Q4 2019 Earnings Call
Greetings and welcome to Yours fourth quarter 2019 earnings call.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder of this conference call is being recorded.
It's now my pleasure to introduce your host director of Investor Relations trip Trujillo. Thank you Mr. Trujillo you may begin.
Welcome to you yards quarterly financial results Conference call, our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website I art.
Dot com and the supplement we have reconcile all non-GAAP financial measures to the most directly comparable GAAP financial measures in accordance with Reg G requirements statements made during this call which are not historical may constitute forward looking statements. Although we believe the expectations reflected in any forward looking statements are based on.
Reasonable assumptions, we can give no assurance that our expectations will be back.
Discussion of risks and risks factors are detailed in our press release and included in our filings with the FCC, we do not undertake any duty to update any forward looking statements. We get to the question and answer portion, we ask that you'd be respectful everyone's time and limit your questions to one plus a follow up management will be available after the.
Call for your questions that did not get answered on the call.
I'll now turn the call over to you yards, Chairman and CEO Tom Toomey.
Thank you track and welcome to UTI ours fourth quarter 2019 conference call.
On the call with me today are Jerry Davis, President and Chief operating Officer, and Joe Fisher, Chief Financial Officer, who will discuss our results.
As well as senior officers Warren troupe, and Harry Alcock, who will be available during the Q and a portion of the call.
Our fourth quarter results highlighted by robust same store NOI growth of 4.1%.
FFO as adjusted per share growth up 7% continued to demonstrate strong execution across all aspects of our business.
To recap 2019.
It was a very good year for UTI, our and our shareholders.
First we continue to perform well on operations, which drove approximately 65% of our 2019 F.L.A. per share growth. The year was highlighted by the ongoing development and execution of our next Gen operating platform, which allows our current and perspective.
Customers to engage with us online and in a self service manner. They have demanded across most aspects of their lives.
Second our capital sourcing and allocation remained disciplined using equity priced at a premium to an AB.
And low cost debt to Accretively grow our business through 1.8 billion in acquisitions.
These acquisitions have significant operational and investment upside.
Right and markets targeted for expansion and will produce outsized after I follow a growth in 2020 and beyond.
Third we wound down cafe, JB and halved our relationship with Metlife, Vietnam creative asset swap.
These actions simplified our business and added more high quality real estate on balance sheet.
Fourth we proactively and Accretively de risk, our enterprise through well timed issuance and prepayments that extended our duration and improved our liquidity.
And last.
We accomplish these goals while dramatically improving our resident satisfaction scores, maintaining strong employee engagement and completing a wide variety of E.S.G. related initiatives that enhanced our returns.
In summary, 2019 was a very good year and representative of what investors can expect from UTI are as we continue to execute our long term strategies.
My thanks to the UTI our team for their hard work and making 2019.
Very special here.
Turning to 2020.
Our business is strong as the fundamental landscape for apartments.
Like you will be fairly similar to that 2019.
Specifically, we expect a relatively robust economy and balance supply demand environment.
Set against volatility that we have all come to see as normal.
But whatever the macro environment. We believe we have the right strategy portfolio and team in place to grow F. all eight.
And the dividend per share at an elevated rate over time.
Through a variety of value creation mechanisms.
For 2020.
We are expecting 6% F O a per share growth at the midpoint of our guidance and announced a 5% year over year increase in our dividend per share.
Last.
Warren troupe, our senior executive Vice President will be transitioning to a consulting role with UTI, our effective April onest.
I've worked closely with worn for 18 years and I'm thankful that UTI are in its investors will continue to reap the benefits of his expertise.
In transactions legal risk management and capital markets activities for years to come.
With that I will turn the call over to Jerry.
Thanks, Tom and good afternoon, everyone.
We're pleased to announce another quarter and full year of strong operating results fourth quarter same store revenue expense and the NOI growth rates were 3.3%, 1.3% and 4.1%.
Full year 2019, same store growth rates were 3.6%, 2.5% and 4% respectively.
As Tom alluded to in his prepared remarks, UTI ours primary operating objectives are to consistently generate above peer average same store growth well also expanding our operating margin.
Both of which drive fairway per share growth overtime.
Over the years, we have successfully executed these objectives in a variety of ways.
Prior to 2019, we primarily focused on topline growth initiatives, such as parking short term furnished rentals and common area rentals and 2019. These top line growth initiatives continue to produce outstanding results, but we also pivoted our strategy tomorrow actively minimize controllable expense.
Growth through the implementation of our Nexgen operating platform.
Well I did our focus shift.
Three reasons.
First our customer increasingly expects to conduct business with us on their time.
Across a wide variety of industries intuitive easy to use self service apps have come to define high quality service.
Interacting with our customers should be no different which is why the backbone of our next Gen. Operating platform is built on self service [noise].
Second centralizing certain operating functions outsourcing, others, providing better self service to our current and prospective customers and more actively utilizing the data. We collect will result in greater efficiencies throughout our cost structure.
By 2022, we expect these efforts will expand our controllable margin by 150 to 200 basis points, which translates into $15 million to $20 million, an incremental run rate and Hawaii or $300 million to $450 million and value creation at a 22 times multiple.
Third.
The consistent adoption nx and execution of operating initiatives, a boost revenue growth constrained expense growth and enhance f. away per share growth is ingrained in New York Cultural DNA.
But the Nexgen platform is and will remain somewhat of a distraction to our teams in the field and that corporate until fully implemented by the end of 2021.
As we consider the sequencing of growth initiatives over the coming years cost efficiency will be the focal point in 2020 with additional revenue growth initiatives beginning to come online in 2021 and beyond once our property technology and data analytics data analytics platforms are fully built out.
Moving on we're now a year and a half into the implementation of the platform and have achieved approximately 25% the original underwritten in Hawaii improvement.
