the need for more housing.
Turning to the investment markets. Cap rates remain stable, with A quality properties and locations trading in the height 3% to low 4% range, while Bs traded 25 to 35 basis points higher. In this environment, we are looking primarily for A minus to B minus quality communities in markets with the best long-term growth prospects.
Six communities we acquired from our co-investment partner earlier this month are consistent with this strategy. We are pleased to increase our stake in these high-quality communities, while earning a $6.4 million promote from significant value creation from our partners and shareholders.
The majority of our development pipeline will be leasing up in 2020. We have experienced our share of development delays due to a challenging construction labor market. However, we remain pleased with the initial customer response at our development communities and the current leasing pace. We continue to pursue development opportunities, but often see a better risk reward relationship within preferred equity and other structured investments.
That concludes my prepared comments. I'll now turn the call over to John.
Thank you, Mike.
For the full year, we achieved 3.4% year-over-year same-store revenue growth, which was an increase of 60 basis points over the prior year's growth rate. Huge thank you to our E-Team for their outstanding work in improving the customer experience while delivering top results.
Our fourth quarter 2019 results were fantastic, with 4% revenue growth of the prior year's comparable quarter. This was driven by strong market and bolstered by our shift in strategy to increase occupancy in preparation for both the seasonally slower demand period and expected elevated supply in the fourth quarter of 2019 and the first quarter of 2020. This resulted in 30 basis points growth from the increased occupancy. We additionally had 40 basis points growth from other income, which included some one-time items such lease breaks. Overall, our markets continue to show strength, driven by year-over-year job growth, 2.3% in the fourth quarter of 2019, which exceeded our expectations by 40 basis points. Income growth continues to outpace rent growth, improving affordability in our markets.
Turning to 2020. Our guidance of 3.1% revenue growth at the midpoint contemplates rent growth for our portfolio of 3%, consistent with long-term CAGRs in our market and what is outlined on the S-16 in our earnings package. Additionally, we have factored in a slight reduction in occupancy of 10 basis points, as well as the negative impact of rent rollbacks related to the recently passed California assembly bill AB 1482, which is a 10 basis-point headwind for our California communities.
Regarding expenses in 2020, we continue to see pressure on utilities, taxes and wages with offsets in controllable, resulting in our midpoint guidance of 3% for our year-over-year operating expense growth. In terms of supply, the bulk of the new apartment deliveries continues to be in downtown location. We project that 2020 deliveries will be about 65% lower in our suburban sub-markets compared to the downtown urban sub-markets, consistent with 2019. Only 12% of Essex’s portfolio is concentrated in downtown urban sub-markets.
We estimate the demand, supply ratio in our markets, assuming it takes two new jobs to absorb each new home, to be 1.7 times, meaning demand is continuing to exceed supply across our West Coast markets.
Lastly, we continue to drive our vision of optimizing our portfolio’s performance through our strategic tech investments, various platform initiatives, and asset optimization through data science and analytics.
Recently, we implemented a new lead management system in our call center, and plan to roll it out to the communities this year. Also in the pipeline is our plan to upgrade 20,000 units for smart home technology and rollout our mobile maintenance platform 2.0 across the company.
Shifting now to an update on our market. In Seattle, our same store revenues in the fourth quarter were led by Seattle CBD with 5.4% year-over-year growth, while other Seattle sub-markets grew between 4.4% and 5%. On jobs, Seattle remains the strongest major U.S. market for job growth in the fourth quarter, growing 3.3% year-over-year. This growth was mainly due to an additional 32,000 jobs in the top four paying industries, a 57% increase from the prior year. Regarding major tax activity in the market in recent years, Amazon has committed to a sizable footprint of nearly 3 million square feet in Bellevue area while recently putting up 770,000 square feet for sublease in Seattle. Although we are seeing some local geographic movement, several other major tech companies such as Apple, Google and Facebook have recently expanded their footprints in Seattle. As mentioned on a prior call, Apple announced it would expand its Seattle workforce by more than 2,000 employees by 2022, a significant increase from its current census of 450 employees.
Other activity in Seattle includes, Airbnb expanding by 60,000 square feet and Bank of America committing to 116,000 square feet of Amazon sublease. On the other side of Lake Washington in Bellevue, Facebook preleased an additional 325,000 square while of Alibaba expanded their footprint by 50,000 square feet.
Office supply and demand is strong in the market with over 9 million square feet of office space under construction, 79% of which is preleased. Multifamily supply in Seattle was down substantially in the fourth quarter and we expect it to decline about 30% in 2020 from 2019. Combination of strong income and job growth as well as declining supply is leading to tight market rental condition.
Moving to Northern California. Year-over-year same-store revenues in the fourth quarter were led by San Francisco achieving 5.4% growth, followed closely by San Mateo 5.2%, Santa Clara at 4.6% and Alameda at 4%. Job growth from the Bay Area averaged 2.6% year-over-year for the fourth quarter. San Francisco, San Jose and Oakland grew at 3%, 2.9% and 1.8% respectively.
