Q3 2019 Earnings Call
Good day and welcome to assist property Trust third quarter 2019 earnings Conference call.
During today's conference is being recorded.
Statements made on this conference call regarding expected operating results and the 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.
The information about these risks can be found at the company's filings with the FCC. It's now my pleasure to introduce your host Mr., Mike Schall, President and Chief Executive Officer for Essex property Trust. They can muster shall you may be and.
Thank you operator, and welcome everyone to our third quarter earnings Conference call.
John Burkart, Angela Kleiman will follow me with comments before we open the call to QNX.
I will begin by highlighting that our third quarter results exceeded our expectations.
Core AFFO per share for the quarter was four cents better than the midpoint of our guidance, which represents 6.3% growth compared to the third quarter of 2018.
We're pleased to raise our full year core AFFO guidance by five cents at the midpoint.
This is the third time this year, we've increased our core FFO per share guidance, which is attributable to a solid summer leasing season dramatically improved cost of capital compared to the start of the here.
Continued execution by the ethics team.
John and Angela will provide more details about the quarter and the increase to our full year guidance and their remarks.
Turning to our expectations for 2020 rent growth in the West Coast markets. We have continued our practice of providing our baseline and key budgeting assumptions on page F 16 of the supplemental.
This is intended to be a scenario based on macro level forecast sutras U.S. GDP and job growth that we obtained from third party sources.
He took the scenario is our ground up research on apartment supply throughout the ethics metros.
In recent years apartment supply has become more concentrated in California as urban areas, resulting in periods of high rental concessions that often substantially impact sub market pricing power.
Therefore apartment supply estimates are more important than ever and our delay adjusted supply estimates for 2019 have proven invaluable in targeted acquisitions and dispositions.
Overall, we expect 2020 to look much like 2019, representing the continuation of rental growth near long term averages.
Overall, we expect market rents in the ethics targeted areas to grow an average of 3% compared to 3.1% in our F 16 forecast a year ago.
Once again, we expect very tight labor market conditions exemplified by a very low unemployment rate of 3.3% as of August 2019.
This is down 20 basis points from year ago, and is expected to slightly reduced job growth for 2020 compared to 2019.
The tech market should continue to significantly outpaced the nation with 2% job growth expected in northern California, and 2.4% in Seattle.
Our outlook for supply and 2020 contemplates similar apartment supply deliveries compared to 2019 for a total of around 35000 apartments in the ethics Metro's.
With meaningful variations in certain markets, including lower apartment supply in Seattle, and Orange County, and higher supply in Oakland and San Jose.
There are several positive factors and confirming indicators that impact or 2020 forecast.
Tight labor markets may constrain job growth, but they also push it comes higher while higher wages will pressure operating expenses. They will also help relieve pressure on housing affordability issue that is constrain growth rates for the past several years.
We have added flight F 16.1 to the supplemental this quarter to demonstrate the historical context, where the west coast superior income and job growth compared to the rest of the country.
Income growth and ethics markets has outpaced the nation by 12 percentage points on a cumulative basis. This decade and has accelerated in the past several years.
Office development continues to expand at a healthy pace all of our markets are building out new office space to accommodate strong demand Seattle in the Bay area. Currently have 19 million square feet of office space under development or nearly 4% of existing inventory, which compares to national average offers.
Office growth I've just 2%.
Each of our markets had very strong office preleasing and solid absorption in the third quarter as well as positive rent growth compared to one year ago, with San Jose and Seattle office rents up 11% and 5% respectively.
Hired at the top 10 tech firms all of which are headquartered in an FX market continues to be very strong. These companies currently have 25000 job openings in California, and Washington up 19% as compared to the third quarter of 2018.
Amazon's job openings in Washington are up 52% compared with one year ago and it's also notable that Facebook now has over 5000 employees in the Seattle market, while Google and Apple are also expanding rapidly in South Lake Union.
Turning to the transaction market an acquisition activity, we transition from being a net seller a property in 2018 to a net buyer and 29 team given a dramatic improvement in our cost of capital throughout the year.
As a result, we're pleased to have exceeded the high end of our acquisition guidance range. This year with 660 million of acquisition deals close through September Thirtyth, and we expect to remain active for the remainder of the year.
The acquisition market has become increasingly competitive as positive leverage is a powerful force for multifamily housing.
The higher demand for apartments has been accompanied by more property been marketed in late 2018 in early 2019, there was a slight upward pressure on cap rates and this trend has reversed with cap rates down about 10 to 20 basis points.
We believe that we added value by reacting quickly to changing market conditions.
In terms of cap rates recent activity indicates <unk> eight properties in a locations typically trade between a 3.9% and 4.1% cap rate.
With B properties impute locations trading 20 to 30 basis points lighter.
We remain selective in this environment, and we will and we have significant advantages, including great research strong relationships and track record and robust balance sheet with ample liquidity.
As noted on previous calls we continue to favor preferred equity investments over direct development, primarily because yields are compressing given that construction cost increases have exceeded rental and satellite growth rates for the past several years represented a significant headwind to direct development.
Lastly, before I turn the call over to John I'd like to comment on the passage of California Assembly Bill 14, 80 to one of 18 housing related bills that were signed into law by Governor Newsome earlier this month.
Most of these new laws are expected to remove barriers to build more housing incentivize affordable housing and fund housing production.
Maybe 14, 82, well generally cap rent increases to fee P.I., plus 5% and is intended as an anti gouging measure.
At ethics, we've had a longstanding practice of limiting renewal rents to temper sad and do not expect this legislation to have a material impact on our results.
With rent regulation, a recurring theme amongst legislatures across the country, we remain committed to California, and we'll continue to advocate for smart housing policies.
With that I'll turn the call over to our COO John Burkart.
Thank you Mike.
Three was a good quarter for Essex overall, our markets follow the historical seasonal pattern with the market rents, peaking in early August a little later than normal.
As a result, we continue to favor achieving market rents over higher occupancy taken advantage of the stopped strong market conditions to lock in higher rents into September , allowing our same store portfolio occupancy to dip to 95.8% or 60 basis points below September 2018.
This strategy enabled us to increase year over year scheduled read by 3.5% for the third quarter compared to the prior years period.
For comparison year over year scheduled rent growth in the third quarter of 2018 was 2.5%.
This hundred basis point increase sets us up in a better position going forward.
