Q4 2019 Earnings Call

Excuse me everyone. Thank you for your patience and holding the conference well begin momentarily again, thank you for your patience unfolding.

Good day and welcome to the equity residential Fourq you 2019 earnings Conference call Today's conference is being recorded.

At this time I would like to turn the conference over to Marty Mckenna. Please go ahead.

Good morning, and thanks for joining us to discuss equity residential fourth quarter and full year 2019 results and outlook for 20 Twond.

Our featured speakers today are Mark Ruelle, our president and CEO , Michael Miller, our Chief operating Officer, and Bob <unk>, Our Chief Financial Officer. Please.

Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the.

Securities laws. These forward looking statements are subject to certain economic risks and uncertainties.

Yes, and no obligation to update where supplement you state that become untrue because its subsequent events now I will turn call over to Mark Roe.

Thank you Marty good morning, Thank you for joining us today I'm going to start by giving a quick overview of our business and investment activities and then I will turn the call over the Michelman Allen, our Chief operating officer for a discussion of our 2019 operating results and 2020 revenue guidance as well is giving you some detail on you exciting operational initiatives that we.

We're pursuing.

And we'll pass the call over to Bob Your channel, our Chief Financial Officer will give you color on 2020 expense and normalized funds from operations guidance and a bit about our balance sheet activities.

Only 19 was a very good year for equity residential we saw continued strong demand to live in our well located urban or dense suburban properties in the nine metro's in which we do business and our excellent customer service led to record levels of customer satisfaction and resident retention.

Big Thank you to all my colleagues equity residential for delighting, our customers every day and for working together as one team.

As we predicted the fourth quarter of 2019 reverted to the normal lower seasonal demand that is common at the end of each year slightly weaker conditions than projected let us to slightly underperformed on same store revenue versus October guidance, but still perform at the top end of our expectations from the beginning of 29.

And we saw normalized funds from operations, increasing 2019 by an impressive 7.4% exceeding our expectations as we continue to produce strong reliable growth.

2020 looks to us to be more of the same slow, but consistently growing economy and continuing positive demographics, leading a good demand into steady revenue growth, albeit at a somewhat lower overall level than in 29 tea.

We expect the east coast markets to continue to improve on a relative basis and overall, we expect the average revenue performance difference between the east coast and West coast markets to be only about 25 basis points in 2020.

Except for New York, we see supply is similar to or slightly higher in our markets in 2020 versus 2019 in New York supply across the area in which we operate has been declining the last two years and we expect it to fall by a further 40% in 2020.

In fact in Manhattan, where we have 70% of our New York Metro revenue, we see fewer than 1000 market rate units being delivered in 20 Twond.

Also as we've discussed on prior calls will be facing a headwind of 20 basis points are so from new rent control regulations in California and in New York.

On the innovation front, we're very excited about the benefits to revenue and expense as well as the customer satisfaction that can be gain from the continued rollout the various initiatives that Michael will discuss these benefits will be modest in 2020, but we believe will accelerate and compound overtime.

Switching to investments we had a busy 2019 as we've stated previously increased demand for apartment assets, which led to cap rate compression between newer and older properties. This let us in turn to accelerate the sale of some are older lower return properties and to reinvest that capital in newer properties and we think will provide considered.

Really better long term returns.

We were particularly successful at doing this in 2019, we reallocated $1.1 billion of capital from assets that were on average 35 years old assets that were on average two years old and incurred no cap rate dilution in doing so.

We think owning these newer higher growth assets will benefit our and F. F O growth and because we expect much lower capital spending at these newer assets the level of our capitalized expenditures, which has already much lower as a percentage of revenues compared to most of our peers should be lower and our unlevered irrs higher going.

For the fourth quarter was a microcosm of this as we sold two older suburban Washington, D.C. assets that averaged 41 years old for total proceeds of $374 million, 84.8% cap rate and acquired $370 million newer assets one in central C.

I don't want in suburban Seattle, and one in suburban Washington, D.C. that were on average one year old at a 4.8% cap rate.

We also acquired more than we sold in 2019, we've guided for the same outcome in 2020, well cap rates and I are ours are certainly lower than historical averages. So as our cost of capital the spread between the Unlevered I or are we can achieve on new deals we see for sale versus our weighted average cost of capital is relatively high.

We intend to finance is increasing our assets with a combination of new debt and net cash flow our strong balance sheet gives us ample capacity to do so but as always we'll be prudent in managing our balance sheet.

Switching to new development the equity capital availability story since early 2019 has somewhat improved for large established developers, while smaller local and regional developers continue to work hard to put their equity capital stacks together.

We have been pursuing a few of these opportunities with smaller developers as joint ventures, and believes that investing our capital and shovel ready deals would sound deal structures that provide some protection or capital is a good way to source new properties, while managing the risk inherent in development.

You should expect us to announce new joint venture development activity in 2020, as well as new wholly owned development deals, including some lucrative density place, we're taking down a low density portion of them, an existing property and replacing it with higher density housing.

We expect 2020 development starts a $500 million $650 million, depending on construction timing and development spending in 2020 of about $300 million. We continue to believe that development makes sense and selective locations in our markets. We're acquiring new properties is difficult but were existing prop.

These trade materially over replacement cost, we have no imperative to start a certain amount of development per year, and we will always compare development opportunities to the market to acquire existing assets and look for the bask risk adjusted return opportunity for capital.

We will also seek to keep the amount of capital we expect to spend on development in any one year roughly equal to our annual net cash flow and expected new debt capacity.

Finally, let me finish by talking about our dividend, we believe one good way to use our growing cash flow to reward our shareholders and 2020, we plan to increase our common share dividend by 6.2%.

Now I'll hand, the call over the Michelman else.

Thanks, Mark so today I'm going to provide a quick recap of 2019 performance sure insights into our 2020 same store revenue guidance discuss what we're seeing today across our markets and end with updates on our current operating initiatives.

Let me start by acknowledging the dedication and hard work of our employees and 29 team for the full year, we reported 3.2% same store revenue growth highlights for the year include 96.4% occupancy, which was 20 basis points higher than 2018 every market, except for San Francisco was able to grow.

Occupancy on a year over year basis.