Thus far our controllable margin has expanded by 60 basis points and site level head count has been reduced by more than 15% through natural attrition.
After reducing our same store controllable expenses by <unk>, 0.4% in 2018 2019 controllable expense growth was just 0.9%, resulting in an average annual growth of only 0.3% over the last two years versus 1.8% for the peer group.
For 2020, we expect our controllable expense growth to be adequate below this level.
At the same time 2019 resident satisfaction scores improved by 11% and we anticipate further improvement in 2020.
As such expanding our margin through cost and head count reductions is clearly not resulting in that in a decline in actual or perceived customer service.
Rather it is more efficiently delivering a superior all around experience to our customers.
Our next Gen operating platform is proving to be a win win for UTI, our our associates our residents and our investors. We're excited to update you on continued progress on our continued progress and expected economics throughout 2020 and beyond.
Next 2020, a started well occupancy remains high at 96.9% and our $1.8 billion of 2019 acquisitions are ahead of underwriting expectations.
As a reminder, we expect the weighted average yield on these acquisitions to improve from a trailing 4.7% of purchase to above 5.5% by year three.
These accretive investments will continue to drive our AFFO growth and value creation for years to come.
Looking ahead full year 2020 same store revenue expense and then why growth ranges are 2.7% to 3.7%.
2.2% to 3.0% and 2.9% to 3.9% respectively.
Drivers of our revenue growth include higher rents, including smart home contribution slightly higher occupancy.
Offset by lower contribution from other income as a growth rates from initiatives rolled out over the past several years, such as parking short term furnished rentals moderate.
And lower utility expenses reduce our Ics reimbursement revenue.
It is important to note that is 2020 unfolds, our quarterly same store growth rates will be higher than our year to date same store growth rates as 2019 acquisitions move into our quarterly same store pools.
In addition, the Metlife JV communities acquired in 2019 are included in our full year 2020 same store pool.
These are not expected to significantly impact same store growth rates.
Their inclusion will provide more transparency through 2020, beginning with our first quarter supplement.
At the market level, we expect 2020 topline growth rates will exhibit less variability and then years past.
The Monterey Peninsula, Portland, and Boston markets are forecast to grow same store revenue at a rate above the high end of our 2.7 to 3.7 portfolio growth rate range in 2020.
New York, Baltimore, and Orange County should come in below the low end.
All other markets are forecast to grow revenue within the colors of our portfolio growth ranges.
Regarding accelerating versus decelerating markets in 2020 versus 2019, we expect that Portland, Tampa, and New York will generate the highest year over year acceleration in 2020 same store growth.
San Francisco Seattle in Baltimore are forecast to decelerate the most.
In closing I.
I would like to thank all you de our associates in the field and at corporate for producing another year of robust operating growth successfully integrating 1.8 billion of acquisitions and continuing to embrace the future in the form of our next Gen. Operating platform 2019 was an eventful and very rewarding year.
I'm immensely proud of each of you with that I will turn it over to Jeff.
Thank you Gerry the topics I will cover today include our fourth quarter and full year 2019 results.
Full year 2020 guidance expectations.
The transactions and capital markets update.
And the balance sheet up that.
Our fourth quarter earnings results came in at the midpoint of previously provided guidance ranges.
I suppose adjusted per share was 54 cents, approximately 7% higher year over year and driven by strong same store in lease up performance accretive capital deployment and lower interest rates.
Full year AFFO per share was tool that representing year over year growth of over 6% and driven by factors similar similar to our quarterly results.
Next our full year 2020 guidance.
Full year of AFFO per share guidance as to 18 to 22.
Driven by continued strong operations.
2019 capital deployment and interest expense savings.
Primary drivers of the 12 cents of growth between our 2019 for way of tool it and our 2020 midpoint of 220 per share include a.
The positive impact of approximately seven cents from same store stabilized babies and commercial operations.
Positive impact of approximately five cents from transactional activity DCP development and redevelopment.
The positive impact of approximately three cents from lower financing cost.
Flat year over year Jenna.
And the negative impact of approximately three cents from a variety of other corporate items, including ground lease resets and the amortization of certain nexgen operating platform investments.
A full guidance update including sources and uses expectations and first quarter guidance ranges is available on attachment 15 of our supplement.
Moving onto <unk> transactions and capital markets.
During 2019.
Wired approximately 1.8 billion communities at share at a weighted average trailing yield of 4.7%.
With equity priced at a premium to any b and low cost.
As Jerry mentioned in his prepared remarks.
We see this weighted average yield grow into above 5.5% by year three generated an additional 10% NOI growth above and beyond the 3% annual market rent growth we used in our underwriting.
This encapsulates UTI ours value proposition, when we're able to overlay our well tuned operating platform.
Bind with targeted Capex investment on under managed assets that are looked at a market is targeted for expansion.
In short, we can buy assets at market prices, but drive above market returns and growth overtime.
Well utilized this value creation equation again subsequent to quarter end.
Purchasing the slid a channel side.
294 home community and Tampa for $85 million or $290000 per home.
Similar to our 2019 acquisitions, we anticipate slades yield growing from 4.6% near 1% to 5.3% by year three.
Next during the quarter Prefunded the majority of the acquisition of Breo.
259 home community in Bellevue, Washington.
On which we have a $170 million fix purchase price option and 2021 with a $115 million note at a 4.75% interest rate.
This property is contiguous to our existing elements and elements to properties in Bellevue and after stabilization will be operated as a phase of those properties, thereby garnering operating efficiencies.
Regarding the developer capital program subsequent to quarter end, we exercised our purchase option to buy the 51% we did not already on of the Harbor, a west Coast development JB community with 276 homes and suburban Portland.
Our cash outlay for the transaction totaled $54 million, including the payoff of debt.