Our total same store market rents were up 3.4% year over year in the third quarter over the prior years period.
Revenues for the same period grew 3.1% with financial occupancy of 96%, which is 40 basis points lower than the prior years period.
On a trailing 12 month basis portfolio turnover rate was 46.3% through September .
This is a 200 basis point decrease from the prior years period.
Finally, we continue to be on pace to achieve the 3.3% midpoint of our full year 2019 same store revenue guidance.
Oh supply multifamily supply growth as a percent of stock is projected to be 120 basis points higher in downtown urban Submarkets during 2020 at 2% versus suburban markets at 80 basis points concentrated downtown urban supplies, a consistent theme in the cycle in the West Coast Mark.
Yes.
Looking forward, we continue to be excited about the various platform initiatives that we're working on including our new CRM that were collaboratively designing with a third party vendor our mobile maintenance platform 2.0.
Our wells are as well as our smart units and many other initiatives.
We are tracking over 40 separate initiatives for workflows, all directed at improving the customer and or employee experience as well as leveraging technology to reduce labor.
The initiatives or at various stages that our process from design or proof of concept to pilot to rollout and their impact will be felt over the next one to three years.
Turning now to an update on our markets in Seattle or same store market rents were up 5.2% year over year in the third quarter Submarket revenues for the same period grew at 4.7% and the Seattle CBD, 3.7% in the east side and an average of 4.7% in the north and South.
Seattle N D remains the strongest major U.S. market for job growth in third quarter growing 3.4% year over year, but the top for pain industries, adding over 30000 jobs, 60% increase from the prior year.
Along these lines major Tech company expansion was healthy with Amazon job openings remaining around 11000 for three consecutive quarters, well Facebook continues to expand in the market.
With multifamily supply forecast did increase.
About 25% in the second half of this year, the Seattle market is benefiting from the delivery slowdown.
Moving to northern California, same store market rents were up 3.9% year over year in the third quarter.
Revenues for the same period were led by San Francisco, achieving 6.4% growth followed by Santa Clara, 3.6%, Alameda, 3.4% Contra Costa at 2.9% and San Mateo achieving 2.5%.
We continued our three lease ups in the Bay area. Milo is now 27.3% leased offerings six weeks concessions.
Station part Green Phase two is now 63.3% leased offering four to eight weeks concessions.
And we started lease up of 500 fulsome, no 10.8% leased offering four to eight weeks concessions.
Regarding my though the Santa Clara market is very strong we had the asset 28.2% pre leased in mid August prior to units becoming available. However, as a result of construction delays we lost several leases.
Job growth in the Bay area averaged 2.7% year over year for the third quarter, San Francisco, San Jose and Oakland grew at 3.3%, 2.8% and 2% respectively.
With all three markets seen the largest gains in professional business services.
Jack expansion activity was robust in the South Bay, mainly attributed to googles acquisitions activity, including 16 acres of land in Sunnyvale 56 properties and your Saturday is geared on station and an additional 1.3 million square feet of office space in the Submarket.
Looking at multifamily supply in northern California, the deliveries are heavily weighted towards the second half of this year with double the number of units coming online compared to the first half of this year.
As a result of the increase is applied during the seasonally low demand period, we expect the bay area market to be choppy for the next two quarters with isolated pockets of weakness from the supply.
Adding further down south.
Based on market rents in the region were up 2.3% year over year in the third quarter.
Growth in our so Cal markets averaged 1.2% in the same period L.A. at 1.2% Orange County at 1.1% and San Diego at 1.9%.
Yeah like County revenues for the third quarter were up 2.7% led by Woodland Hills, with 4.6% West L.A. with 3.3% and the Tri City Submarket with 2.7%.
As expected L.A. CBD declined by 3.6% as a sub market continues to feel the impact of concentrated supply the downtown urban area with stabilized comps offering up to eight weeks concessions on new leases.
In Orange County, you every year third quarter revenues were up 2.7% in the south Orange Submarket and 1.4% in the North Orange Submarket.
Lastly, in San Diego, our year over year third quarter revenues were up 2.3% led by the Oceanside Submarket with 3.5% followed by North city, with 2.1% and Chula Vista with 1.9%.
As the market interest the seasonally slower demand period, which is usually the fourth and first quarters of the year, we've adjusted our approach to favor occupancy.
Our Q4 renewals have been send out at about 4.5% at our portfolio is currently at 97.2% physical occupancy with our availability 30 days out at 3.5%.
Thank you and I will now turn the call over to our CFO Angela Kleiman.
Yes.
Thank you John .
I will start with a brief overview of our third quarter results and the increase to our full year guidance and provide an update on our structure finance investment and balance sheet activity.
Beginning with our third quarter performance I'm pleased to report that we exceeded the midpoint of our core AFFO per share guidance by four cents.
This was primarily driven by investment activity and lower interest expense, including favorable refinancing and higher capitalized interest from development delays.
Following these results we are raising our full year core AFFO per share guidance by five cents to searching 33 at the midpoint are presenting a 6% year over year growth.
The revised guidance range assumes we sell a large urban assets in northern California into fourth quarter, which is owned and our co investment platform at a 55% pro rata share.
The sale of this property will take us to the low end of our full year dispositions guidance range and below 300 million.
Turning to our structure finance investment activities.
The recent decline in interest rates and a strong transaction market have enable developers to either refinance or sell their development projects. As a result, there has been an increase in early redemption of our preferred equity of subordinated loan investments.
During the third quarter, we have 31 million of early redemption and we currently anticipate an additional higher and 10 million <unk> of redemptions in the fourth quarter.
As we maintain an active pipeline we plan to reinvest the proceeds from these early redemption and achieve comparable yield but until the reinvest the proceeds are fully funded.
They will be an impact to core AFFO on a temporary basis.
In addition, during the fourth quarter, our investment in a collateralized mortgage obligations, which was originated back in 20 time for 17 million will mature.
As a result, we expect to receive a payment of approximately $80 million.
This investment has been highly profitable for our shareholders, earning around a 470% return over a whole period.
It is another good example of our opportunistic approach to investing.
However, replicating this investment in today's low environment, no rate environment will be challenging.
And will lead to an estimated AFFO per share headwind of 14 to 18 sites in 2020 subjects, who reinvestment yield and timing.