Long achieved renewal rate increases of 4.9% for the year, which was the same as 2018 turnover declined by nearly 200 basis points to 49.5 per cent for the year, which is the lowest full year reported turnover in the history of our company.

Strong absorption of elevated supply and many of our markets delivered slightly more pricing power than we originally expected at the beginning of 2019 and resulted in 0.3% new lease change for the year, which was a 50 basis point improvement from 28 gene.

And finally in addition to the areas just mentioned the company continued its trend of record breaking customer satisfaction and online reputation scores. This strong positive feedback from our customer and the progress being made on innovation. We shared in the release demonstrates that we have some of the best employees in the industry or cash.

And at about meeting the ever changing needs of our prospects and residents.

Looking back it is clear that the fourth quarter of 2019 reflected a return to seasonal softness which in some markets was greater than expected and this was very different than the upward acceleration felt in the fourth quarter of 2018.

The good news is that the portfolio demonstrated resilience and we're starting 2020 well position to achieve our revenue expectation.

Moving into 2020, our same store revenue growth guidance range is between 2.3 and 3.3% at the midpoint of 2.8% were 40 basis points lower than our 2019 actual result.

This guidance assumes a similar occupancy of 96.4%.

And improvement in new lease change of 30 basis points to a positive 0.6% for the year and anticipated renewal rates achieved a 4.7%, which is 20 basis points less than 29 T. Recall that these renewal rates will be impacted by recent regulation that we have discussed on prior calls.

In 2020 supply will be down considerably in New York up in Boston, and L.A., and mostly comparable and our other markets year over year.

We expect consistent demand that should aid in the absorption of this new supply.

Market, New York do you see in Seattle are expected to deliver better revenue growth this year, while Boston, San Francisco, and Southern California market will be worse.

Let me take a minute to reconcile the 40 basis point decline at the midpoint and the expected same store revenue growth for 2020 as stated on our last call rent control in both the California, New York markets is expected to negatively impact. Our overall same store revenue results by approximately 20 basis points. This year the remaining 20.

Basis point comes mostly from the incremental impact from competitive supply in our market and if you then it will be difficult in 2020 to replicate the occupancy gains we had in 2019, given the current high occupancy of the portfolio.

Painting, the upper end of our guidance range of 3.3% will be mostly dependent on rate, meaning that in order to achieve this outcome, we will need to have strong pricing power on new leases early in the year and through the peak leasing.

The bottom end of our revenue guidance range of 2.3% would likely result from declines in occupancy due to softening in overall demand.

Sitting here today, the portfolio was 96.3% occupied the same as what it was at this time last year.

She renewal increases for January and February are expected to be around 4.2%.

So now let's move on to the individual markets beginning with Boston.

Boston continues to be a power center of the knowledge economy overall demand drivers are strong and the long term outlook for this market remains positive.

Our 2019 results of 4.0% revenue growth includes gains in occupancy of 30 basis points and strong growth from other income mainly parking thatll be difficult to repeat this year.

Boston is expected to deliver more units as we are tracking close to 6000, new units in 2020 compared to 1700 29 G.

These new units will be concentrated in the CBD and deep work and are likely to have more of a direct impact on our portfolio performance.

Our expectations for the market is about 3% revenue growth and assumes occupancy remains flat at 96.2%, we anticipate less growth from renewals and new leases given the increased levels of competitive new supply and we expect the first half of the year performance to be stronger than the second now given the strong and.

Good growth that we have entering the year.

New York had a busy year end with plenty of press surrounding growing tech expansion in the market and significant office leasing. This activity is fueling continued diversification of the local economy, which we view as a long turn positive.

As 2019 progress operating fundamentals continued to improve in this market. We finished the fourth quarter with seasonal softness that resulted in a concessionary environment that was greater than we expected. However, during the month of January operating fundamentals have improved each consecutive weeks, reducing concession use and then.

Proving occupancy.

2020, we are forecasting better revenue growth, which should be a little north of 2.5% our guidance assumes slight improvements in occupancy and renewal rates achieved but the majority of growth is expected to come from gains a new leases as pricing power returns to the market given the almost complete lack of new supply.

I mentioned earlier.

Overall demand for our product to remain strong with what traffic or tours in January being up year over year. The portfolio was 96.7% occupied today, and we are well positioned to seize improving market conditions.

Washington, D.C. continued to demonstrate strengthen operating performance. Despite the 12000 plus deliveries that we have become accustomed to in this market.

Last year at this time, we were discussing the longest government shutdown on record, but today, both Congress and the president of signed at spending Bill which includes over $50 billion, a new spending.

This budget clarity and increase spending is expected to positively impact the region and continue to aid the absorption of 12000, plus additional units expected in 2020.

Northern Virginia continues to be the economic driver for the region, having captured seven out of every 10 jobs created in the last 12 months in the area.

Our portfolio results in DC validate this as same store revenue growth in the district, which was near a 1% while the northern Virginia, Submarkets with approximately 50% of our revenue averaged above 3% growth than the year.

Overall, the market delivered 2.3% revenue growth in 2019, our forecast for 2020 is a little better than 2.5% revenue growth with improved results, mostly driven by stronger embedded growth starting the year as operating assumptions for occupancy new lease change and achieved renewal and.

Features are expected to be relatively flat year over year.

Moving over to the West Coast, Seattle finished 2019 strong.

It was 3.4% full year revenue growth driven by 70 basis point gain and occupancy and consistent improvement in pricing power and revenue results throughout the year.

We did experience concentrated supply pressure on the east side that we expect to continue into the first half of this year supply in the CBD, which was not particularly impactful in 2019 will return in 2020 during the back half a year. This provides an opportunity to establish rate growth early in the year and through the peaks.

We think.

It's also possible that some of these units get pushed into 2021. If this were to happen it could strengthen our anticipated results this year.

Overall, we expect 2020 to deliver better revenue growth of around 4% with similar occupancy slight improvements to achieved renewal rates and the majority of growth coming from gains a new leasing as we capitalize on the current and near term pricing power in the portfolio.

San Francisco delivered 3.7% revenue growth and 29 chain, which was driven by gains made early in the year offset by declining occupancy in the second half of the year that resulted in a full year occupancy of 95.9% as we've discussed on the last call. We sell deceleration in this market as the year progress.