The Bay Area continues to maintain higher job growth in top paying industries compared to the bottom paying industries. Office expansion in the Bay Area remained robust in the fourth quarter. This includes biotech expansion activity, about 540,000 square feet made up of Amgen’s new lease in down town San Francisco and Zymergen’s new lease Emeryville. In the South Bay, Google expanded by over 800,000 square feet adding a new lease Sunnyvale, in addition to acquiring a trio of Cisco buildings in San Jose.
Airbnb grew their South Bay footprint by signing a 300,000 square foot lease in Santa Clara. There is currently over 15 million square feet of office space under construction in the Bay Area, over 70% of which is preleased.
Looking at 2020 multifamily deliveries in the Bay Area, San Francisco deliveries are expected to be slightly higher than in 2019, most of which is concentrated in downtown San Francisco and San Mateo. San Jose is expected to see twice as many deliveries in 2020 than in 2019. And in Oakland supply deliveries will remain elevated in the broader market throughout 2020 with significant supply continuing to be delivered into downtown Oakland, while Fremont will get an influx, half of which will be for sale condo.
Heading further south to Southern California. Year-over-year, same-store L.A. County revenues for the fourth quarter were up 3.5%, led by Woodland Hills with 5.5%, West L.A. with 3.7%, and the Tri-City submarket with 3.7%. The L.A. CBD submarket continues to decline with revenues down 1.6%. L.A. job growth in the fourth quarter was 1.5%, 10 basis points above the U.S. average.
On supply, we estimate consistently high deliveries throughout 2020 in L.A. County. Deliveries in the L.A. CBD submarket are expected to remain high at 4% of stock, but down materially year-over-year. Our West L.A. and Woodland Hills submarkets will see more new supply in 2020.
Moving down to Orange County. Year-over-year fourth quarter revenues were up 4.2% in the South Orange submarket and 3.1% in the North Orange submarket. Total 2020 supply in Orange County and San Diego remain consistent with 2019. However, deliveries in both counties are expected to decelerate through the year.
Lastly, in San Diego, our year-over-year fourth quarter revenues were up 2.8%, led by the Oceanside submarket with 4.9%, followed by Chula Vista with 4% and North City with 3.3%. Job growth for the period was a healthy 2.3% year-over-year, led by professional business services, which made up almost a quarter of the growth. Apple made progress on their plans to grow the footprint in the San Diego market by pre-leasing 200,000 square feet of office space in the Sorrento Valley. Our Q1 renewals have been sent out at about 4.4% and our portfolio is currently at 97.2% physical occupancy with our availability 30 days out at 3.9%.
Thank you. And I will now turn the call over to our CFO, Angela Kleiman.
Thank you, John. I will start by providing some color on our 2020 guidance, followed by an update on capital markets and the balance sheet. The key assumptions for our 2020 guidance are available on page five of our earnings release and S-14 of the supplemental. We're guiding to a midpoint of 3.1% for same-property revenue and NOI growth this year.
Overall, operating fundamentals in our markets remain healthy, as we continue to assume steady market rent growth, near the long-term averages and for our West Coast market to continue to outperform the U.S. average. Compared to 2019, we're expressing a modest acceleration in Seattle and a slight deceleration in California, largely attributed to demand and supply trends commented earlier.
Moving on to the core FFO guidance. We are expecting a growth rate of 4.2% at the midpoint in 2020. As discussed in our previous call, we have a short-term headwind from the repayment of a highly accretive mortgage-backed security, which generated a 17% internal rate of return for Essex shareholders. The lost income from this investment accounts for approximately $0.18 of headwind in 2020 or 1.3% of our 2020 FFO growth, and mostly explains the sequential decline in core FFO between our fourth quarter results and the first quarter forecast.
Our 2020 guidance also includes the recent acquisition of a 45% joint venture partner's interest in a $1 billion portfolio. We expect to recognize a $6.4 million promote from this transaction as well as a remeasurement gain in excess of $225 million, which incorporates small impairments of $18 million recognized in the fourth quarter. This gain and promote will be recognized in the first quarter of 2020 and both are excluded from core FFO.
We remain committed to our co-investment platform as it provides for an alternative source of capital and an attractive risk-adjusted return for investors. Over the past three years, we have generated incremental earnings for our shareholders from promote income totaling approximately $66 million.
Lastly, on capital markets activities. In the fourth quarter, we issued $150 million 10-year unsecured bond at an effective 2.8% interest rate, prepaid several mortgages with 2020 maturities. Consequently, we only have $280 million of maturities to refinance this year. We continue to maintain our discipline to optimize our cost of capital and will remain thoughtful and opportunistic. Our balance sheet metrics remain strong with over $800 million of available liquidity.
That concludes my prepared comments. And I will now turn the call back to the operator for questions.
[Operator Instructions] First question is from Austin Wurschmidt, KeyBanc. Please proceed with your question.