The Arbor is expected to generate a year, one AFFO yield of approximately 5.4% on our all in blended price.
Finally.
On the topic of transactions.
During the fourth quarter, we closed the 1.8 billion dollar UTI, our Metlife joint venture transaction that was originally announced in August which effectively have to our relationship with Metlife.
We believe this deal was a win win for both sides and continue to value our partnership with Matt.
Turning to 2020.
We will remain disciplined with our capital source him and allocation and pivot to investments that provide the best risk adjusted return should we had an advantageous cost of capital and can match fund.
It further external growth opportunities present themselves and 2020, we will continue to evaluate all capital sources.
Currently we have approximately $300 million of assets being marketed for sale.
Regarding capital markets in December we settled all 1.3 million shares sold under our previously announced forward sales agreement and a forward price of $47.41 for net proceeds of 63.5 million.
No additional equity was issued during or subsequent to the quarter.
During the fourth quarter and as previously announced.
Continue to take advantage of the low interest rate environment.
Issuing $400 million unsecured debt at a weighted average effective rate of 3.1% with a weighted average 13.9 years to maturity.
$300 million of if that qualified as a green bond and represented our first use of this U.S.G. friendly product.
Proceeds were used to prepay $400 million, a 4.6% to 5% unsecured debt.
Please see our supplement for further details on our transactional and capital markets activity.
Moving onto the balance sheet.
At quarter end, our liquidity as measured by cash and credit facility capacity that of the commercial paper balance was $867 million.
Our consolidated financial leverage was 34% on Undepreciated book value.
And 26% on enterprise value inclusive of joint ventures.
So I'll, let David net debt to EBITDA ARIA 6.1 times.
And inclusive of joint ventures was 6.0 times.
Our consolidated leverage metrics at year end look slightly elevated due to only having one month of the NOI from the acquired Metlife communities set against the full debt load of those communities.
Normalizing for this would bring our consolidated net debt to EBITDA Ari down to approximately 5.8 times and within our targeted ranch.
Over the next three years less than 3% of our debt comes due after excluding our commercial paper facility and working capital credit facility.
Additionally, our weighted average duration is now over seven years.
Both of these put us in an advantageous position regarding through your liquidity.
We remain comfortable with our credit metrics and don't plan to actively lever up or down.
Moving on.
In conjunction with our released yesterday.
We announced a 2020 annualized dividend per share of $1.44.
5.1% increase over 2019.
Last we'd like to officially welcome trend for him to the UTI our team as our director of Investor Relations.
Right, we'll be running our day to day Investor Relations and we are happy to have them onboard.
With that I'll open it up or do you want to.
Operator.
Thank you we will now be conducting a question and answer session.
If you like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is in a question Q you May press star too if you would like to remove your question from.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.
Thanks.
You talked about the same store revenue growth assumptions, what's embedded in guidance in terms of blended lease rate growth and if you can discuss non renewals expected in 2020.
Yes.
Jerry.
Blended lease rate growth is expected to be comparable to last year right around 3% range.
You know with.
No low fives.
As you know probably in that 1% or so range and what was your second question.
Oh, no that was that entire questionnaires that good ask about the new lease rate growth in fourth quarter. We saw turned negative in the spread between that and the previous year wide and I'm. Just wondering if you could provide some more color on that.
Yeah really when you look at that Nick.
For Q 18 was a pretty exceptional year, where you didn't see the normal seasonal softness that we witnessed in prior years. We look at Fourq you 19, new lease rate growth was negative 2.5 that compares to negative 0.5 in Fourq 17, and to a out flat and Fourq 16, So 18 at one.
Percent was more of the aberration in that quarter, we didn't feel the effects of new supply that we Bob.
We've seen in the other three years in the past four.
I will tell you when you look at January though we've seen a normal seasonal acceleration.
Blended growth is up 2.4%, which is higher than it was in the fourth quarter, but honestly, it's 60 basis points higher than it was in December.
So you are seeing good sequential monthly acceleration, but it still is 40 basis points less than it was in January of last year.
Thanks, that's helpful.
Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
Thanks, just just gone to the guidance.
Jerry just just a couple of questions. I think you said that for 2020, obviously the same store pool is changing a lot, but did you say that there's no real benefit or detriment from having a higher pull meaning that if you didn't change the pull your same store numbers would be similar [noise].
Yeah, what I've said, well inclusion of the Metlife portfolio into the full year same stores. The the delta to revenue and expenses is fairly immaterial well, we are really saying as.
You know as you see the sequential or each quarterly growth rate as the year rolls on.
Acquisitions, we made last year, we'll be rolling into the pool. So those are expected to have higher growth rates and full year.
Pools same stores.
And this is Joe maybe just to add to that a little bit in terms of about life that goes back to one of the reasons that we had talked about in terms of why we liked the assets that we acquired meaning that they had less near term supply pressure. So I think investors are used to seeing metlife portfolio under perform a little bit relative to legacy same store.
But to per Jerry's comments, you're saying that the Metlife assets, we acquired right. There in line with our same store legacy portfolio and willing to breaking that out for you on attachment five.
Started in one Q of 20, so you can see legacy.
Metlife as well as they combine which is what we guided to.
Okay helpful. And then I don't know if I I missed this but can you just quantify what the impact is from.
Rent control initiatives in New York, and California on 2020 same store revenue.
Yeah. So it's in that 10 to 15 basis point range I think.
Back in the third quarter, we told everybody in New York was.
500 to a million range.
Eight A.B. 14, 82, we did the calculation after that came out as about.
$300000. There so and then now the other thing that's impacting US an anti gouging laws that went into effect in California response to wildfires in the fourth quarter and a bit of an effect on 2020 as far as short term furnished rentals in California of a couple hundred thousand dollars.