Lastly on capital markets activity. We also took advantage of the decline in interest rates to issue five heard of 50 million of unsecured bonds in the third and fourth quarter was a coupon of 3%.
The majority of this data is being used to repay.
Secured debt maturing in 2020.
We will continue to be opportunistic as we consider our refinancing alternatives to optimize our cost of capital.
This concludes my remarks, and I want to <unk> now I'll turn the call over to the operator for today.
Thank you.
If he would like to ask a question. Please press star one on your telephone keypad. It's tough for me should total indicate your line is in the question can you May press star to if he would like to remove your question from the Q and for participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys. Please ask one.
Question and one follow up question and then re queue for additional questions.
Our first question is from Austin, Wurschmidt with Keybanc capital markets. Please proceed.
Hi, Thanks for taking the questions. First question is is really around prop tend to point, though and I guess since the initial prop 10 vote in 2018 other than than a before do you need to getting past I was just curious what else is change in your mind that could.
Potentially swing the vote you know in 2020 in your view.
Okay, Austin, its Mike [noise], yes.
We certainly hope.
That we would not be a following up on prop 10. This this quickly but here. We are so you know to the contrary actually we're hoping that the bills passed would be given time to work.
And so anyway, what's happening currently is a signature gathering is ongoing for the proposition there somewhere around 600000 signatures, they probably need around 900000 signatures in order to get rid of the you know the duplicated some unregistered voters et cetera. So there's still the ways to go.
As you know we've kept our California is for responsible housing entity in place that was used as part of the up the prop 10.
Battle and we're just starting to focus on the proposal, but I would say.
Remember that.
Costa Hawkins, probably 10 was overwhelmingly defeated in 2018, a loss in all but one counties in California. It was a decisive victory and [laughter] again, I think the politics or a little bit different this time and that.
The <unk> the I think the governor and legislature would like to have some time for the existing bills to work before going to the ballot box. So I think it's still too early to tell exactly what's going to happen, but we are definitely focused on it and and were.
Organized and ready to fight it as needed.
But would you say anything sentiment wise from the voters that and that either changes to the proposed to bill or you know something amongst I guess, you know just voters in general that that they taking a different view because we all know that it obviously was voted down.
Pretty significantly on in 2018.
Yeah. So yes, I think that there had been some changes.
That make it more palatable to voters, but again less palatable to another sand so it exams individuals it on two homes or less.
For example from the from the provisions but.
Then again, there is a vacancy control element, which I think we'll be.
Viewed as being a undesirable.
So I think that there are offsetting pieces, there and again I think the the politics are very different this time, because I know as you recall with respect to prop Tenda Democrat Party endorsed it I think that's very unlikely. This time, so we still think that a bit doesn't get supported and.
So it will be voted down but again its little bit early to come to that conclusion I guess.
I appreciate that and then.
I know you said theres not a a material impact.
From a before do you need to was just wondering if you could put a finer point on that and what the impact of 2019 same store revenue growth would've been if we were looking at you know that being implemented Jan one of this year.
Yeah. This is John the you know again from Essex. His perspective for years, we have done a couple of things one we self imposed red caps, which are relatively consistent with 14 82 and number two is we typically you well, we always focus on the market and we tried to bring the renewals.
Slightly below or at market. So we're not really a ahead of the market with our renewals. So with that said in the fact that rents are growing roughly 3% a year.
Probably would not have had a material effect on on a 19 and nor will it on 20. The types of issues that you can run into is if you're pushing ahead of the market or so there is a little bit of friction as it relates to the terms, sometimes a shorter term leases gets some price premiums, but we have.
Relatively few of those so I don't see it having really a material impact on our business, but we'll obviously include whatever that we'll be in our in our guidance when we issue that next quarter.
I appreciate the thoughts guys. Thank you yeah.
Thank you.
Our next question is from John Kim with BMO capital markets. Please proceed.
Thank you I was wondering on this type of 5% right cap on what do you think that well have as far as a impact on your renewal rates and your.
And your financial results.
Yeah, Hi, John I think John will probably want to add to this.
We run our renewals and new leases new lease rates at pretty similar numbers.
For the September 19 year over year, New was 3.1 and renewals 4%.
Overall for the company so because of that again as John said, we don't see it happened a huge impact on on our portfolio.
And you want to.
No I mean that answers I mean again, it's the way we operate it again consistent with how we've operated for years with self imposed caps with how we look at the market and how we look at our renewals with respect to the marketplace. So yeah again, I do not see a material impact there may be minor impacts as it relates to turn.
And how we are adjusting we're working through all that right now, but it just really not immaterial impact.
Okay and then my second question is on a now being in that acquire with your cost of capital getting more attractive.
Are there any major underwriting.
Assumptions.
You're doing differently. This time that you that you're taking now versus a four and can you update us on where you see the best returns as far as acquisition.
Certain investments in development.
Sure. John This is Mike in terms of underwriting we look at things much like we have in the past.
We will look at every transaction based on the sub market rent growth and again, our research department ranks our sub markets by.
For your rent growth.
Divided into 30, Submarkets and so we're trying to invest in the top performing submarkets from rent growth perspective over that period of time. So that's how we do that and we'll call the portfolio.
With respect to the bottom part of that.
That hierarchy.
And in terms of of best overall performance I think that on acquisitions, we look at it relative to the portfolio. So in other words what are the returns that are available in the private markets versus what are the what at what returns or implied in the stock and try to understand how we create value how we.
Can create a core AFFO per share and and Avi per share growth both of those metrics are the key to what we.
How we look at an acquisition and then of course, whether we use on balance sheet sources of money versus our co investment program. So all these factors go into.
How we underwrite a transaction and how we we approach should and.
Really no different from before.
Thank you.
Our next question is from Trent GE Helio with Scotia Bank. Please proceed.
Hi, good morning out there I'm on your 2020, Oh, I guess preliminary outlook there the job growth forecast for southern California looks to be basically a continuation of what we've seen year to date and now as you look at your markets and think about you seem to do a deep dive into office space requirements type growth VC funding and other factors.
Would you say that southern California job growth has a higher likelihood just surprised to the upside or downside than what you put it not forecast.
It's a good question I wish I had that answer and it would if I did have that answer it might influence what we what our decision making is but we.
Tend to gravitate at this point in time, if you look at the you know the top part of our portfolio from a growth perspective, it's still remains the north and the tech markets, Although Oh definitely southern California is betting benefiting from some of the tech companies moving operations to Southern California, I think seattles.