Hi. Good morning, everyone. With the move to a high occupancy strategy, what are you guys assuming for blended lease rate spreads for 2020? And then, could you also tell us what the spreads look like for the fourth quarter of 2019?
Sure. This is John speaking. So, the -- going forward, what we're looking at in guidance again is 3.1%, and that's really made up of about 1% -- or sorry, 3% rent growth as we have on our S-16, as well as some other income. When you say the blended, it would blend to that. We pretty much do not push our renewals above the market. We keep them consistent with the market, so they really run together. And that keeps it simple and it keeps it focused on the customer experience, which is critically important.
And so, what is that blended number versus what it was in '19?
Sure. So, in 2019, all in, obviously our revenue came in at about 4% for the fourth quarter, 3.4% for the year. And that was really about 3.2% scheduled rent, which would be the blended number and the remaining amount relates to other income items.
Got it. Thanks for that. And then, just curious what led CPPIB wanting to really dissolve that -- the venture and what opportunity set do you see across those six communities?
Hi. It's Angela here. We have an excellent relationship with our JV partners. And the exit really relates to the timing of the investment. These properties were formed as individual joint ventures, and most of them were formed back around 2010. So, at this point, we're near that 10-year term. And so, it made sense to have a discussion for the exit. And so, going forward, we actually have continued to have active conversations about future opportunities as they come up. But, as you know, we decide to put an asset or investment in joint venture, it's really driven by a function of trying to optimize the cost of capital. So, it depends on where the stock is trading, where the asset sales are coming in, et cetera.
Did you consider I guess, selling outright, or was the plan all along really to buy out their interest?
Well, you see that we actually sold one of the assets in joint venture in the fourth quarter as well, and that was Masso. And so, and that was a very attractive sub-4 cap rate sale. And so, we do evaluate whether it makes sense to bring it on this wholly owned, or really what's the best return for our shareholders.
Our next question is from Alexander Goldfarb, Piper Sandler.
So, just following up on Austin's question on the CPPIB. Can you just provide a little bit more color on funding? Was there anything transacted or was it sort of an even trade? And then, two Angela, what the benefit is for 2020? Obviously, you guys are working hard to backfill that CMO. So, just curious how much this played a role in providing an FFO assist for 2020?
Alex, I'll talk about the funding and then Mike will chime in on the overall strategy. On the funding, we use our line of credit to bridge the closing, but our intent is to finance -- refinance with long-term debt. And on the equity portion, now since the portfolio is actually unlevered, we won't need to raise as much equity to be leverage neutral. So, this will allow us to be opportunistic in our equity issuance or we may sell assets depending on market conditions.
Yes. And Alex, I'll just add real quickly. Keep in mind that we had a promote, which is noted in the press release. And we also have the different tax base than what the tax base would be at market. And therefore, our yield is a little bit higher. And that helps make these transactions attractive to us.
Okay. Maybe I missed it. Did you provide what benefit this is on an FFO?
It's incorporated into our guidance. And so, if you look at our -- we have a line on accretion from external activities. That does include the CPP transaction among others.
And then, second question is, Mike, your favorite topic, regulation and taxation. So, with all the fun of Prop 10 2.0, Prop 13 split roll. Maybe you can just address your thoughts on what you guys see the Governor in Sacramento as far as increased taxation, if they do the split roll? And then, how you think the Prop 10 2.0 is shaking out at this point?
Yes. Alex, I think it's a good question, and it came up very early in the call today, so all good. So, as I probably reported recently or actually last -- late last year, there were 18 bills that were signed by Governor, some dealing with housing. The biggest one was 1482, which is a statewide rent control initiative. Following up on that, there's been some pretty big allocations of funding for housing, $1.75 billion last year and $500 million that has been discussed as part of the ‘20 to 2021 budget. And so, I think that the political environment here is to try to wait and see what happens with these large investments and with 1482 as opposed to go to the ballot box and try to create a whole different scenario with Prop 10 2.0. So, I think that the politics for the matter are the legislature has acted and the state is funding, the housing shortage issue to a pretty substantial extent. And let those things run the course. So, that's what we hope happens. Obviously, Prop 10 2.0, they submitted around 950,000 signatures in December. We're still waiting to see if the ballot qualifies. I'd say that compared to the first go round, obviously, we're early innings. And so, the proposal has not received a great deal of attention at this point in time. And as I go back to think about Prop 10, the early polling was that it would pass. And that was noted obviously throughout the investment community. And it was in fact overwhelmingly defeated in the end. And even though this current proposal is a little bit more palatable to the owners, I still think that it will be difficult to pass. And by that or in support of that, I would suspect that it will be an ongoing discussion, and we will have an entity that will essentially commit to a robust opposition to Prop 10 2.0. And, again, given the outcome of the last go round, I expect it will be successful once again.
Our next question is from Shirley Wu, Bank of America.