Okay. Just one last question is I'm going back to 2019. The final number on same store NOI growth. It looks like ended up hitting the bottom of your guidance range and I think he also your revised up a little bit.
That range in the third quarter. So what happened it ended up driving you to slow the low end of the revised range.
Yeah, It's really a couple of things from primarily want as a we had two significant fires in the portfolio that took 40 in in October that took up somewhere in the 40 to 50 unit range out of service for the entire quarter, which.
Drove down our occupancy a bit secondly, as I said on the California anti gouging laws that were put in place from late October through late November It had not only in effect on short term furnish rental income in the first quarter of 2020, but also some impact.
The last month or two of 2019 and are we at elevated levels of insurance expense as well as.
Some elevated electricity costs.
Alright, thanks, everyone.
Thank you.
Our next question comes from the line of surely Woo with Bank of America. Please proceed with your question.
Hey, guys. Thanks for taking the questions.
Your first question after the occupancy so this coming year, you're thinking a little bit higher occupancy is that's a function of kind of frame what is that the unit line or is that over to the shift in strategy in maintaining occupancy I pulling back on rates.
It's really not pulling back on rights I'd say, we're so as we get more.
Information on data analytics, you know the third phase of our platform.
His data science and Theres a couple of.
Things Weve.
Determined as we had first looks at this we think are going to allow us to reduce the number of days units. It vacant from one resident moves out to when they move and every day, we can reduce that it's about 12 basis points of occupancy pick up so it's really more focused on that and anything with plane.
With rate versus occupancy.
That's helpful and so my second question.
On your Smart home initiative, so you guys have gotten around 60%.
So can you talk a little bit about your cadence 2020, and the contribution to revenue growth from initiative.
Yeah, 2020, our expectations to add another call it seven to 10000 homes.
Probably most of those will be completed the first half of this year.
So.
Earning incomes and the expectation when you look at how much it's going to contribute to that portion of rent growth its call. It 60 basis points.
You factor in the.
Follow through from what we did last year as well as the new leases that go into effect in 2020.
Perfect. Thank you.
Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.
Hi, good morning, guys.
Oh.
Just a quick question on next Gen Opie and.
There's there's an impact.
FFO and then and then you're going to capitalize certain.
Parts of the total costs or can you just walk us through sort of the accounting there and maybe how much of the amortization of certain expenses and sitting in AFFO and just break it down that we really quickly.
Yes, Hey registered.
In terms of the call it $30 million that we've laid out for expenditures for the platform. That's been spent in 2019 and 2020, we had to capitalize in <unk> and depending on the actual investment.
Typically averages out to about five to six years of amortization. So once that is prepared and ready to be put into service. We start the amortization period, which is really starting to kick in here in the first quarter.
As we bring more the process or project online.
In terms of the impact yeah. It starts out at call. It between one and two pennies this year and ramps up to around two pennies on a go forward basis.
Until it burns off and we got through it also say non cash impact interest non RDR depreciation that works against us from a of away headboard.
Got it okay. Thanks for that Joe and then maybe just a little little bit bigger picture question as we as we contemplate 2020.
Yeah, if you had to pick one or two factors maybe across supply growth job growth or changing customer preferences. As we think about maybe move outs the home purchase and things like that you know where do you where do you think the biggest risk to to your forecast could be at this time.
Yeah, I think more so on the job for the wage front, yes take on the supply side, we had a pretty good handle in terms of where we are leveling out there in terms of supply being up call it flat to up 10% in our markets.
The irrational pricing front, we really haven't seen any on a market wide basis of course, there is some some of that taking place on a submarket specific basis.
So I think we have a good handle on the supply front.
The demand front is where we'd be more concerned either to the upside or downside that could drive pricing power.
Their direction, but obviously the jobs report the last couple of months have been fairly strong wages have been strong hours have been strong. So we feel good about it at this point, but that's part of the bigger variable for this year.
Got it thank you Joe.
Yep.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you just to clarify the same store results like you how this year. So it sounds like the quarterly results would be higher than the full year figure just given the acquisitions from last year being added.
To the pool and I was wondering if you could just quantify what that difference maybe if you average the quantities versus before your.
I don't have that number right in front, we will probably have to give you call back with Atlas Joe has it.
Hi.
Well, we'll come back on a quarterly impact what are your pricing between 10 and 20 Bips pick up.
Between quarterly pool, and full year pool, as we know throughout the year.
Okay.
I guess, it's been a couple of months since the press reported your interests in the Mack Cali multifamily portfolio and obviously, it's on your guidance.
But do you want to describe what the situation is like as far as your relationship to the.
The deal that supported.
Hey, John It's Joe.
Obviously, not going to make any comments on rumors that are out there in the market. So I don't think when our position to talk on that front I guess, what we would say is generically when it comes to external growth in capital deployment, Yeah, we've laid out a pretty clear set of parameters by which we have operated intend to continue to operate.
Be that making sure we get near term AFFO growth and accretion mixture that were match funded leverage neutral risks neutral.
And making sure the assets, we looked at fire have and Hawaiian platform upside to help drive some of that accretion. So none of that has really changed.
The other piece with external growth to think about.
We've talked in the past about development pipeline, where we want that to trend towards.
We spent most of the cycle at 1 billion, plus we've talked about getting back to 2% to 3% of enterprise value.
When you look at the current pipeline of 300 million plus land that we haven't opportunities that we haven't internally.
I think we have a good path to get back to that so.
That's got the comments so we can make on external growth at this time.
Okay understood. Thank you.
Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.
Good afternoon, guys. Jerry when you guys did your you're budgeting for 2020, what markets had the widest bands between the likely top and bottom in terms of possible outcomes on same store revenue.
Yeah, probably.
Seattle.
He adds one every year you look.
I was projected to have.