And that trend continued through the fourth quarter <unk>.

East Bay was approximately 40% of our 2019, new supply and approximately 20% of our San Francisco revenue was our lowest performing submarket in both the quarter and full year with revenue growth below 2%.

All of our other submarkets produced growth above 3% for both the quarter and full year.

New supply in 2020 will be relatively flat year over year with the concentration of competitive supply impacting the downtown San Francisco, Soma and South Bay Submarkets the most.

Overall, we expect 2020 to have lower revenue growth of around 3% as we continue to work through the impact of supply and the impact of new regulation.

Our guidance begins with around 50 basis points of lower embedded growth than last year occupancy at 96.4%, which is a 50 basis point improvement over 29 G.

Similar new lease change and the decline in achieved renewal increase.

As we sit here today leasing velocity in San Francisco is good rates are growing book traffic is up and occupancy has recovered to 96.4% which is the same place we were at last year at this time.

This market has the critical mass of tech talent and while we expect some softness when supply is concentrated around to the long term drivers for this market remained very strong.

Los Angeles finished the year with 3.7% revenue growth, which was driven by strong performance in the first half of the year as noted on our prior call deceleration occurred in the second half of the year as deliveries came on line and put pricing pressure on a number of our core submarket.

For 2020, we expect Los Angeles to be our most challenged market as we continue to deal with the elevated new supply implementations of new regulation and restrictions on short term lease pricing put in place as a result of the wildfires.

We expect to deliver lower same store revenue growth in 2020 of around 2.5% was slightly lower occupancy modest gains a new lease change that are back half loaded and a decline in achieved renewal rate.

As we sit here today, we are 96.2% occupied and delay and while our foot traffic is on par with last year, we feel pricing pressure.

One of the bright spots continues to be west L.A., which is home to the changing dynamics of Los Angeles as Silicon Beach flourishes and online media content takes hold in the entertainment sector, leading to good absorption of the new product in the Submarket.

Our other southern California market spoke Orange County in San Diego are expected to deliver strong, but lower same store revenue growth in 2020, averaging around 3% with similar occupancy slight gains a new lease change that are back half loaded given the anticipated pricing pressure early in the year and a decline in overall renewal.

All right well based on the impact of new rent regulation.

In both Irvine in downtown San Diego, we expect to feel the impact from new supply delivered in areas that will be very competitive to our community.

Both markets sitting at 97% occupancy, we are well positioned heading into a competitive environment.

Moving onto operating initiatives as you know we have long been focused on running the best in class operating platform, which included development of some of the original pricing renewal and online leasing tool widely used in the business today.

As our industry undergoes another phase of significant change we continued to identify opportunities to utilize new technology that will shape, how we interact with our customers and manage our day to day operations going forward.

Our focus is to harvest technology that best serves our customers provides enhanced career opportunities for our employees and creates efficiencies in our platform.

We're currently in the process of executing a number of initiative that fall into three primary areas Mart home technology sales focused improvement and service enhancement.

And while there are many opportunities in the industry to rollout system. We are taking them methodical approach to implement only the tools and processes that we believe will create the best long term benefit in value in our portfolio. So let's review some of the initiatives in three areas.

So first smart home technology, we have already installed over 2100 units and thus far have had success in generating a rent premium a $30 per month on these units.

During 2020, we plan to install smart home technology in an additional 10000 apartment units at an average cost of approximately $8000 per unit.

We are focusing on properties, where we think this technology will yield the greatest immediate results.

Technology includes smart life, a thermostat lytswitch water leaks sensors and a hub that connects at all.

Moving to sales our focus continues to be on improving the customer experience by leveraging technology automation centralization to meet their ever changing need. We currently have deployed Ella our AI enabled sales tool over 200 community and we will be fully deployed by the end of Mark.

We have over 60 communities offering self guided tours and have been receiving very positive feedback from both our customers and our employees on this new process.

During 2020, we will continue to roll out the self guided tour option in the majority of our communities and we will be deploying a new mobile customer relationship management platform to improve efficiencies in the sales process and provide flexibility to our sales team.

Finally on the service side of the business. We are now fully deployed on our new mobile service platform, which means our service teams now use a mobile app manage all of their work in real time.

This allows us to you shared resources across asset and improve service personnel utilization I, having specialist become focused on being subject matter expert.

This will deliver operating expense savings do less dependent on overtime in contractor use as well as improved customer experience through real time notification and resolution of maintenance requests.

Overall the impact of these initiatives are expected to deliver approximately $15 million in annual and Hawaii contribution once fully deployed it will take into 2021 to fully realize that contribution but we have included approximately $5 million of net annualized benefit in our 2020 <unk>.

We believe these early stage initiatives will provide a foundation upon which to continue to build our platform.

Thank you I'll now turn the call over to Bob Your China, Our Chief Financial Officer.

Thanks cycle. This morning, I'll discuss our 2020 guidance assumptions for same store expenses and normalized FFO, along with a couple brief remarks, and our balance sheet and capital markets activity.

A couple of quick highlights I'm 2019.

Our same store revenue for 3.2% expenses grew 3.7% and and alike are 3%, which was mostly in line with our expectations from the third or call.

For normalized FFO, we delivered 91 cents per share in the quarter, which was three cents higher than the midpoint of our expectation is.

This outperformance was primarily driven by higher than anticipated that NOI from higher than expected acquisition activity during the quarter.

Lower than anticipated overhead stemming from lower than expected employee benefit costs that also impacted same store payroll expenses described on page 16 of the really.

And better than forecasted interesting that.

Michael provided color on 2019 same store revenue the let me briefly touch upon 29 in same store expenses.

Full year same store expenses grew 3.7% in 2019 compared to our forecast of 3.8%.

Notably real estate taxes ended the year higher than anticipated at 4.3% as we had fewer successful guilt conclude during the fourth quarter and we had expected.

This was offset by lower anticipated perilous bank, which grew only 80 basis points for the full year.

This outperformance was due to significant improvements in employee benefit costs like the ones impacting overhead that I just got.

Now moving to 2020 Guy.

For the full year 2020, we expect same store expense growth between 3% and partners.

Its forecast incorporates the anticipated 2020 savings from the initiatives that Michael outlined earlier.