So, my first question is for John. So, as you go into this new first half of the year with more downtown supply, and you're really focusing on that occupancy. I just kind of wanted to get this sense of in terms of cadence of that 10 basis points of occupancy headwind, how's that going, how do you anticipate that to play out through ‘20? Is it going to be pretty much an equal spread, or is it going to see more deceleration in the first half first versus the second?
Well, good question. So, let me step back a little bit and explain the occupancy or why we made an adjustment. We take a lot of effort, a lot of effort in understanding supply in the marketplace. And of course, we know from history that seasonally demand slows down in the fourth quarter and first quarter. So, as we ended up the third quarter, we held out as long as possible. And then, we rapidly made some changes to increase occupancy, getting ready for what we saw as a little bit of market disruption and most certainly in Northern California where the supply was going to hit the market during this lower demand period.
As we continue through into the -- in the first quarter now, we're still at good occupancy. And we expect to most likely carry that occupancy, but the reason why we did it is to put ourselves in a position of strength, so we don't have to. So, we if we start to see some isolated pockets of lower pricing, we may hold back and allow a little bit of occupancy to go down a little bit. So, we've positioned ourselves well, remembering, every time we lock in a lease at the beginning of the year, it impacts the entire year of course, 12 months. So, we're really got -- have our position -- ourselves positioned strong. All that said, I expect our occupancy will be higher in Q1, it'll go down in Q2 and Q3 and then pick back up in Q4. Does that answer your question?
Yes. That's extremely helpful. For my second question, Angela. So, previously you did mention the earlier redemption, which played out in 4Q. So, I was just kind of curious, is there still that expectation for more deals in your portfolio to be redeemed early or are those mostly done so far? And in terms of pipeline what's in the works to backfill from those deals?
Hey, Shirley, that’s a good question. We do expect heavier redemptions in 2020. And I think you may recall that that we have talked about carefully, investments tend to have a three-year life and sometimes they get extended longer, which is terrific. And so, the redemption timing can be lumpy. So, as for 2020, the redemption outside of the mortgage backed security investment, and so on the preferred equity event, it's about $145 million. And it's -- between the first half and the second half, it's pretty even and maybe a little bit heavier in the second half. And of course, you have -- there's probably somewhere around 110ish. So, that's the cadence. As far as the pipeline, Adam will chime in on that.
Yes. Shirley, this is Adam. We're pursuing and underwriting several deals in parallel at this point on the pref equity side. These deals inherently have a long lead times, just like any development deal. So, when they actually come to fruition, it can always be an unknown. But, we are pursuing many and have quite a few in the pipeline.
Yes. And Shirley, you may recall, we have a guidance between $50 million to $100 million, so it’s 75 midpoint. So that's a good number too for modeling purposes. And then, the one thing I'll add is really the timing of the funding because they do lag a little bit. And so, you want to layer that consideration.
Our next question is from Nicholas Joseph, Citi. Please proceed.
You highlighted the decrease in permit in your markets? But given the current pipeline and the tight construction environment that you talked about, when do you expect the actual benefit from the decline in terms of delivery?
Yes. Hey, Nick. It's Mike Schall. I think that when we look at permits, you're looking a few years out, and there is a natural lag there. So, connecting the drop in permits over the last couple of years, I think we're still looking down the road in terms of when that actually comes out. Keep in mind that California, unlike many places around the nation, has a much longer period as you go through the permitting process and delivery process. And I think that's complicated to some extent by the lack of -- or the tight labor markets in construction in terms of getting things finalized and moving ahead. So, I'd say, we're looking beyond 2021 to really see a significant impact.
Thanks. And then, maybe following up on Shirley's question, and I think in your prepared remarks you talked about continuing to pursue development but seeing better risk adjusted return with preferred equities and the other structured investments. Obviously, you can get a better return from those, but there's a difference in duration and length of investments. So, how do you think about the size of both of those and the stickiness of the cash flows?
Yes. I'll start big picture. And then, Adam can take it from there. Generally speaking, it's a risk reward equation. And we will do direct development. And I would say more to bottom of the cycle, because conditions at the bottom of the cycle are typically better. And by that, I mean, there's less pressure on construction costs. The cities are more receptive to development because they're trying to keep their construction labor force at work. And so, they're more willing to permit. [Ph] As you go through the cycle, more and more impediments. And I can use a variety of examples for that public artwork projects that are part of your deal, more difficulty in getting the phasing or temporary certificates of occupancy, et cetera. So, the headwinds become more substantial. And so, within the preferred equity, I mean, we’re looking at the same deals we otherwise could do as a direct developer. But, we are looking at that risk reward continuum. And we're saying, all things being equal, let's do acquisitions and preferred equity as opposed to more direct development.
So, having said that, I'll turn it over to Adam, because he has been pretty active at looking at development deals. And it's not that we are -- and actually he's found a couple that he likes. So, we're looking at those. We just try to make good decisions and certainly be aware we are in am cycle, and again, construction cost increases and all the other related factors come into play.