Benefiting more from that trend out of the Bay area, but southern California, definitely we'll get some some advantage.
You know as to southern California, it's been in this low 1% range for several years and so bad that it's going to move a move a lot is probably unlikely I would guess, it's a huge it's a huge the largest part of our portfolio. It's a huge amount of people and jobs and so it's.
Hard to make that work, it's a more diversified economy more reflective of the United States and so practically speaking I think that if the job forecast is not going to vary by a whole lot. If you look at this past year Oh, you know, we said originally southern California, a year or go into Europe .
So the 19 forecast southern California would be at 1.3%.
We had northern California, 2% I'm, so we've done quite a bit better in northern California. It's.
Currently.
At a up about 2.7% and Seattle started a lot better. So it's really been driven by the tech markets and so I think our view is spread that tech wave and we think northern California in Seattle or the best way to do that.
Appreciate the color on that thank you <unk> looking at your development schedule I noticed that station part Green phase three weeks <unk>, it's nearly complete and yet construction cost went up about $10 million or 50000, a unit versus last quarter. I can you talk about that little bit more and maybe provide some context as to why that is.
And how that's perhaps affecting your view of future development starts.
Well, yes, we.
Commented is actually in the script and many times before about this.
Difficulty of direct Vela bad in that construction costs are growing much faster.
And.
And rents and its compressing development yields and as you see US go from phase three to phase for you see the costs were pretty significantly again as it relates the phase three specifically, it's caused by shortages of labor and longer I'm curious what does the building that's under comes.
Structure, and and similar similar type problems and so again this is a.
I'd like to say that were different from the comments that we make about direct development, but we are part of that world and so you're seeing the outcome.
Alright. Thank you very much appreciate the time.
Our next question is from surely well with Bank of America. Please proceed.
Hey, guys. Thanks for taking my question. So my first question has to do it despite that you've seen a night.
So in your 19, Fourq, how you, yes, I forgot that around 35700 units.
A lot coming online and 19 I was curious about the slippage that you do anticipate going to company and whats Submarkets.
Yeah.
Yes surely. This is this is Mike yes. There are some there are some nuances here as to 19, we were actually very close we go back to our original.
Expectations for 2019 were still very close to that number so I give our research department great credit for for doing such a good job building in the supply pipeline up and and being pretty accurate. There was have been some delays that we're a little bit greater than what is implied in our forecast but.
It's really been.
Something that has added a lot of value.
What will change between 19, and 20 is the sort of the cadence of the supply deliveries. So.
In 2019.
In Q1 in Q2, we had a roughly 16000 units delivered out of the 35000 total.
In 2020 that will go to about 19000 so.
We're actually projecting the Q4 2019 is the peak on a quarterly basis to supply so even though it looks like it's the same number year over year. The reality is that it's picking now and will decline throughout 2020. This will have an impact on on pricing and that we will have.
More.
Supply deliveries in the first and second quarter, which obviously are more impactful to our 2020 guidance and.
But again as we noted on and what in our presentation.
At the BAML.
Meeting.
Overall, we hit the peak on building permits a in a couple of a year or two ago and so we're now down about 13% from that number. So we think that we've hit the peak of so the pick a suppliers to permits we think that would hit the peak as two deliveries in Q4 2019 and.
Looks like we get better as the year goes on in 2020 [noise].
Great.
Oh My God.
Your strategy going into early 20 feet to keep occupancy on to hold back right.
Our strategy going forward, you're saying, yet you know as I mentioned in line.
Remarks up front.
Our portfolio right now is that a 97.2% occupancy and that was very purposeful, we held out benefiting from the stronger peak leasing season, and the ER. The peak in rents, which was later this year again another good thing that's that we benefited from but then we rapidly repositioned the portfolio recognizing.
The supply that's that's coming at us So, yes, we will hold out higher supply but.
I'm, sorry, higher occupancy, but more than that we positioned our portfolio, which will enable us to avoid some of the load as you know when I when I say choppy I, what I mean is occasionally people start pricing unit down to aggressively and if we're in a good position like we are in right now we'll have the ability to hold back you know wait a week.
Hold back and let things clear up and then ill Ah lease our unit. So I do expect our occupancy to come down some from the 97 too, but we'll we'll generally favour occupancy for the next a couple of quarters for sure.
Got it.
My next question.
So your date responses are at 3%. They maintained that's about two to true like for like how should we think about the rest here.
Okay.
Adnan in China.
Well the higher quarter as well.
Yeah, Hey, Shirley Dangelo here R&D expenses side, it's tough to do you know.
Okay.
Quarterly run rate and try to assume would that mean, there because expenses are by nature very lumpy and you'll see that last year at our <unk> expenses ran higher in the second half, particularly in the fourth quarter, whereas this year, it's a little bit more throughout the year and when we set our expense planning.
With the team well, we don't do is we don't.
Uh huh.
[noise] focus on when they're going to execute certain expense items, it's really whenever it makes sense for them to do so and if there was a good window to do so and so you know the N. day, you'll see that Lumpiness, that's probably going to continue having said that.
We are expecting to come in in our guidance range and and we are on plan Src expenses are concerned.
Okay.
Our next question is from Nick Joseph with Citigroup. Please proceed.
Thanks, I appreciate the color on the operating strategy I'm, sorry, I missed it but what's the current loss to lease.
For the entire portfolio versus this time last year.
Sure, let me start but the loss to lease is obviously a function of the market Red first as scheduled rents and so as I mentioned, we had a phenomenal year. This year move increase our scheduled rent, 3.5%. So we took a lot of or the rent that was available in the marketplace and then we also held out longer.
For adjusted our portfolio, which met which means actually that the September numbers are not as a comparable as they should be but that said our numbers are 90 basis points for September 19 versus a 150 basis points for September 18.
But again because of these adjustments a better way to look at it is really recognizing that the or if we average August and September together for both years, they come up actually equal. So we're about in the same spot as we were last year, but we drove more money down to the bottom line because of the market conditions and and how we played it.
Does that answer your question.
Thanks, that's very helpful.
Maybe just on a transaction market.
Broadly that are impacted by 14 82, what do you think the cap rate.
Impact could be going forward.
Yes. Good question Nick for sure I don't think it's I don't think it's got to have a huge impact because you know as long as you'll see <unk> plus five is somewhere around 8%.