Let me walk you through the major categories and drivers that are forecasted growth.

At a little over 40% of overall same store expenses property taxes, driving significant portion of expense growth.

We currently anticipate growth between 3.75% and 4.75% driven by the continued burned off the for 21, a activate met some of our New York properties.

Slight decline in forecasted year over year appeals activity and a relatively healthy increase anticipated and yeah.

For the full year 2019 same store property taxes declined in Seattle as the state legislature took on more of the educational funding burden from local me out.

We've not incorporated that recurring and 2025 Guy.

In onsite payroll, our next largest category, we anticipate growth between 2.25% and 3.25% or 25.

This expense really consists of two key drivers direct salary bonus and commissions for our onsite staff and employee benefit costs like medical insurance.

We expect to see a benefit in this first driver from the operating efficiencies that Michael and his team are working.

This will mute total payroll growth for the year.

As a result, nearly all of the 2.75% expected growth in payroll is coming from anticipated increases medical insurance and other employee bad.

Finally, our last two major category utilities and repairs and maintenance.

Each of these line items individually contribute about 13% to totaling fat.

Each is also expected to grow between 2.5% and 3.5% in 20 Twond.

Drivers of utility growth are expected to remain the same in 2020 as they werent 20 Nike.

While we continue to benefit from relatively low commodity prices that shouldnt usage, given our sustainability investment we see price pressure in the service related categories like trashing Zohr, particularly on the West coast, which we expect to continue.

On repairs and maintenance, we expect to see another relatively modest growth here. This line item has seen significant pressure from increases in minimum wages across nearly all the states, we operate and driving out cost for contract labor.

However improvements in the utilization of our workforce stemming from surface mobility and other initiatives Michael Decata are offsetting this growth.

Our guidance range for normalized AFFO in $2023.59 per share to $3.69 per share.

Major drivers for the change between our 2019 normalized FFO of $3.49 per share and the midpoint of $3.64 from our 2020 guidance include an 11% contribution from same store NOI and our same store property based on the revenue and expense assumptions that Mike on I just outlined.

A one cents year over year contribution from leased up and Hawaii with our lease up properties generating $10 million NOI for 2020.

A seven cents contribution from lower anticipated interest expense predominately driven by the favorable refinancing activity. We undertook in 2019 that I'll discuss in a moment.

Offset by one cents per share related to higher anticipated overhead, which we define as gionee and property management expense.

And finally, an additional three set off that related to other items net which mostly consists of other individually and immaterial items like interest and other income.

A final note on the balance sheet.

Financial position remains the strongest in the company's history, and what are the strongest and three industry.

2019 was a busy year on the balance sheet fraud, having issue nearly $1.5 billion in debt, including the lowest yielding hang your unsecured bond in <unk> history.

Upsized and extended our revolving credit facility with incredible support from our banking partners and with market leading terms.

And finally increase the size of our commercial paper program to $1 billion.

We also paid off approximately $1.8 billion and that during the year, including the early redemption of the 2020 maturity described in last nights release.

These favorable financing activities are the drivers and year over year interest savings I discussed earlier.

For 2020, we anticipate issuing between 600 million and 1 billion dollar and debt capital coming out that that is currently on our commercial paper program or revolving line of credit.

Standings are mostly the result of our net investment activity in 2019, and our early retirement 2020 mature.

We have very manageable development spend and we would anticipate being funded from free cash flow.

With that I'll turn it back to the operator, where the queuing <unk>.

[laughter].

Thank you if he would like to ask a question. Please signaled by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question.

Well pause for just a moment to allow everyone an opportunity to signal for questions.

Our first question comes from Jeff Spector with Bank of America.

Good morning, Congratulations on a great 19, just one or two questions on 20 and 20 comments.

Can you talk about the latest you know concession environment I guess in.

Markets like San Francisco or other markets, where you described you know some heavier supply in the first half of the year because I'm trying to connect I heard a comment that's the first half should be better than the second half I didn't know if that was just in general but it seems like at the same time you know there were some comments that you know supply is current.

The pressuring where there's some heavy supply pressure in select markets in the first half.

Yeah sure Jeff can where this is Michael So I guess first I'd just say you know at the top of the house, so concessions for us and our portfolio, we tend to be more of a net effective shop. So even though I described the concessionary environment. It did cause us to use a little bit more concessions than we expected on the quarter we were.

Talking about five $600000 in total concession use across the portfolio with the large majority of that kinda still centered in the New York market. So I think when we think about markets like San Francisco or anywhere that we have this concentration of new supply, we expect to see concessions in the new supply typically offering but.

I mean anywhere between four and six weeks and we monitor those concessions that theyre offering in the marketplace as an indicator of their own velocity. So when we see concessions on new supply in San Francisco start ticking up to eight weeks are they start going longer that's an indication that overall, there velocity as kind of feeling some.

Pressure and that's what we're kinda will responding to in the fourth quarter as I think about the first half of the year. What we've seen is a lot of that concessions that we saw in pockets of New York and some pockets of San Francisco on the East Bay start to abate, meaning it's still present at those lease up properties, but the.

Stabilized assets around them are starting to use less and less concessions and I've seen is now for the last four weeks, we've been monitoring the as we progressed through 2020, so I think what you're going to see as demand continues to grow throughout the year like it normally doesn't the seasonal year, you should should expect to see less and less concession and our portfolio for.

For the full year, we would expect concession used to be very comparable to 29 team and I think just given what we just saw in fourth quarter, probably will be more front half loaded than back half loaded.

Okay, Great. That's helpful. It sounds like some positive news on the concessions at least so far this year can we taught you talked about a you know strensiq in foot traffic demand remained strong can you talk a little bit more about a move outs and anything new move outs to home buying.

I'm sure. So I would just I guess I would say with turnover being down almost 200 basis points for the year absolute number of move outs and less on a year over year basis, but when you start to look at those that did move out and the reason they cite for move out we really saw no change across I read across any of the reason.

Homebuying run roughly about 12.5% of the reason cited for those people that are moving out to buy homes and we saw no change across any of the markets that we're operating in.

Okay, great things, because we noticed that does some of the homebuilders have cited success with entry level homes, and just confirm if you're seeing any change it sounds like not.

Great. Thanks, your for your comments today.