Adam, do you want to add to that?
Briefly, yes. I mean, we continue to underwrite and track all the land deals throughout our markets. Unfortunately though, given dramatic increases that we're seeing in construction costs relative to where NOI growth has been, we just -- we've been able to see this real time through our prep equity program. Generally speaking, we aren't seeing the necessary yield premium to really pursue the majority of the development deals out there. As Mike mentioned, there are some that fit into that parameter and provide the adequate risk adjusted return, but for the most part deals are tough to pencil right now.
Our next question is from Steve Sakwa, Evercore ISI.
Just two questions, kind of both Seattle related. You guys spoke pretty positively about job growth out there, the strength that you're seeing. I think, you mentioned supply was going to be coming down. When I look at your 2020 outlook, you've only got at the midpoint about a 20 basis-point acceleration in revenue growth in Seattle. I'm just wondering, the commentary would suggest maybe the market is a bit stronger than that. So, I'm just trying to figure out -- are you just trying to be a little cautious here? Is there something that keeps you more or less flattish, or how do we sort of interpret that?
Sure. That's a fair question. And at this point in time, you're right, Seattle is doing really terrific. Its rents are roughly 5% up year-over-year. At the same time, the unemployment is very low. It's 1.7% in that zone. So, we do expect the employment growth rate to slow down, and that's partly driving it. We are showing in our S-16, employment slowing down pretty significantly across the board, still staying 50 basis points over the U.S. over the U.S. average for the Essex portfolio, but slowing down because of the low unemployment. And Seattle has the lowest unemployment of all the areas. So, that's the scenario that we have out there. At this point in time, obviously employment is beating that expectation, and we'd love to see that continue.
Okay. And then, I guess as kind of the other side on the expenses, clearly, you had very low expense growth in Seattle. I know there were some kind of tax benefits, real estate tax benefits you got. Can you just sort of remind us of the aggregate benefit in 2019 from that that kind of acts as maybe a headwind on the expense side in 2020?
Sure. It's a good question there. On the Seattle property tax, it was an interesting year in 2019, in that our property tax bill actually came in lower than 2018, and it was all driven by assessment bills. And so, what that means is definitely from a year-over-year perspective, we have challenges on the comp. In terms of how we think about Seattle property tax, because it's not -- it’s one of those things -- those numbers are just not as [indiscernible]. So, in 2019 it was 3% lower than the prior year from the assessment. But the five years before that those increases were in between 13% to 17%. So, in 2020, what we try to do is kind of thread the needle and looking at like a base run rate of 6% and then you add into it the refunds. We're looking at kind of low single digits, the 8, 9% for Seattle property tax increase.
Our next question is from Neil Malkin, Capital One Securities. Please proceed with your question.
Hey. Thanks, guys. I'm not sure if you answered Austin’s question in the beginning in terms of the new and renewals that you had in 4Q. But just curious as what you're kind of seeing in January for new and renewals, and what occupancy stands at for the portfolio today.
Yes, sure. So, let me go back to make sure I answer that. I may have missed that. So, in the fourth quarter, new rents were about 2.2%, renewals were about 3.5%. And really, the bigger difference was in Northern Cal where the supply was coming into the market. Going forward, in the first quarter, I'll answer a question on renewals, they went out at about 4.4%. Today market rents are a 2% to 3% up year-over-year. And that's really a factor of where the slow demand period. So again, it always is a little bit of wonky in December and January. We expect us to -- we expect to achieve the market rents we have laid out in our S-16. And of course the strongest market as I already mentioned is Seattle.
Right. And then, what’s occupancy?
Occupancy is 97.2.
Okay, great. And then, next one, preferred investments obviously you've highlighted is what you guys are choosing to do in terms of capital allocation. Just curious on either the current book or the ones you're underwriting, is there an option, are you trying to get options to actually roll your preferred into equity or essentially take ownership of those deals when they complete, or is the financing market just too easy for the developer to sort of get permanent financing?
So, this is Adam. We look at it several ways. I'd say the most basic kind of down the middle of the fairway, pref deal is going to be paid off after a certain period of time, whether it be two, three years. We do however -- with every deal, we have that conversation where there are potential hybrids, where there is that potential to convert into equity. And it is on a deal by deal basis. And we're seeing probably a little more of that opportunity now given where we are in the cycle.
Our next question is from Rich Anderson, SMBC. Please proceed with your question.
So, on the MAA call this morning, they kind of outlined a sort of a silver lining in the supply that the rents are 25% above their in place rents. And so, it's an opportunity for them to deploy some redevelopments on. And so, a little bit of a good and a bad situation. Do you see a similar dynamic in your markets, considering you also are sort of B, B plus type of product? Is the incoming new supply, while problematic, provides some opportunities for you to redevelop and sort of find that middle ground between what's being delivered and where your market - where your rents are today?