A significant supply impact, but a job growth always seems to come in and surprise to the upside. We also have been very.
Adept in recent years to push through and get high penetration.
Levels on our other income initiatives, but it's one of those yeah. I can tell you for example in Redmond, we have one asset Theres a couple of thousand units coming online there right now we're not feeling as much of an impact from that as you would have expected. So it just interesting to watch, especially on the east side of Metro.
Seattle their ability to both take supply, but because of the significant job growth that you see in places like Bellevue Redmond Kirkland, then it gets absorbed so quickly at such high right. So you know this past quarter or read our Bellevue assets had revenue growth of 5.2%.
You look at Amazon, which is jumped to cross Lake Washington to there and there's a they have 2000 jobs and Bellevue today going to increase it by another 2500 by the end of this year and a I believe they've taken.
Well over three to 3.9 million square feet of space. It could accommodate eventually 25000 associates on that side.
Of the like you compound that with other tech companies that are coming over into the east side, whether its Facebook Microsoft expanding.
Their campus Google.
You know things just feel very strong so that would be the one that I would say probably has the widest variance followed by you know San Francisco. We've told you a fourth quarter, we began to see our field the impact of new supply, both and so might as well as down in Santa Clara San Francisco is another market.
That if you don't feel irrational pricing and we're not dealing it yet today that job growth and its quality job growth cannot absorb those units very quickly. So that's another one I would say they cannot surprise to the upside.
Okay and then when you guys look at supplying your California markets over the next whatever 18 24 months or whatever you guys have good data on how much of this stuff has condo maps and you guys expect that the various legislation a ballot initiatives in California, I got to make condo projects and or conversions more attractive which could also help.
A little bit on the supply side on the rentals.
Hey, Rob it's Joe so.
When we look at a supply when we track the permitting data that that is out there. It's a california generally it's probably one of the markets. It is trying to lower from a permanent activity. So over the last three to six months' you've seen permits nationally tire really led by more of the sunbelt markets on a little bit on the east coast.
But west coast has been looking better as it relates to the condo mapping we have not gone to that level of detail to figure out how much of that supplier permal activities related to that.
So really no comments on that front.
Okay 'cause it presumably your high rise stuff in these west coast market. This is stuff that where you have supply coming online is probably the easiest to do condos right I mean and so.
Some of your supply if you're going to get hit with would make the best condo conversions or condo sales just right out of the box if that.
Right.
Yeah potential it.
Okay. Thanks, guys.
Our next question comes from the line of Wes Golladay with RBC capital markets. Please proceed with your question.
Hi, guys just a few DCB questions for you what are your expectations for Alameda point block.
[noise] [noise], let's just as Harry right now we have Oh, we have a land loan on this project that we've had for a couple of years.
The land loan matures at the end of March.
The developer continues to work through final pricing and the like we have a.
An option.
No, but on satisfying certain conditions to provide sort of permitted DCP in that but we're not at a position yet to to be able to comment on it.
Okay and potential extension that may happen it would that be.
A potential assumption there.
Wes This to me certainly that would be one consideration, we'll look at what Harry highlighted when the numbers come in but what we're excited about Alameda is in August I believe the fairy starts its operations and so that whole corridor is going to be activated and.
We like the price point relative to the markets around it so I think it's going to be up.
That area to keep your eye on and.
We are hopeful we can find a deal inside of that and in was I guess I missed the the project itself has made tremendous progress in terms of Oh infrastructure in terms of a road now conducting a the rest develop needed to the waterfront.
First market rate apartment project. It started construction of the first two townhome or sale project. It started construction. So so it has now turned into that.
You know real viable project at this point.
Okay, and then looking at Breo could you just bought that asset today and done the lease up yourself looks like you know you guys would do a much better job on the lease up than a developer. So how did you think about that versus a doing a secured loan for your.
Oh, well assistance area. So the structure is that we funded 115 billion at 4.75% with an option to acquire the property a one year post Tcl, which.
Sometime next year you are it we are managing the lease up.
We get some significant operational synergies on notice the structure allows us to mitigate lease up dilution will still managing the lease up gives us a fixed price option next year, We fund 75% of the purchase price today, we've done business with that this developer in the past we like the asset in the location yes.
What I would add to that Harry said, well get synergies just to let you know this deal is in Bellevue I. Just gave you an update of all the positive things happening over in Bellevue Redmond Kirkland, but.
Makes this deal more enticing to us as it is contiguous to two additional phases of UBS.
Elements buildings that were built by the same developer where price point differential between.
Joe and the 10 year, and I guess nine year old product that it'll be run with but Oh, sorry said, you'll get synergies you know, we think we'll be able to run. The this profit on stabilization, maybe one extra person in the office and one extra person and maintenance so.
Quite a bit of a benefit being located there on being able to lay on our operating platform.
That makes a lot of sense. Thank you.
Our next question comes from the line of Austin Wurschmidt with Keybanc capital markets. Please proceed with your question.
Hi, Good morning, Gerry you mentioned that you plan to turn the focus back to revenue initiatives in 2021.
You will still be reaping the benefits I guess from the expense efficiencies over the next three years, but can you give us a sense. So what those new revenue initiatives are that you're exploring and the potential magnitude if that opportunity.
Hey, Austin. This is to me, maybe I'll step back and I'll get to let Jerry answer that question, but a couple of things come to mind then.
But at this 25, plus years and and I have seen over that trend.
Developments excuse me investors focus shift away from development capabilities consolidations to market mix.
Last five years is probably been around revenue, but you know our strategy in our view is always been that long term value creation share price appreciation comes from cash flow growth.
And you've got seven companies today that are really good and you can see it in the convergence of our revenue on top of each other and very little differentiation.
But ultimately starting in 17, we started look at it and say, whereas our customer going.