Thank you.

If you find me or question has been answered you may even if yourself from the Q by pressing star to.

Our next question comes from Nick Joseph with Citigroup.

Thanks.

$5 million net benefit the same store NOI in 2020 from the operating initiatives break down between the revenue benefit and the expense savings and then what's the impact on both same store growth rate this year.

So I guess I would tell you it's about probably a 50 50 split when you look at the 5 million between revenue and expense and on the revenue side, it's probably going to equates to roughly 10 basis points of improvement across the various markets that we're doing those operating initiatives.

Thanks, Mark you talked about the cap rate compression between older and younger assets what percentage of your portfolio or JV would you consider older and that you could ultimately trades for newer assets if the opportunity exists.

Yeah, Hey, Nick Thanks for that question, we don't have any more in the portfolio a lot of must sell if any must sell assets and some of the older assets or some of our best assets and places like New York in Boston. So it isn't always age, but I did use that in my remarks is a indicator qual.

Due to some extent I don't think there's a grand reservoir, we have of capital. There are few assets in every market. When you have a 40 billion dollar portfolio that have become less competitive and we'll look to sell those especially when cap rates are this close between value add and brand new product, we'll look to trade out to the new products. So I don't have exact percentage, but.

So low single digit sort of number and then it's for US. It's just opportunistic when we see cap rates like this so close together, we're going to take advantage.

Makes sense. Thank you.

Thank you.

Our next question comes from Nick Yulico with Scotiabank.

Thanks, So just going back to the guidance you know appreciate all the building blocks you gave on to explain why there's a my modest slowdown same store revenue growth. Yeah. I think you said, you're assuming better new lease pricing and stable occupancy. So to me that seems like a a kind of bullish indicator for the business I would suggest.

Yes, you guys could even push pricing even more so I guess I'm wondering is you know are you just being conservative and how you're forecasting your pricing this year or is there something else. That's a crane this dynamic that that's not allowing to push pricing even more so.

Well I guess a this is Michael so I guess I would just start by saying you know I think that 30 basis point expectation and growth in new lease change is demonstrating that we experienced <unk> are we expect to experience growth. It's really just coming off of the deceleration in the back half of 19, and the fact that now we're expecting kinder to recover and low.

Looking at where this applies on US we think some of that recovery is gonna be more back half loaded. So I think when you think about our guidance you've gotta look at the full range that we have out there and understand that sure in markets like New York. If we continue to see pricing power returned to us quickly and in front of the leasing season will outperform that.

Expectation, but you know I don't think it's prudent for us to sit here and think about all the markets with all of the supply that we have coming out of the think that we're going to outperform those expectations early in the year.

Okay and itself I guess, just following up on that I mean, so if I look at the track record as a company in the last three years you gave initial guidance on the same store revenue.

Ended up hitting pretty much closer to the top end for three years in a row.

Yes, I'm wondering is you know what's what dynamic is different this year as we think about the starting point versus prior years I think last year, you got you and why the industry on occupancy benefit this year. It sounds like it's more of a better pricing dynamic and I guess I'm. Just wondering whats you know is one more difficult than ever to achieve.

[noise] well, Nick it's mark each year kind of a different year in stands alone I mean, our process. This year in 20 wasn't very different than 19 or 18, we asked the field for specific feedback on what they see you know maybe there's a lease up right next door or you have renovations in the property and get a little boost there we all.

So look at the top and think about macroeconomic conditions as Michael said this year again, we feel well position going into the year, we worry about the supply, particularly in some of our bigger markets and we did see some weakness as we've said in New York late in 2019, so that positions us where we ended up going out with guidance could we do better we certainly hope so.

But you know looking at it we try to balance things out and don't assume that everything a go perfectly well.

Alright, Thanks Mark.

Thanks, Nick.

Our next question comes from John Polaski, with Green Street Advisors.

Thank you maybe just a quick follow up to the first question Michael data here at right that concessions in the Bay area, a lease ups push to eight weeks free in the fourth quarter.

And curious if they've gotten any better or worse in January .

Yes, so I mean, I think they stayed pretty consistent and stable when I say weeks that's on longer term leases. So we saw them kind of move around with or four to six I'm just conventional terms and then they started offering some longer terms and kind of were just monitoring that I mean, primarily now you've got Oakland, where you got more assets coming online. So it's a great.

Kind of pocket of assets for us to watch the concessionary environment and it's been fairly stable they have not been volatile when what they've been doing but they clearly started going long and offering a little bit higher concession rights for those longer term leases and that's what we've been watching.

Okay, and then turning to New York curious from your lens, how they kinda organic operating backdrop is going to be different. These next few years or after the rang control package was was implemented or the rent control laws change and curious if you're seeing anything right now in terms of market turnover.

Your game plan on marketing expenses are kinda vacancy and any early indicators that could play out in the next two or three years in New York that you're saying happened today.

Hey, John before I, let Michael launch into giving you that detail, which is very important I think the overall comment about New York and what we've all read about you know just increased demand that's coming all of these tech relocations into New York, particularly the West side in New York, We're getting a lot assets is very encouraging us now when they announce something.

It doesn't happen right that moment that they hire but we see that and in fact, our research is indicating research. We've seen is indicating there is actually more tech jobs and the newer Metro area. Then there is in the Bay area. Now. So we're excited to be involved in that and again, you're right. We have to adjust to these rules, but the overall demand drivers in New York. The next few years really good to us.

Yeah, I'd say right now we have not noticed any material change from that looking at the rents they properties versus kind of the market rate units or market rate building. So we're not seeing any differentiation on turnover, we're not seeing kind of from an operation standpoint anything yet that is manifests itself, what we're gonna be.

Running those buildings differently, yeah, and I was suggesting John I think on prior calls in our meetings that we thought turnover might start to decline in New York, because with lower renewal increases there would be more reason for people to stay obviously, we only have a couple of quarters sample size really haven't seen that yet you know we're looking more carefully at.

Capital spending in New York, but we have a high end clientele. So continue to maintain those assets well. So I don't have anything to add there in terms of again it seems to us intuitive that turned over should get even lower and the term of our residents should get even longer but you haven't quite seen that yet.

Okay. Thank you.