Yes, Rich. It's a good question. And I'll start and lateral to John after that. I guess, from our perspective, you can't produce a B. So, there -- and therefore all the supply is in the A category. So, the closer you are to the A, the more impacted you are by the concession environments and the new delivery. So, in addition to that, you have this -- where's the supply going, which tends to be more urban downtown as opposed to suburban. So, all of these things are factored into that equation. And I think that we are seeing the best opportunities to redevelopment -- to redevelop in the suburban B markets. And so, I would suspect that that will continue. John, anything I missed there?
Yes. No, I think you picked it up.
Great. And then, second question, perhaps for anyone. But, any comment on Park Merced? I know you know were gathering that years ago and not this time with AIMCO jumping in. I’m curious if you took a hard look at it, soft look at it, not looked at it at all? Anything, any kind of color would be interesting.
Yes, Rich. This is Mike again. It was pretty broadly marketed. And so it wasn't as if that was acquired deal. It was marketed around. And when I think about our preferred equity business, we think about really two things. One is, development deals where we're coming in at the last minute, just before start -- just before the start, so we know what the construction costs are. So, we are trying to take that construction cost risk off the table in those deals. And then, we also will do preferred equity on stabilized portfolio, which actually was the first go round that we had with Park Merced when we - as you alluded to, we had invested in it once before at a much lower value by the way. And so, this transaction is neither of those, because it is looking at the development deals and trying to assess how they might look. And so, it didn't really fit our basic strategy. And, we will from time to time deviate a little bit from our strategy, if we really see a lot of value. But, we just didn't think that was applicable or appropriate this time.
Okay. Sounds good. Thank you.
Our next question is from John Kim, BMO Capital Markets.
I was wondering on the CPP portfolio, if you could provide some color on where the assets are located? Do they contribute immediately to the same-store pool? Or will it be 24 months from now? And also, how do you think the performance of this portfolio will be on a same-store basis relative to your existing consolidated assets?
John, so as Angela mentioned, we sold Masso in Q4. So that was in Downtown San Francisco. And so -- and Angela, why don't you take it from here?
Yes. And the rest of the portfolio, it's all throughout Northern California. So we have one in San Mateo, one in Dublin, one in Pleasanton so in the East Bay, and San Jose, and of course, Walnut Creek. So those are the locations, but it's all Northern California. And as you know, we built these and have operated them. So we know the assets very well and certainly like them very much and glad to have all of them into our consolidated portfolio. They will be in the same store next year because, as you may recall, we roll them in, and we'll have one year of comparable results before we add them to the same-store pool.
Okay. And can you just remind us why the co-investments generally are accounted for under the equity method when you own, in many cases, 50% or more of the joint venture?
Yes. It's an off-balance sheet because of the control reasons. Our partners have essentially comparable approval authorities on basic items like budgets and financing, and so it's really a technical reason.
So is there anything different in asset management that you're going to do as you take these assets under your control?
Yes. This is John speaking. No, not at all, the operationally, asset management-wise, we operate all of our assets consistent -- in the consistent way. Our partnerships, we have great relationships, and we don't have an Essex way and then the other way. It's, I call it, the family, it's all one way. We operate in an integrated approach across the board. So there won't be changes there. We do like the locations of the assets quite a bit. They're in the technology markets that are growing, and we're excited about that. But there's not a change like -- would happen when we're buying an asset from a third party.
Our next question is from Rich Hill, Morgan Stanley. Please proceed with your question.
Hey, guys, Mike, maybe I'll start with you. Just wanted to think about the age of your portfolio and sort of the age of your assets within your portfolio? And how that influences your capital allocation decisions to maybe buy some assets and sell others?
Sure, Rich. Yes, our portfolio, as you note, is a little bit older than other portfolios, and I would attribute most of that to the fact that we produce less than 1% of our stock, of our housing stock per year. And therefore, as you can imagine, over 20 years, you produced less than 20% of your stock, and therefore, 80% of your portfolio is more than 20 years old. So just a fact of life, and we think that this is a very good thing that we don't produce a lot of housing in general.
And so I think it's just -- that is the nature of our markets, and we are a reflection of our markets. In terms of opportunity, again, I would say, you can't build a B. And therefore, you see less competition. And so I'd say, generally speaking, at the early part of the cycle, maybe the As outperform the Bs, synergy up later on in the cycle, the Bs outperform the A, so all of those broader themes are out there.
And then I would also say that as the A product becomes more luxury oriented, it opens the door toward very thoughtful redevelopment programs where we can add value. And add a yield that is higher than the cap rate and benefit both from the growth embedded in the redevelopment program and the increase in the value of the portfolio when you cap it out. So it's kind of all those things.
Got it. That's helpful, Mike. John, quick question for you. Look, we definitely agree that there's not enough supply of apartments relative to demand, sort of, picking back up for what Mike said. And so look, I think a lot of the questions on this call have been about supply, which is obviously a near-term consideration. But we've always thought demand and job growth is a big long-term driver over the medium to long term. So I was wondering if you could just maybe take a step back and help us think about what are you looking for in your West Coast markets where demand could accelerate to the upside? And maybe what makes you -- would leave you a little bit more cautious?