Whereas our margins going because mature businesses eventually arrive at that conclusion.
And after 17 concluded and started implementing an 18, our operating platform and in rather you have a billion a revenue or 3 billion 102, or 300 basis point margin expansion.
It is a heck of a lot of value on the table and and I'm really happy that were after that you can see our progress that Jerry and team are reporting on that front and I think the best days lie ahead.
But when I look back at the last.
Years.
One thing I'm struck by is an 18, we good grew clash flow, 6% 19, 6% and 20 at the mid 0.6%.
I'd like to keep that trend goal and I think what Jerry and the team are all working on with respect to the initiatives in the platform certainly you're going to baby. The biggest driver of that going forward. So I think the industry is arriving at a new door of opportunity.
We're all going to go through it.
There is no doubt my mind about that because our customers already stepped through that door and how we implemented in the speed, which we implemented will be the differentiating point, but you talked about revenue and potentials off of the platform I'll kick it back to Jerry and let him talk about where he said yeah.
I answered some of this earlier, but when we look at the data science component of the next Gen operating platform I to everybody here. That's got first glimpse of has gotten pretty excited we see opportunities to better price our homes. When you can see things specialty through heat maps.
Opportunities jump off the page at you and you can just to identify and really quantify where theres opportunities that you were missing when information was either.
In a spreadsheet or I'm, just not quite as visible yes. The thing I think we're going to be able to do much better job on is improving resident retention as we.
We are able to accumulate more information about our residents and where the best place. We can go acquire those residents in the future I think it's a it's going to help us drive down turnover increased retention and <unk>.
I think we're also going to be able to gain more and more data compare communities to each other find best practices to reduce the time it takes to reoccupy homes or the way, we always say this reduced the number of vacant today. So I think what you're gonna see as most of its going to come on.
The true occupancy and rent side not other income initiatives that we're going to find through this.
Data science.
That's helpful. Appreciate all the commentary and thoughts there and I guess that kind of goes a little bit into the next question.
Given the ability to a quiet market cap rates and generate upside.
And in cash flow growth at this point your acquisitions, though have been largely one off more surgical opportunities over the last couple of years and.
Spread out fairly well geographically, but just wondering if there any markets, where you feel like your significantly under exposed or under index to that you'd like it take you know a little bit more of a concentrated run at potentially through a larger transactions or a series of one offs.
Yep, Yeah, it's not it's Joe.
No I think our diversified approach continues to stand in terms of.
When we deploy capital over last 12, 18 months, you've seen us all up and down the east coast, you've seen us down into Florida markets. We're just talked about.
And what we're going to layer in Seattle, I do think we'd like to be active in so cal but.
Trying to map out the risk reward and the cap rates that we get there which are fairly compressed. So I think you'll see us continue to be diversified in approaching spread our butts and try to match fund those and they'll get the an ally upside on the platform.
Austin I'd, just say, there's a lot of opportunity when you think about our footprint today.
In the buying the one next door by in the one down the street.
[music].
We don't lack for an opportunity set we just have to be very disciplined about making sure that we accrete the value and not the seller.
And so we're going to stay focused on what we've been doing and it's worked.
Understood. Thanks, guys.
Our next question comes from the line of Ritchie <unk> with Morgan Stanley. Please proceed with your question.
Hey, guys, Hey, Joe I think if I'd be a question for you given some maybe a little bit of a guidance question, but it sounds like you guys are getting much much smarter on your next Gen Oaky Big data. So I'm wondering as we think about that 3.4, a full year in a wide guide.
Are we supposed to think about that cadence as it is it.
Because it's still very.
Time to leak peak leasing season or are we supposed to think that as you get smarter and more efficient that we're going to start to see some acceleration and the back half the year.
Hi, Richard So you know, we've traditionally not provided quarter by quarter guidance as it relates to same store so.
Probably not got started at this point, we provided one Q AFFO guidance.
So I'll leave it at that and then you'll see the cadence developed throughout the year.
I figured I'd try Joe I'm, not asking for guidance, but you're right [laughter] I do yes.
Understood understood Hey, so coming back to the development I think we've shut it in the past.
That maybe that could get up to 500 million.
Versus the billion dollars at the peak.
So and I think you've referenced some some land deals are starting to put pencil out a little bit more can you just walk us through you know, what what's driving that that increasing and development potentially.
And then maybe just some quick historical context, maybe Harold jump into yeah. We had been at 1 billion plus for most of the cycle and so we've been very disciplined around making sure we get that hundred 5200 basis points. We haven't been focused on maintaining 10 billion at all costs. So you saw that billion shrink to zero kind of from the.
2016 to 2019 timeframe as deals completed.
At this point time, we've been working on land for quite a while you saw the Denver parcel that we acquired last year.
The Union market deal and DC that we acquired last year, both of which have been worked on for an extended period of time.
Today, we got the 300 million dollar pipeline o'clock across three deals.
Union market is not in the active pipeline as of quarter end, but we expect it to be shortly that's about a 140 plus or minus deal. So that'll take a the pipeline up in addition, the trubion through the Metlife transaction, where we had vitruvian west one and now too in the pipeline.
We've been getting good deals with those on the mid Sixs and so we have vitruvian west three.
We think we'll be able to move forward with here in short order.
So that would get you back to plus or minus a half billion, yeah, I think depend on circumstances cost capital and opportunities.
That probably takes a little bit higher than that and the 2% to 3% range of enterprise, So Paulo 567 $800 million.
And but that's easy to fund when you're thinking about the cadence of it and the free cash flow that we throw off of 120 550, a year they leverage capacity that we have each and every year and then the dispositions that we typically put out there as normal course business. So.
Definitely not anything insurmountable from a funding standpoint.
Got it and just for clarification. This is an addition to not lieu of the CDP program right.