The market is not underwriting.
<unk> percent rent growth.
And so you may have some years.
Here's your coming out of a recession for example, where you might be constrained by those current.
Parameters, but I think the you have the marketplaces underwriting longer term rents I know.
Everyone on the call lots of things, but shorter term the markets take the longer view and.
You don't get anywhere near.
C P plus five in terms of long term rent growth. So I think it'll have relatively small impact on transaction values.
Thanks.
Our next question is from Rich Hill with Morgan Stanley . Please proceed.
I wanted to come back to the supply comments, just just for a moment and really asked two questions first and foremost I just so I'm clear it sounds like supply, it's just been pushed out a little bit a into two age.
For Q1 9 is the peak.
And that will still have some ripple effects through one Q and into Q, but once we get passed that if if I'm thinking about this correctly, we should finally be back past the supply or am I thinking about that correctly.
Oh you know this is just Mike.
We don't have our numbers for 2021, yet so [noise] flying blind a little bit, but I definitely agree with what you're suggesting we think that.
The peaks of Ben had with respect to permits and we're starting to see it on the deliveries and so I think it will level off at a level that will be quite a bit below the 35000, but yeah. There's still plenty of interest in development. So we're not saying, it's you know it's going to a nominal amount, we're just suggesting owed.
It will trend down.
Yeah, Hey, there's 2021 helpful.
I want to come back to your comment about plenty of interest in development and Mike I just want play Devil's advocate here for a second you've noted that.
Interest rates up really helped your acquisition volumes.
As a tremendous amount of negative yielding fixed income data globally by our kind of around 15 trillion [laughter] is there any scenario where development yield actually good development suddenly begins to reaccelerate because development yields actually look really compelling on a relative basis, particularly in markets like San Francisco.
[noise], yes, I mean definitely I think that that could happen. It tends not to happen later on an economic cycle. Because you have things the pull against you you know labor shortages caused construction cost increases to be very large and that is a top of the market phenomenon generally not a bottom of the market.
Phenomena.
For <unk> assets and rents are at pretty high level. So you.
You know compared to the 2012 to 2016 period, where we were growing a same property revenue an average of 7% per year, that's not likely to happen at the top of the cycle given the constraints of rent to income and affordability and so.
Yes, we try to triangulate the stuff pretty carefully and what we thought is as I said in the prepared remarks.
Preferred equity is a better way to approach out because were coming in late in the process were coming in at the point. The construction begins the costs are known the bank financing in place.
Et cetera, and similar to one of the deals we did a couple of years ago century towers, where we would take both and ownership position in a development deal as well as a preferred equity piece. So we would consider doing that but the point is we want to come in late in the cycle.
And because that's where.
Yeah, you get better growth and.
Cities generally are more agreeable to to helping make development work.
And I'm, just the whole scenarios better.
Got it thanks, Thanks for that Mike I appreciate it.
Thank you.
Our next question is from.
Stevenson with Janney Montgomery Scott. Please proceed.
Good afternoon, Mike Oh, your three acquisitions this quarter it looks like two jvs and one wholly own how do you guys think about how much more aggressive you can bid for deals and a 50% JV with the various fees and promotes that you'd be comfortable bidding for a wholly owned asset made does the 50% JV or allow you to bid 20.
Five basis points, lower 50 basis points, how meaningful is that gap when you're able to bring the co investment program to bear.
Yeah. It's it's a good question actually the we have a partner on the other side and if we're going to pursue something which will generally be the larger transactions in a joint venture mode.
Yeah, we're working with them.
On these scenarios, we generally have a sort of an internal benchmark sensitivity analysis as to whether it's more beneficial for us to be in a JV format or on balance sheet and.
Actually overtime, we go back and forth in terms of depending upon the cost of capital in the impacts on core AFFO per share and NPV per share. So we're constantly changing the mix and but I would say, we're not trying to.
Push the pricing because if we start pushing the pricing guess, what we start affecting future deals and so we want to.
By property. So we think are well suited well located at a at an attractive you only deal that works. It adds value both from a core AFFO and may be per share basis, and not influenced the market. So that's our basic program. It really hasn't changed a lot and I cringe, a little bit about the thought.
Of.
Oh Gee, we should bid more because we can bid more we really try to avoid that.
But there has to be some sort of got that right I mean, whatever it is because otherwise at this point in the cycle, giving you know your 27 billion dollar entity and you know opportunities are more scarcely capital for you you do them all on balance sheet right.
Well no not really actually you know so in the sensitivity analysis that I was talking about.
Yeah, we need a certain a premium to end Avi in order to utilize our.
Our balance sheet as opposed to a joint venture transaction. So just working through the math on these things and so right now our preference strong preference is to use joint ventures, you'll notice that we did do one deal on balance sheet, but it was a relatively small deal township and it would that was driven more by the size.
The deal rather than a rather than its overall impact so.
That's how we look at it again, it's not in our best interest I don't think too.
To try to push the market cap rates down we want cap rates to remain as high as possible. So.
And then it's really the other way around our transaction people try to find high quality deals in markets that are going to grow and then we try to find the best capital to fund that deal. So the transaction comes first the capital decision comes second.
Okay and second question year to date average monthly rental growth in same store portfolio was 3.4%. How much you know are you seeing a expansion in fee growth and the same store portfolio, you know pets parking trash et cetera, and how we sort of reached the point not only in your portfolio, but it is an industry, where you sort of.
Maxed out on the fees you can charge a resident that you're already trucking 4500 I'm on for correct.
Sure. This is John .
The the fee part of it is running just slightly in front of the of the base rental.
Revenue at this point in time, but that said there is a level of have changed that's going on within the different line items. For example, you have cable and you have the cable cutting so that's going down yet at the same time parking is going Oh.
And then there's few other line items that are that are moving where pets is fairly flat. So I think longer term there'll be some opportunities I had mentioned a while ago, we were working with a raising some of our amenity space to non residents and at the same time I commented that immediately two of our peers picked up that off the call.
Paul and went with our same vendors. So we're pretty quiet about the details that we have going on but going forward at least [laughter], but I I do think there'll be some level of opportunity without the big thing they'll always is Reds and ethics has always been focused on our assets on our locations on our research and that will always be there.
Number one most important aspect of ethics, but we do try to enhance.