Sure. What we see right now is, as I mentioned, we have great demand in the Seattle area. And that combination with the great demand and the decline in supply is tightening up the rental market quite a bit, that's terrific. As it relates to cautious, it gets back to just the temporary impact, the disruptive impact of the supply entering the market. And that, again, is largely located around the downtown locations.
There's some level of that certainly in L.A., although L.A. is getting a little bit better, a little bit less supply than last year, still downtown L.A. is problematic. Oakland to some extent, but of course, Oakland is -- you have to understand Oakland. It fits into the broader Bay Area. And so whereas L.A., downtown L.A., sits there in its own market.
Oakland is really interrelated to San Francisco because people take BART across. So you have to look at the demand in a broader area there. But it's the supply that causes some concern, and it's temporary as you noted. Does that answer your question?
Yes. Yes, yes, it does. It sounds like what you're saying is that the demand side of the equation remains very, very strong. And although, tech is diversifying across the United States, tech remains very strong and the economies you operate in are quite diverse.
That's true. And I would say with the tech, it is -- it does -- it is going across the U.S., but the headquarters are still here and the highest paying jobs are still here. So it's -- they're doing a natural thing as far as taking more of the back office and moving that out and then taking other components of the business, but the creative design, the top-notch aspect of the tech, really still located in West Coast. You find that in each of the different companies that are out here, the major companies. And so it's that and the incomes that are tied to that, which really drives income growth, and that is certainly beneficial.
Thank you. Our next question is from John Guinee, Stifel. Please proceed with your question.
Great. Just building on the current discussion, the great affordability migration is alive and well, and although you have a really good property tax-driven competitive advantage in your markets and with an ability to really grow outsized FFO. Any chance you would ever look at the higher-growth markets, whether it's Denver, Phoenix, Austin, Portland, places like that?
John, its Mike. Well, we've been in Portland before and exited Portland and we do look at it from time to time. It's definitely on our list. Portland, the reason why we exited is because they had an urban growth boundary that they essentially kept expanding, and we convinced ourselves it was not supply constrained. So I guess it depends on what housing and how these markets adjust. So in our experience, it's not just the apartment supply, but relatively inexpensive single-family housing meant that essentially as soon as rents get to a certain level, people go, you know what, I don't need to pay this rent anymore. I'll just go and buy a house.
And so we look at that dynamic of what we charge for rent and what the comparable house and how difficult it is for our renter base to be diluted by homeownership. And so if we could find markets that satisfy and that look appealing from both those perspectives, good job growth and the overall amount of supply is somewhat limited and the transition from a renter to a homeowner is somewhat limited.
We think that, that is a good market. Practically speaking, and we go through this process with our Board every year in terms of current markets and other possible markets. So Portland is definitely on that list. And there are some other markets that are on the list as well. Generally speaking, they are the more supply constrained markets.
Our next question is from Hardik Goel, Zelman & Associates. Please proceed with your question.
As I look at your guidance, your same-store revenue guidance, just focusing on Northern California. That range of 2.6% to [3.6%]. Can you give me some color around what has to happen in the market for 2.6% to be achieved? And then what has to happen for 3.6% to be achieved? What are the scenarios there?
Well, it really revolves around supply of new homes and then demand and that interaction. The -- we obviously believe we're going to hit the midpoint, that is the probable target. But the impact, the disruptive impact of supply coming into the market in Q1 could negatively impact things.
Again, at that point, you're locking in rents, lower rents possibly, for a longer period of time for the year. On the other side, if supply gets delayed and it moves into the higher demand season, Q2, Q3, that's beneficial. So it's a range we expect to hit the midpoint. We knew there's enough supply\/demand dynamics going into this. But if they move around a little bit on us, that will adjust that. Does that make sense?
No, it does. And just as a quick follow-up, I noticed you guys are going to be planning on being net acquirers and you discussed why with your cost of capital. Just the type of product you're looking to buy, is it going to be more of selling older stuff that others see us value-added and buying recently built stuff? What is kind of the niche there that you're targeting?
Okay. So on the dispo side, this is Adam. On the dispo side, we're going to target the assets that have been slower growing within the portfolio in order to maximize our overall portfolio growth. On the acquisition side -- on the disposition side, our target is between $100 million and $300 million. As you noted, we expect to be net acquirers this year.
And again, we're looking at just increasing shareholder return overall. So we're going to be looking at our higher growth markets. And as Mike alluded to earlier in the call, we're going to be looking at that probably A- to B category, the brand-new stuff, as we've seen over the last few years, given whereabout the supply is coming, that product has not grown nearly as well as the Bs.
Got it. And then are there plans to renovate something when you buy it? Or is this something you like to look for something that's already -- that doesn't need any incremental capital?