Our next question comes from Steve Sakwa with Evercore ISI.

Thanks, I guess two questions. When you sort of think about New York, you know how to sort of the Jersey Kinda gold coast play into sort of your outlook in terms of you know the rent growth that you've got a in that part of the you know region versus maybe the city.

Yeah. So I mean for for 19 <unk> It was pretty comparable right. When you just think about that various submarkets between Manhattan, Brooklyn, as well as the Hudson waterfront and I think going forward, we would expect kind of hopefully start to see pricing power returned to Manhattan and see some mark.

Good rate growth that could accelerate that beyond what what we're gonna see kind of from the Hudson waterfront, but right now they are pretty.

Pretty pack like really close together from from a result standpoint, and our expectation, but I think you will see Manhattan started to differentiate itself over time.

Okay, and I guess second question, maybe Mark if you think about a you know new development you know it looked like you were able to buy some you know relatively new assets and you know call adopt the high fours and you're thinking about some new development starts you know where are those yields on the new starts and you know how is that spread contracted and.

How narrow would it need to be for you sort of not to pursue new developments.

Yeah. That's a great question. So we are just constantly Steve comparing because we're not committed to being either developer or an acquirer. We can do either bolt on and we constantly compare the two to see if it's you know sort of on a risk adjusted basis, you'd rather just by the asset even if it's in a slight premium to replacement cost because there's a fair amount of risk and develop.

Women.

As we look at our development pipe now you heard me say, we're going to refill. It some of those are special events like we own the land already and we have an apartment building on it and we're doing the density play and so those sorts of things, especially because on a GAAP basis, you have very low basis in the land you bought in many years ago. Those returns look great and even when you market to market.

Look really good so I'd say in some cases for US we're building all the way down the yields in the middle fours. There's a tower, we're thinking a building on the west coast, that's more in that range and our thought process is it's just terrific product we like the per unit cost, we like the location and because we're not a merchant builder, where we have to hit the cycle Perfs.

And if we don't hit it when we get the C of O and a year or two we can get pushed out of the deal I mean, we can kind of build for the long run. So I think I'd tell you I don't worry about spreads all together I worry about just getting the right location do we have exposure in that Submarket can I buy in that sub market. Those sorts of things are then do I like the per pound kinda cost and how are we.

Funding it.

Well, maybe they'd be a little more specific on the I think you said youre going to start a couple of hundred million dollars a in 2020.

Sure. So we've got about five or 600, maybe 650 will start Steve.

So I would say when you talk about these JV deals that we've spoken about those deals tend to have yields around 5% on current rents. So current construction cross and current rents the tower I'm talking about is call. It a 4.6% yield on current and again, we're still in the underwriting process. So that may change a little bit but.

We feel again that we like the location and we like how that feels and then you've got a few of these other you know density plays that we're doing that I would say when you're marks Atlanta market feel like 5% plays or so on current rats. So that gives you a general feel.

Okay, great. Thanks.

Thank you.

Our next question comes from Richard Hill with Morgan Stanley .

Hey, guys. Thanks for taking my call. A quick question, Yeah look I resonates with me about maybe I can see peaking stable and so I I think that you know new and renewal leases and a disclosure that you gave on leasing pricing statistics are increasingly important in 2020. So I'm wondering if you can.

Maybe give us a little bit of color do you as as revenue growth, maybe decelerates, a little bit compared to last year or do you think that's equally from new and renewal leases are you seeing more strength in newer and renewal leases or vice versa.

Well I guess I would say we gave the top level guidance that would suggest that renewals are gonna grow.

20 basis points lower than [laughter] down to four seven versus before nine.

And we're improving new lease change and the overall guidance. So it's our expectation that you're going to continue to see this kind of convergence between new lease rate and renewal. So our expectation we should start to demonstrate better new lease rate growth and kind of take the impact on the renewal mostly from the went regulation.

Got it a understood that's up that's helpful.

Look at you know so for Q1 9 seemed a week well it relative to the other quarters. You. Obviously noted that that was a return to seasonality.

I also heard hersom color that that was a broad trend do you do expect for accused going forward to two to to be equally as a week or you know what I guess, what what really drove that that weakness compare to the strength that you saw an 18.

Yeah, I guess I don't know if I would say this week I look back almost like at 27 team. We've gone back over multiple years to understand just rent seasonality demand seasonality and really what we saw 19 is it kind of just returned back to the norm and 18 was the anomaly where are you just had that strengthening.

Demand in that Kinda later part of the year that allowed you to accelerate what otherwise you wouldn't expect too. So I think it embedded in our normal guidance process right. Now for 19 is normal seasonal declines in the fourth quarter of EUR 20 normal seasonal declines to the for that quarter.

Got it Okay. That's helpful guys. That's it for me.

Our next question comes from Harding Jones, with Zelman and associates.

Hey, guys. Thanks for taking my question today.

Bob If you can talk about Oh, but at the expense guidance and you know how those ranges work and maybe talk about you know the big components like real estate taxes on what you guys on writing in your guidance for them.

Yeah. So I mentioned in my prepared remarks, Theres really you know for large categories and real estate taxes is by far the largest so that's at 40% at the moment, where you're expecting you know three and three quarter percent growth to four and three quarter percent growth. So very similar year at the midpoint relative to 2019.

The drivers of that continue to be a lot of the same conversation so that that for 20, when a tax abatement growth that we're experiencing in New York, but also what's unique in 20 relative to 2019 and you've heard other companies talk about this in 2019 is that we saw good meaningful benefit in Seattle, where in Seattle.

Absolute real estate tax for US was actually negative in 19, and we're not expecting that or forecasting that to be the case in 20.

On payroll, it's a which is the next largest category, it's too in a quarter to three in a quarter percent I talked in the prepared remarks about some of the drivers there.

It really is mostly the medical benefit piece initiatives that Michaels putting in place is really helping us curtail some of that salary growth that we would otherwise have expected and then finally on the on the third piece, which is really are the third and fourth piece, which is utilities and repairs and maintenance were expecting normal growth two and a half the three and a half.

Got it and just one quick follow up if you could share of kind of the blended rent growth you're getting and early in the first quarter relative to last year doesn't really helpful.