Our returns wherever possible.
And how meaningful or the overall fees or whatever you're calling fees out of the revenue standpoint. These days.
You're talking a few percent.
Okay. Thanks, guys.
Thank you all right.
Our next question is from Alexander Goldfarb with Sandler O'neil. Please proceed.
Hey, good morning out there.
Mike.
On the err on the rent regulation on Abby 14, 82, and then you've got rock Tenn, 2.0, I thought that harder for of 14 82, superceded whatever local towns wanted to do so what would overturning and maybe that's not correct, but what would overturning Costa Hawkins do given the.
Limitation of 14 82.
Yeah, Alex I actually 14, 82 does not affect what a current rent control regulations that are in place. So it's it's separately from that so a those regulations remain in place.
Right I didn't mean I didn't mean overall the current regulation I thought it governed stuff going forward is that not the case.
Well, Yeah, you have Costa Hawkins out there that's a statewide law you have 14 82, that's statewide law and then you have the local regulations and maybe I'm not understanding your question, but each of them set as a separate entity and they one does not supersede.
Or overruled the next day, you have to comply with each of them does that make sense.
Yes, no that Mike that absolutely does that absolutely does.
And then the second thing is Angela you mentioned that 14 to 18 cents of headwind and I think if I heard correctly that was from the early repayments that you got in their Q and that you're expecting in Fourq.
So maybe just a question of how quickly do you think you can put that.
To work and then Mike you spoke about the competition or what's going on your preference for the developer equity, but clearly others.
Your peers are getting into that business.
Maybe you can talk a little bit about how you guys. You know view a deal for income versus underwrite a deal that you may actually want to on the asset at the end.
Hey, I'm Alex on the.
The structure finance and.
Comments.
Let me just make sure I clarify.
So on the early redemption of Ah that's coming for us in Q4 for her and 10 million.
That does not relate to the 14 to 18 cents headwind for next year.
As we do expect to backfill those prefer equity investments. So the question really is though there will be some headwind because as these these deals get back filled the they don't fund immediately they tend to take it up to six months to fund and so that you know that that is.
That's one one item and and I don't have a specific number for that at this point time.
But I highlighted the 14 to 16 and 14 to 18 cents 'cause that's eight.
More meaningful from a single investment and that really Intuity CMO that we originated batch and 20 <unk>. So its separate from the front for for equity and that's a onetime item for debt instruments.
Okay. Thank you for that.
And then Alex I'll try to hit the second part of your question. So.
When we realize that there definitely is more competition for preferred axle equity that is that's definitely a true statement.
We feel pretty good about the relationships that we have we formed and.
A number of of our.
Relationships have come back for a second transaction and so.
Yeah, we feel pretty good and we feel like we have and advantage there relative to others were were known quantity we've been in the business a long time, we have great.
Construction lending relationships or we can marry with our preferred equity et cetera, and we you know we've always tried and I've commented on this on the call too.
To leverage those preferred equity investments into other types of relationships either by trying to get an option to buy at the end and we generally don't get an option to buy primarily because the developer thinks it's worth a lot more than we do at the end of the.
The construction period. So that's that's been headwinds you end up you would take a much lower yield and then you don't have an average transaction at the end that's not attractive to us we do have a seat at the table there've been several of these transactions that we've either purchased at the end or purchase shortly after a.
Action completion and or converted to a.
Longer term lower preferred interest that keeps us in the capital structure.
Again as I said in my comments one of them there are a couple of.
Opportunities to to do some direct development and this would be one of them, which is you know marrying our preferred equity with a a direct ownership interest in the deal.
Where we're coming in again later on in the in the process. So we.
We continue to look for ways to leverage the preferred equity into other types of transactions and you know for whatever reason you know this a whole series of refinances I think we've we looked at a couple of those deals.
Refinances and sales at Angela referred to in my comments looked at some of those deals, but you know a number of them we did not.
The other just went on and sold the property and are we didnt want them. So I you know again I think that.
Preferred equity keeps the hunt from a variety of perspectives and it's a worthwhile and it's also great financially.
Okay. That's helpful. Thank you Mike.
Thanks, Alex.
Our next question is from Steve.
Uh Huh with Evercore ISI. Please proceed.
Ah things really just one question, Mike as you sort of think about you know he be 14, 82, and some of the other potential legislative changes has it sort of altered.
Your investment strategy as it relates to Submarkets age of assets types of buildings that you're willing to buy and Conversely is it impacting how you think about the portfolio on what you might want to sell going forward.
Ah, Yes, hey, Steve good to hear your voice.
It does to some extent I.
I guess beginning at the.
Couple of years ago, when this risk was increasing.
Looking at our portfolio from their perspective of.
The cities that have really horrible rent control you know rent control that basically shuts down new development. Yeah. We know that was essentially fixed by Costa Hawkins in that Costa Hawkins.
Pivoted.
Pernicious forms of rent control yeah, two older property in effect. So I'd say, we have been more cautious with respect to those cities they'd be basically San Francisco, Berkeley, Santa Monica et cetera.
And but beyond that I think that to the discussion in California has become a pretty balanced discussion.
In that it's not just about protecting the renter, which is obviously important and that's why 14 82.
Was a build that the California apartment Association did not oppose.
But at the same time.
Don't.
Change the the ability or the attractiveness of developing more housing because there's an enormous shortage in California estimated by one study at at three and a half million homes, and and probably getting much worse that was out. Some 2015 is probably gotten worse. Since then and maybe another way of looking at it is I think in this fall.
Michael we produced about five times more jobs than homes created in the ethics markets. So 270000 jobs to 55000 homes. So the the housing shortage of getting worse not better and the last thing we need is to shutdown the development pipeline. So I guess.
Yes, we view 14 82 as a balanced proposal, we view for the amendment of Costa Hawkins as a essentially an anti growth.
Very unbalanced proposal and so that's that's how we look at it so I guess it would change it in a couple of very specific areas in terms of where we want to own property, but it hasn't had a huge impact on the overall company.
Got it thanks very much.
Thanks, Steve.
Our next question is from a hard to school with Zelman and Associates. Please proceed.
Hey, guys. Thanks for taking my question I've got two for you today on the first one on supply just you know.
I understand you're thinking here I can always permits are down 13% over the last 12 months in our markets, but if I look at the pipeline of units that have been started.