That is it's a standalone so when we're talking about 500 to 700 that is typically ground up.
Consolidated development that we're speaking to when you look at DCP, we've traditionally thrown out there kind of the three 350 400 million type of number of which we sit in the high twos today as we have some capacity to add there as well.
Got it I'm sorry for the confusing question, what what I really meant was you wouldn't be reducing your development capital program to increase development, there would be development, increasing while the development, while the development capital program stays where it is maybe increasing a little bit more.
Correct. Okay. Thank you guys.
Our next question comes in a line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning out there.
First I'd, just congrats to warn us so well done.
So two questions Jerry on the on the Smart home technology front.
In in answering one of the earlier questions you mentioned that revenue opportunities occupancy.
And expenses.
The expenses I get obviously, you guys had talked about personnel retention being able to retain your better employees and not have to go through that people are cycling in and out but as far as occupancy and rent you guys are like 96% plus.
The industry has had yieldstar El Toro, adding number the pricing systems and you said that this really isn't about driving other income can you just elaborate more where the smart home I get it on the operational on the expense side, but where on the.
On the revenue side, if you've had really good occupancy and you've had really good rent growth through the system is where the smart home will help you grow out of the revenue side.
On the reality is smart home you know, we we get a rent increase ads.
New lease terms.
I mean, it call it that $20 range, we do think theres efficiency.
You know that we gain either through our maintenance people are Brett our prospective residents being able to self guided tours.
And be able to utilize the smart homes.
You know implementing leak detection devices drives down our NIM as well tourist cost, but I don't foresee smart homes are going to drive occupancy I think there is that rent pick up that you get as you have that amenity that again ALS allows a lot more flexibility for entering your apartment.
Doug sit or.
Or somebody like that have access to it.
But when we look back as Weve installed the smart homes and look at what our market rents have done in those communities.
From the time before we install till after a you know we're comfortable that we're getting that $2025 pop in rents.
Okay, and then Joe just the perfunctory rent control obviously the latest from Albany is that they're looking at Cpis, plus three which is slightly better than the C. Plus one half, but still obviously would not be a positive thing maybe you can just give your latest on your thoughts on what will happen in Albany, and then also how that has the effect.
Thank you guys looking at New York City, if you're still actively looking in New York or if you're interested in the region is now exclusively in the suburbs.
Hi, Alex So maybe just to clarify on Alberta, you may have a more information than we do on this but I think the way we looked at it it was a greater of Cpis times, one and a half.
Cars, 3%. So it seemed like there were setting a 3% floor on renewals, but still at vacancy to control. So.
Just wanted to clarify that's a if that's the scenario and you still a vacancy do control still of the upside on news.
3% renewals as a floor.
It's not what we'd ideally like to see we'd like to see a more constructive discussion around public private partnerships UBS own in densification less regulation things of that nature.
But it is a factor that plays into our thinking when we're thinking about New York City, an allocation there as well as the broader region as well it goes in a qualitative factor.
But that's a pretty.
Consistent national as well yeah, we're seeing.
Increased activity nationally and so it goes into our thinking everywhere, but thats why we like the diversified platform that we have.
But would you still consider buying and in New York or you're more focused on Jersey.
I would say that or New York, a we'd consider new Jersey's is all with one William last year, a new Jersey also is talking about CVI plus 5% I believe so.
I think there's a number of markets out there that are looking at that sold take into account each time, we're looking to transaction.
Thanks, Jeff.
Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Hey, guys. Thanks, I first want to touch on capital allocation.
Given your track record that very very good operating ability and capital costs, both on equity and debt that are favorable.
Maybe could you talk about why the acquisition or potential acquisition.
Outlook in your guidance that was pretty pretty light.
You know.
And also if you have anything you're potentially looking at right now that'd be great.
Yes, and nail it's Joe.
Terms or guidance historically, our practice has been to guide to speculative activity.
Yes, if you go back to our guidance last year clearly were surpass that from a acquisition standpoint, we were able to find accretive opportunities attached on those wells well priced equity and debt.
So the acquisition guidance you see there on attachment 15, a 40 million, that's really just for slate and channel side that we announced as well as the buyout of our.
Wolf joint venture.
So going forward, we'll continue to what we've done over the last calibrate the months, which is look at the pipeline try to.
Hi, guys that can drive additional upside as we did this year and drive more earnings accretion and growth.
And if we can do that we'll figure out where to pivot towards in terms of the source of capital a discussion that we have $300 million of assets in the market today.
So generally normal course business for us, but we have a pretty well for swath of markets and cap rate rentals that we're looking at and we like the feedback we're getting so far so we're looking at that as well as a source of capital.
Okay. I bet you can't I mean are you talking about 300 million of of assets on the block to sell but I mean in terms of either that the pipeline or the a pool of assets that are potential acquisition candidates I mean, how that trended higher just in terms of how the market close your cost of capital.
Oh, it's a yeah I think we're saying back in November the pipeline that dried up a little bit, but I don't know if you were down to an image see the other week typically that's when you start to see more activity to come into market. So typically pipeline starting to pick up around that time, so we'd expect to see more deals coming in.
Market, but again, we're going to keep disciplined around the parameters that we got to see.
Just simply go out there and by just to utilize the cost capital.
Okay. Thanks, and the other one for me is could you just talk about your outlook for supply in.
Northern California Seattle.
The data vendors there seems to be a fair amount of disconnect between data vendors.
What ethics is talking about I'm, just wondering it what you're seeing.
In those markets are what you expect to see.
For 2020.
Yeah, I think it when you look at a both northern California, and Seattle, when we look at third party data permit data in terms of the aggression approach. We've taken then talking to individuals on the ground as we work through our budget process.
Both of those markets are expected to be up generally seattle's a little bit more flattish at a market level.