[noise] Ah so I don't have that I have for the renewals that we're kind of expecting to be around 4.2% I'll tell you. It from a new lease change standpoint, we kind of wait until at quarter end is to really look at that but I just based on where rents are moving each and every week you know in our in our AD.

Asking rents I could tell that we're seeing improvement in those stats as well.

Well I guess, so how about January over January the newly afraid because I know you mentioned every week was improving so I'm just trying to get a sense for how much the improvement as Oh sure. Just just you know from a base rent or Amenitized rent standpoint, our rents today are up 2.5% over the exact same time that same week.

Last year.

And they've been improving each and every time frame.

Yeah.

That's really helpful.

Yeah.

Our next question comes from Haendel, St Juste with Mizuho.

Hey, good morning.

So Ah I guess the call it wouldn't be complete if there were any questions on the regulatory environment. So I guess, Oh I can help on that [laughter].

My question, specifically the on SB 50, or the California law that would allow for denser apartment build up around public transportation areas in the state.

Yes, I'm curious first of all the expect that to be ratified on January 31st and if so how might that impact your view our plans for a California development.

Hey, handouts, Mark Thanks for continuing the tradition, we appreciate that.

Common SB 50, I think he described it pretty accurately on you know we're not sure of its prospects. We certainly are big supporters of at both the company in the industry I think having additional density near transit hubs and having that state mandated is a good idea I know the sponsor that measures made some changes to try and get support and having talk just recently.

Our experts on this I can tell you we hope it passes we aren't sure it'll get through the state House, and we're sort of waiting to see what will happen. The next few days as you said, but certainly think it's a good idea. We don't think it'll add to the road traffic much by putting in your transit hubs and [noise].

Do you want to make an impact and you want to have three or three and half million more housing units in New York is a lot of policymakers a sudden that state you need to start somewhere and starting with putting more density in your transit hubs is a good idea.

Appreciate that thank you [laughter] with more I appreciate the comments earlier on your your portfolio recycling plan selling older buying younger, but curious, perhaps where you're looking to add and you know I know it might be a bit on pad drilling here, but just curious about the opportunity set in front of you and how much of the volume that's.

Contemplating this year that could come from new markets, you talked about perhaps often a quarter or so ago and then maybe some comments on how the underwriting in some of those newer non coastal markets would compare from an initial cap rate and I are perspective versus your coastal markets. Thanks.

All right a lot a lot of questions bundled up in the there, but so our average age of our assets about 18 years old. So the portfolio is relatively young and then again there was some skew and some are markets like Boston, New York, where we own some great assets, but they're older properties. So I would like I said it to the prior question say, there's always a handful.

All of assets that probably should be sold and we do have a handful of those and you know, especially when you get the opposite to do that and the non diluted basis, you should do that and we had to gas on that and we hope to do more the same based on what we heard coming out of National multi housing conference last week. It seems to be a lot of demand some of the deals we're talking about or deals where the buyer me the value.

I thought process. So we'll push that I'm in terms of just moving capital around a little which I'll take is the middle part of your question. We've talked in prior calls about having a little bit less exposure in Washington, D.C., maybe shifting some of that capital to Denver, that's really a reaction to it has been consistent high levels of supply in Washington D.C.

That said, we're both the buyer in developer and end market and have announced both a in 2019 and expect to do the same next year, we'll keep freshening up the portfolio there, but it is an area, where we think the supply is pretty continuous we'd like to own more in Boston in Seattle, We've said that on the call and maybe you'll see us lighten our load a little in California that fund those.

In terms of new markets, we do like Austin, there has to be an entry point that makes sense. Obviously, when you do and investments pro forma you start with your price at the beginning in the price at the beginning for Austin is quite director assets that are we understand to be trading inside a four cap rate on current rents and that's pretty tight for us to buy into a new Maher.

Okay. So there's a lot of market several markets that we're monitoring and I guess I'd say in terms of how the underwriting will differ well, there's probably if you're being really honest some additional property management costs and running an asset away from your main platform and we often take that into account and then the rest of its market specific how do you feel about cap rates, how do you feel about value.

How do you feel about growth rates, we added advantage with Denver, because we knew it so well from being in the market for most of our existence, but these other markets. You know Austin included we were in as well and have a recollection of how that market cycles. So I'll pause there I don't know if I addressed what you what you want to do address.

No. It's very helpful, but I guess, so ultimately im curious what type of IR, our spread would you be willing to accept understanding that some of those markets might have and the kids have often a lower initial yield, but perhaps operating efficiencies, maybe even better growth given some of the the overall in migration job with et cetera. So just curious how you think about the acceptable IR spread perhaps first.

The coast.

Yeah, Great question, so in our Investor materials. This heat map, we've had for a long time, which tends to be on page 16 of our materials for some reason every year has all the factors we take into account I don't know within a market needs to have a higher iowa or a much higher our IR aren't just for us to move into it.

Maybe there is other benefits regulatory and diversification benefits for example, so I guess I'd say you got to underwrite your starting point and Austin is a pretty expensive starting point and then maybe to your point you make it up because you think growth there is better than some of your other markets. Then you've got to think about how's it going to feel in 10 years with the amount of supply market like that gets so again.

I wish I could be absolutely clear about what that margin needs to be but there are markets. We go into that don't need to do a lot better on an IR basis. They just need to provide some benefits overall in terms of diversification or risk and their eye ours can be comparable to those in our main markets.

Got it alright, thank you Mark.

Thank you.

Our next question comes from Alexander Goldfarb with Piper Sandler.

Thank you. Thank you a warning out there so just following up from hand from handle.

Actually on two fronts.

So first mark just continuing on the markets. If you look across I mean, a lot of the markets have converged around similar I know wise and similar cap rates you guys. Obviously, a number of years ago made an effort to focus on certain key gateway markets and now you're sort of going back and looking at you invest in Denver, you talked about Austin.

Do you feel that this convergence that we're seeing is going to sustained where you know you're the idea to go to the certain gateway coastal markets may not be appropriate for the next decade or you think this convergence is just temporary and the markets. Ultimately we will go back to the ones that you guys have really focused on over the past number of years.

I get that is just an outstanding question in some we think can talk about a lot you should always be thoughtful about your markets. While you were there before while you're there now.