Not pipeline whenever it slated to be delivered if I just add up all those sort of started.
That's a five times, what's been completed over the last 12 month, so even if I assume like a really higher abandonment rate I assume a lot better delayed seems like it's a multiyear supply pressure kind of thing that's maybe either in late 2021.
That does that concern yeah, you're seeing how would you think about that yeah. No. It's not at all consistent with what we're seeing and I mean, here's the problem I mean.
The data vendors have have a very difficult time trying to weed out.
Which projects are shown three different times.
My name by location by and you really need to we've you know sort through that data and really understand where it isn't in the process. I know there are a lot of metro's in the U.S. you can take a permit and Andorra start and you can.
We'll go out 24 months and you have an apartment building. It just doesn't work out here and so you really have to be involved in a more fundamental level driving the assets understanding what they look like where they are in the development process in order to get a good estimate of what's going to be produced so because for.
2020, if it's not under construction right now it's not going to deliver in 2020. So I think we know again 50 units and more as well what we do but we send our people out and they drive the buildings because we view supply is been a critical thing you will supply used to be more sky.
Scattered around throughout our marketplaces, it's become much more concentrated and as a result, we have to understand it much better than we that we have in the past and so that's what we spent a lot of time on it get that right. So we feel very comfortable on our 2020 numbers and I'm just.
Sorry about the basic data that's out there it's tough to follow.
Okay, that's really helpful.
I completely agree the 2020 are kind of outlook, it's just hard to see through the 2021 and just a.
A follow up on what you just said.
What is that pipeline number looked like in terms of I mean, you said it takes for much longer to build in California that must mean that if you look at what's under construction right. Now you can see through visibility is higher.
Well right.
Yeah, you're right. Yeah, you are right. We just haven't focused on 2021, yet so we'll get there will be so we'll be talking about 2021 next year I don't have that information right now I'm sure. It exists within Essex I, just don't have a right now so.
And I'd I suspect that again as you go through.
2020.
Do you have a pretty significant drop off you start with 10000 units in Q1, and you have somewhere around seven 8000 units in Q4, so that drop off is definitely there and but I. Just don't have the next steps in front me and I don't want to do want to make it up.
Sure I'm just lastly, she did not show the new and renewal for the quarter just those spreads.
Sure. This is John so for the quarter, our new leases were.
On average the ER.
Here, we go sorry, 3.4% and the renewals going out in the fourth quarter, 4.5% on average the actual achieved for the third quarter was up 4.2%.
Thank you that's all.
Our next question is from John Lewicki with Green Street Advisors. Please proceed.
Thanks.
The acquisitions this year been focus in northern California can we expect northern California bias to continue next year, if your cost capital stays advantageous.
[noise]. It's good question John I, Yeah. The the pipeline right now is is pretty heavily weighted in northern California.
And for maybe down a little bit of color to that we see this rent to income ratio.
At about 103%. So you know incomes have done really well in northern California, and so that becomes less of a constraint.
And southern California has not really kept up to that number but we hope that we can also buy in Seattle. So those two markets would be.
Our focus and.
But we might buy an asset or two in southern California as well.
Okay.
John could you help us quantify a bit of the choppiness, you're referring to in Northern California, you expect to the next few quarters and just be a bit more specific if it. It's so for instance of northern California. Today on average is printing, 39% revenue growth at at Choppiness hits, what does that trajectory right.
And your growth looks like you know this time next year.
Sure. So so the choppiness really relates to what's going on with market rents at any point in time not necessarily revenue. There's a difference obviously that in part was why strategically we filled the portfolio up to 97.2 and are in a good position going forward. So what I'm expecting the a as I mentioned the in.
Northern California, specifically the.
Supply is twice as much in the second half of this year 19 as it wasn't the first half and unfortunately, that's coming at a time when demand is seasonally slower or lower so that will impact market rents and it'll largely emanate around where the supplies being delivered so you can if that if you can imagine in places like.
Downtown Oakland, there's a little bit more supply there'll be an impact but in the sense of revenues.
We're obviously not giving out next year's guidance, but we're reaffirming this years guidance and it really I don't see it having a huge impact on us because we positioned ourselves well to avoid that I think there'll be some headlines of rents being down but again I use the word choppy because it's not that they're going to be down long term you had to step back for a second I realize the.
Hey area is a very strong market has very strong job growth the supply that's coming into it big picture is under a percent. So we're in a good spot. It's just going to create some headlines of lower rents for the for the quarter and probably into the first quarter of next year and that's what I'm really referring to.
Yep understood just a follow up there one one submarket that stood out within that broader healthy backdrop. This quarter was San Mateo and just in terms of the sequential trends or anything specific there that on the demand side that you're seeing outside of lumpy supply heading.
Yeah, I know that one is is really a market that are the results there and for the quarter for Sam a tail are really the result of the market being strong and what I mean by that it actually is a very strong market and I think our own ops team got over their skis on that a little bit and so we had a vacancy decline of over 200 basis.
Pointed that market, which is what drove that number but that's obviously a resolved so.
It was really the the function of the market being so strong they got though I think a little bit overconfident with a that particular market.
Alright, thank you.
Thank you.
Our next question is from Rich Anderson with SMBC. Please proceed.
Thanks, a 15 minutes before the call starts this is what I get our in 10 minutes in [noise].
So thanks for sticking around but I do want to ask a couple apart.
Are you doing.
So.
So when I think he ethics.
You know perhaps of old you're always kind of at least a couple hundred basis points better than national average from a same store growth perspective.
And your kind of more you know by your standards more Pradesh strain type of internal growth today.
Is it all entirely a you know this concentration of supply issue or are there other dynamics, perhaps on the demand side that have changed such that you know kind of a return of ethics is being this premium growth provider are perhaps gone for you know for awhile.
Hi.
Good question Rich I appreciate it.
You know I'd say every.
Economy ever recovery period is a little bit different and so there was no one size fits all and there'll be times, when we I think pretty significantly outperform and <unk>.
This business is one I think reasonably reasonable people would agree that rencen incomes have to grow pretty close to one another over long periods of time and so but this the cycle I think is somewhat different.
And I said earlier.
From 2012 to 2016 rents grew our same property revenue grew 7% a year and that was much faster than incomes and therefore, we created and affordability issue, which we're now mending and is it is getting better so we.
We see I don't think anything has changed I think we're in the markets. The generates the highest takers of rent growth over long periods of time.