Yes. This is Mike. Yes, we do just about everything. So if it needs a renovation plan, we will build that into the pro forma. And if it's in good quality shape, we will look at that as well. I mean we're really sort of agnostic as to where the property is from, again, that, let's say, the B- to A level, it's all about growth as Adam suggested.
And if that growth comes from redevelopment, we're happy with that. If it comes from us understanding the market and growth rate a little bit better than everyone else, so be it. Again, we're totally focused on what is the return of what we're buying versus -- compared to the portfolio as a whole. And that's how we make those decisions.
Our next question is from John Pawlowski, Green Street Advisors. Please proceed with your question.
Thanks. Just one question for me. John, you mentioned there is a 40 bps lift to other income this quarter, largely due to lease break fees. It's a lot larger than the last several years in the fourth quarter. So just curious, what's driving the outsized lease break fees right now?
Yes. Lease break was one component, it's the biggest component and I called that out. There was other items as well. But yes, what was driving the lease breaks really relates to the supply that was coming into the market in Q4. And again, that goes back to our decision as we saw that the supply was going to start hitting the market, and we filled up or increased occupancy.
We did anticipate this type of thing to happen. But you go into the low demand period. The concessions start to increase at the new supply, and you get to about eight weeks free in some cases, and people will break their lease and transfer. So that's what was driving it.
Actually, John, I can add that the move out to purchased homes was -- has recovered a lot and was at 12.1% in Q4, a little bit higher than it's been in the recent past.
Our next question is from Rob Stevenson, Janney. Please proceed with your question.
Good afternoon. Mike, does the continued legislative environment and ballot initiatives in California make condo projects any more attractive in certain submarkets? And any chance we see some of the under-construction apartment projects go condo before leasing?
Yes. And that is a good question. One of the conundrums that we've experienced over the last several years, as we bought many failed condo buildings in the last cycle, and we had hoped to convert them back to condos and sell them at a lower cap rate than we could otherwise sell apartments. We have not found that that's the case at all.
In fact, if anything has gone the other way, we've produced more rental housing, much more rental housing than we have for sale housing, and that's been an ongoing dynamic. So we haven't seen that spread that we had hoped for in purchasing a condo versus an apartment value, and which of course is what triggers tha
. And with the recent past increases in the price of the single-family home being in the minus 3, I think in San Jose to about 1% in the best of our locations. It hasn't helped that condo versus apartment valuation.
Okay. And then I think I heard you guys say that the negative impact of 1482 is 10 basis points in 2020. Given your supply issue commentary, do you guys really have that many units where you'd be raising rents by more than 5% plus inflation this year if you could?
Yes. So we are -- this is John. Where that negative impact comes, it hits the revenue. It really relates to short-term rentals and the premium associated with that. And so oftentimes, at the end of a lease, we will always give our customers the options they want. And on the short -- if they want a shorter-term option, there's a premium related to that, and 1482 restricts that premium, and so that's where the 10 basis point headwind comes from.
Okay. And does 1482 restrict fees for like parking and other stuff? And is it based on gross or net effective rents. In other words, most of the apartment REITs are operating on an effective rent basis, does 1482 lead you to offer a higher face rent and then use concessions to get to essentially a market rate level? Or does the legislation see through that game?
That's a great question. And like a lot of legislation, things aren't always spelled out as much as we would all like. So that's not necessarily contemplated in the legislation. My sense is that it will get addressed in the courts. But it's really focused on rental revenue and not other revenue. But as far as the details of that, I think it will get resolved somewhere in the future.
Okay. And so there's no clarification right now whether or not it applies the face rents or net effective?
We interpret it as being applied to face rents.
Okay. So if a unit was renting -- if market rent was $1,000 for 12 months, you guys could theoretically raise that rent to 1,200 and offer two months free, and be in the same place economically and have ability to have more greater rent growth in the 5% plus inflation by just discounting less?
Yes. I mean, first, let's go back a step. So the 1482 really impacts renewals, right? When a unit goes vacant, it's the market rent. So at the end of the lease period, we typically and the residents typically respond to direct renewal. There's not generally concessions in there. And we are not anticipating going that direction.
Okay. Just curious, given your sub-50% turnover, and it keeps heading south every year, whether or not you get into a situation where you actually are going to need at some point greater turnover.
Yes. No, I mean, frankly, I love the fact that we have lower turnover. I think it's reflective of quality of service out of the assets as well as being fair. We meet the market. We're not trying to push rents beyond the market. We're fair in how we price things. And again, I think that the site teams are doing a terrific job. So I think the lower turnover is reflective of that. I'm not sure it's going to go much lower than that. It -- there's a natural need for people to move.
We have reached the end of the question-and-answer session. And I will now turn the call back over to Mr. Michael Schall for closing comments.
Thank you, operator. I want to thank everyone for joining the call today and look forward to seeing many of you at the upcoming Citibank Conference. Have a good day. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.