So I appreciate the question I think one of the things we think about as you've got such a wall of money going into the apartment industry [noise].

Good distorting perceptions of returns risk or their markets that are frankly overvalued relative to you know what they normally and probably should trade for on a go forward basis. So we look at that you know nine metro's we're in now and say, we like our customer we like our Capex spending we like.

In most cycles the supply picture in these markets and nothing there is changed for US to me. It's more like are there other new markets, where we can find our customer in abundance someone Alex who is you know relatively affluent renters by choice wants to live in an urban dense suburban setting with a lot of.

Walk to amenities, where we find those people we will go to them. If the competition makes sense the supply and demand picture makes sense. So I guess, that's the way I think about it is are there cities that are sort of being promoted into the ranks other markets in which we do business as opposed to saying all markets are equal I think some markets are definitively not equal.

Oil and what's going on is just the wall of capital is moving cap rates and stuff to a convergence point and I don't necessarily believe that's permanent.

Okay and then the next question is.

On the regulatory front, yes, switching coasts here in New York, Oh, Yeah, I'm sure you guys just seeing the press that you have all been he wants to go back even tightened the capex.

Restrictions on on rent control units, even more there's talk of a market wide CPR plus cap I think I've read yeah, one half I don't know where ultimately the habit, but given what happened United lessons learned from 2018. How are you guys thinking about approaching this year's Albany session, which I think expires and or ends in June .

<unk>.

Yeah, well I think in terms of recent good news the the governor in the state of the state address didn't mention affordable housing.

Sense from what we've heard from some of our contacts is that many of the legislature wed like to see these new rules play out a bit and see what the impact is before adding even more to it we hope that would be the case I'm, obviously, it's difficult for us there whether you're in New York or your here in Chicago to predict the action of politicians, but you know.

We're working hard through our trade Association I think they've got real you energy and focus on this issue and having the right kinds of conversations just educate people. Because this is going to do you already is doing the exact opposite of what they intend it's going to cost disinvestment in housing less supply and make the city less of the energetic place we all want it to.

Yeah, that's just what's going to happen is happening.

I just would say I think the trade association is even better position this year than they were before but you know what exactly happened like it remains to be seen.

Thanks Mark.

Thanks, Alex.

Our next question comes from Rob Stevenson with Janney.

Hi, Good morning, guys. So turnover was 49.5% I think in 19th what's the expectation for 2020 and how much of the 200 or so basis point decline that you guys talked about earlier, what's the benefit to earnings from that given the spread between new and renewal Lisa.

So this is Michael I'll start by saying I think our expectations for the year is very similar we're not expecting it to continue to go down, but we don't anticipate kind of some reversal and the trend at all this and see a spike in turnover as far as the contribution goes you know clearly have renewed.

Those were producing a four nine and you had some subset of your resident you know more residents renewing with you that contribution was boosting the revenue lift for the year versus replacing them in absorbing the vacancy law as well as kind of the new lease change at 30, Bips I don't have a quantified number but I do know that.

Lower turnover at higher renewal rates it is a positive.

Okay, and then what's driving the gap between <unk> and normalized AFFO guidance.

I guess my two cents.

Yeah. So there's a you can kind of see that on page 30 of their release there two items that are forecasted there's a penny associated with right off of pursuit costs and then there's another penny of other miscellaneous items that incurred includes advocacy caught advocacy cost, which you've had in historical.

Her et cetera. So those are the two main drivers.

Thanks, guys.

Do you.

Our next question comes from John Clini would stifle.

Oh a.

John Guinee. Thank you, but big picture question it looks like a at the midpoint almost half of the rapid AFFO growth is coming from interest saving seven cents a share.

27 million interest cost reduction.

Sure this make us nervous won.

And to the end result is.

You basically are getting about 2.3% FFO growth from everything else, while your midpoint of your.

Same store NOI growth as 2.5%, which seems a little unusual that to two and half percent same store NOI growth translates to 2.3% FFO growth ex the interest cost savings any any thought.

Yeah, John I'm going to start it's mark.

What happened in the prior year 19 influences the numbers and 20. So a 19, we acquired things early in the year and we sold late this year, you're gonna see we have a number of assets lined up for disposition that are going to occur relatively early in the year. So even though were a net buyer and that is going to fuel fs old.

Growth in future years. This year some of that like the math, you're doing is absolutely right. There should be a bigger if you are fundamental growth on into why isn't that to an AFE for somebody your number should be higher on NFS, though what you're getting a little dilution from transactions and I think we pointed that out in the release, you're getting a little bit of a headwind from transit.

Actions that is going to offset some of that benefit the interest benefit I'll tell you. It's just we continue to be able to borrow cheaper I mean, that's all very real and I'm not sure why that's concerning at any regard I mean, the company is balanced it's really strong and the percentage fixed to floating sensible and yeah. We have great access to all forms of capital So I'm not.

Seven cents to me is is good money and it's something we've executed on before so the vast majority of that seven cents to John just so you know is so we're not changing the profile of the overall credit metrics, we'd expect the credit metrics at the end of Twentyth it'd be very similar to 2019 on kind of all of her guards, a very healthy very strong and the bulk of that that.

Again, if you will is already locked in by having paid off that that was in you know five handle coupons, but with new long term debt. That's in the two and a half that 3% range.

Oh no us. Thank you the obvious issue is that a year benefiting a lot from paying off above market data borrowing at market. So my question really is how much longer can that last is there's still a lot of.

Add on the balance sheet.

Yeah. So if you look at if you look at page 18, they're eight we we disclosed for you and each of the maturity buckets, what our weighted average coupon Dar and you can see in kind of 2021, 4.64% as an example to give you a point of reference if we were to issue a 10 year unsecured bond today I would expect that to be it.

2.5% or lower so there is still a fair bit of runway I'm going forward certainly a longer runway than we had anticipated a few years ago, because we didn't anticipate rates continuing to be this low for this long, but there is still some some favorable refinancing opportunities, which we've taken advantage of in the past and we would.

Expect to take advantage of in the future.

Great. Thank you very much thank you.

Thanks, John .

Right.

I would now like to turn the cap conference back over to Mark peril for closing remarks.

Oh. Thank you all for your time today and your interest in equity residential have a good day.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

Oh.

[noise] [noise].