And certainly this cycle seems to be pretty strong we got a lot more lot better rent growth for a long period of time, which I think everyone is forgotten, but it's set up this affordability issue and we're working through that and you know what we've made progress lot of progress so from as I mentioned before from 2010 to 2015.
Team rents outgrew incomes by about 220% if you look at that enough from 2010 to 2019.
Rents outgrew incomes by about 30%, so it's getting tighter and we're solving that affordability problem and there will be a point down the road, where rents will do better.
Okay. That's great color. Thanks, and then very early on in the call. You mentioned you know how supply is really concentrated in the urban areas, which you generally are not.
And I'm curious if you've been able to quantify how well ethics is done relative to your urban counterparts from an internal growth perspective is there a number that you that you track to see how you're doing purely on that using that supply observation.
Oh, Yeah. This is Mike again, you know I think that there are just fundamental differences between us and the.
The competitive set.
I think one of the key differences is that yeah. We our focus is you know core AFFO per share growth and and NPV per share growth. It. It really is not tied to the same property metrics that are you know quarter to quarter et cetera, and because they will you know why does that matter why would a disconnect.
Well it would disconnect to the extent that you make investments in property you Overinvest in property for example, which use capital dollars and yet it will push up your same property revenue growth.
But it doesn't actually add value on a bottom line basis. So when you look at large and large capital investments capital investments that have relatively short duration income.
We are less excited about that we yeah. We are interested when we do renovation projects. For example, we're looking for a you know a long term return consistent with real estate and there's lots of things that can be done you know investing in personal property.
We are shorter term revenue generating type proposals that can make those numbers look better that's not our focus our focus is on growing income and core AFFO per share cash flow over long periods of time and I think go look back at a chart rich there I think the proof is in.
The the detail there's a actually one chart on our in our presentation that I think sums it up which is we produced a long term by 25 your care been public company for 25 years the CAGR.
Shareholder return is 16% I don't think there's lot of companies that have done that over 25 years no fair enough. Thanks very much.
Thank you.
Our next question is from Neil Malkin with capital One Securities. Please proceed.
Hey, guys. Thanks for taking the questions I just have to questions and five follow ups for each of those question.
[laughter] first one is I saw that your notes receivable increased by about a 145 million. This quarter is that a change in classification of that remic that I think you were talking about selling or is that something else.
Some color on that would be helpful. Thats, a pretty large amount.
He knows receivable increased I'm. The income alignment is really because we had a shoe bridge loan.
We'll see that with the acquisitions.
That's how we provided to our joint venture and so those are now once again.
Temporary in nature, but they do generate some income.
A couple worse on their outstanding.
Procure permanent financing.
Okay.
I know that a lot of questions have been asked about supply but.
And I'm trying to dig dig into the data.
Looks like you know at East Bay, San Jose into your largest market supply is expected to you know as a percentage of existing stock should should.
Go up by more than double and even if you assume you know this double counting phenomenon, you're talking about that would imply that you know like almost all the products are double counted so I guess.
Is it just the gross air and you know the vendor Axiometrics for example.
That that is a massively overstating the impact or any again any any help there trying to understand because to me. It seems like you're setting up for situation like we were a couple of years ago. When the Bay area had rents that fell precipitously due to clusters of supply relative to job growth that was no.
<unk>.
Of the early cycle.
Yeah.
No I'm I might preface the the history with.
I think you're referring to probably 2015 16, when the bay area slowed pretty dramatically and but you know again still very positive in and it back to my prior comments that if rents get too far out ahead of incomes. It creates an an affordability.
Issue, which is like a constraint it isn't a supply demand issue, it's a constraint issue, but people make different decisions like doubling or tripling up whatever.
And so that becomes a factor.
Again back to this this rent to income in northern California.
It's currently to 103% over the long term historical average.
Which makes it more affordable than southern Cal it at 109%.
And so we think that northern Cal is essentially fixing that affordability issue faster than everyone else our numbers and again I can't comment on that as to the data vendor and a you we realize it's challenging to get accurate data with respect to supply.
Having said that as I said in previously we were really accurate in 2019, I give our people a lot of credit for doing the hard work of putting this together, but if I just look big picture at 2020, Yeah, We expect in northern California about 72000 jobs and we are producing about eight.
18000 total housing units, so 11000 apartments, and 6400 single family homes that relationship is two to one so yeah. It's candidly we need more housing in.
Northern California, and it doesn't appear that there is a supply demand issue with respect to that I mean do would.
So I I think it looks good 72000.
Job should translate to about demand for about 36000 homes total homes not apartments in total and we produce about 18000. So that's still seems to work as far as we're concerned.
And I I hear you on that I, just like I said, I mean that someone data providers that they have addresses names.
A lot of detail. So I mean, it just seems like it's odd that they'd be off by such a large amount. So maybe that's something I can look into more.
Well, maybe just go back go back a year and look at what the projections were and then look at what they are now.
I think that's probably the best way to.
All right and then last one short term rentals are becoming a little bit more talked about I, just wonder just given the especially your types of market.
Maybe a higher transient or migration related just.
Are you.
How much if any are you looking to put that into your portfolio is that something that you're seeing more demand for more interest in and if so you know how what kind of rolled you see that playing in your portfolio.
Well. This is John we are of course always looking to figure out how we can maximize the value of the assets in so we do explore different opportunities and evaluate the impact what we see often times on if you're meeting like that the overnight type rentals, we see that that has a negative impact on the quality of life.
Our customers or other customers and ultimately hurts our overall.
Market have you heard hurts our market rents at the end of the day. It creates issues. They are having you can imagine having people coming in with a.
With all their overnight stuff through the leasing offices in into the amenities space and they have a different frame of mind, a very short term frame of mind as opposed to the tenants that live there and it's their home. So we continue to look for opportunities and there are some situations where.
Well, that's working where people are taking a floor or a building and a second get it that way to a basically defined different spaces, but there are still issues then with the amenities crossing over so well, we'll constantly look at that but I think its a.
Not a huge opportunity at this point in time, unless unless something changes.
Thank you guys.
Thank you.
And this does conclude our question and answer session I would like to turn the call back over them in Japan for closing remarks.
Thank you operator.
And thank you everyone for participating on the call today.
We hope to see many of you add new right in a few weeks have a great day. Thanks.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.