San Fran overall, probably a little bit more first half weighted depending on the slippage.
That we see there and then when you flip over to kind of the longer term look.
And think about what we see going forward the permit a permanent activity in northern California has dropped off quite a bit more over the last three to six months versus where it had trended, whereas seattles rebound a little bit more static.
Thank you.
Our next question comes on the line of hardest goal with Dauman Associates. Please proceed with your question.
Hey, guys. Thanks for taking my question is Joe maybe this one's for you you mentioned your balance sheet or your leverage that lifepoint and if I calculate the full run rate of castle JV dealing guys. It's close in the fourth quarter.
<unk> 5.8, if you were so acquire something but you know a 2 billion dollar portfolio I'm not saying, that's the Mack Cali, one or not but.
If you wanted to take down a deal like that how much more could you lever up or what's the appetite to lever up.
If you have an opportunity like thought that make sense.
And as though the current leverage kind of inhibiting you are driving you to not make those decisions because of words.
Yep.
Maybe it's going to just kind of lay out what we could mitigate in the past in terms of the goals on the balance sheet. Yeah, we've talked about five to six times debt to EBITDA.
Fairly consistently and our desire to stay within that range. The plan calls for that so I guess, if you say on adjusted basis or a 5.8 times I guess you could say that we have the ability to lever up 0.2 times to get to our plan or stay within the range. We've laid out. So we really don't have any intent or desire to lever up at this point in time, we'd likely in the solid triple B play.
Speed of light one like the cost to capital that affords us.
And we've really been focused beyond that to EBITDA on a lot of other metrics I fixed charge free cash flow duration, three or liquidity et cetera. So in totality I think it's important to take a holistic approach to thinking about the balance sheet not just luck and then on that debt to EBITDA metric, which did tick up but obviously due to onetime issues related to met.
Lifetime in so I.
I wouldn't say you should expect us to lever up four transactions.
Got it it's I guess, maybe attacking them slightly different way if the wants to be an attractive deal out there than required a lot of capital.
We need to also have the cost of equity to kind of taken down.
Because as you mentioned your balance sheet only allowed to your point too tough.
Probably the right attractive cost of equity or we have dispositions, we have free cash flow, we have other levers to pull as we look out over the next two to three or business plan. So it's not always.
Cost of equity with multiple sources of capital do a Devon too.
Got it thanks, Joe that's helpful.
Our next question comes on the line of handle St Juste with Mizuho Securities. Please proceed with your question.
Hey, or I guess, a good afternoon.
I guess most of might have been.
Asked but I've got a couple of market specific questions.
First on Boston.
A market that you guys about line you expect to grow at a pace better than the overall portfolio out.
A market that is expecting to see a lot of supply come online. This year. So just.
Curious.
And by the way in the urban core where I believe you do have a number about the so just curious what gives you the competence or for that kind of statement facing that kind of supply and then maybe some comments on the lease up over at.
Garrison.
And now this is Jerry.
Yeah, I think we would agree with your assessment that there is going to be supply pressures downtown.
We're feeling and sea port we felt that there in the fourth quarter, where pure for had revenue growth of just 2.1%.
You know our properties, though that are a in the north shore as well as not down in south or should I encounter less supply pressures and do a better so it's really going to be dependent on which assets you're looking at the only property. That's in our same store pool. It's downtown is pier four.
For full year same store so.
Again, we would agree that there is going be supplied downtown there's going be a bit less when you get out the suburbs, especially when you're looking at some of the b product that we have that's a up in the north shore.
Garrison lease up is it's doing well, let's say 80, 80% to 84% physically occupied we finished the renovation of the amenity building that was part of that Redev.
We're looking to Reengage on.
Unit turns again in the next couple of months and you know we anticipate a while we're leasing up against a lot of new supply that location in the back Bay.
As highly desirable I think is.
The construction moves out of that small area or site, meaning the construction that we do during the.
During the renovation period that a you know it's going to be a great asset.
Appreciate that Jerry what type of spread our you projecting or as you think about the the revenue outlook for Boston in terms of the urban versus suburban.
Spread between knows is ER.
I think it's about a 200 basis points.
Okay. Thank you for that and second question on on Baltimore, I recall spending a lot of time.
Last year last summer I think we visited talking about your your market predictive model it how those leading you to.
The a bit more CZ optic about Baltimore, a market, where a lot of your peers seem to be shying away from so I can you talk a bit more about what you're seeing in Baltimore today, calling you to leading you to call out as a market that you expect to.
Some of the most a deceleration.
Doesn't look like there's a lot of supply coming online in that market. This year. So maybe you could talk about what the perhaps changed in your view on Baltimore over the last six or seven months and what was perhaps underappreciated in your and your market.
Revenue model.
Yep and Al It's Joe and then I'll kick it over to Jerry for some more specifics most [noise].
As it relates to.
The predictive analytics piece and how we were looking at that a year ago, a and what drove us to think about that that's a quantitative approach. So it shines a light on markets that we think are set for outperformance, but you still have to take a qualitative approach and make sure that the.
Expectations on the ground actually meet up with what the model or the machine tells you so things that got us excited about Baltimore.
Historically, it's a very stable job growth typically in line with national averages were seeing that continue from an affordability standpoint, one of the most affordable East coast cities out there you know job diversification wise when you look at it, especially on the cyber security and defense side very strong there, but they also have goodbye medical healthcare education.
So yeah, you have a good stabilizing factor in terms of volatility of performance in Baltimore, which is good from a portfolio construct standpoint, and then you have a very highly educated workforce now their top down in stem jobs stopped on graduate degrees as a percentage of workforce.
So there's a lot of things that we're going for the I must say as a whole and then you obviously have to narrowed down to a submarket, which.
As what we did with Rogers forward, so we're not necessarily in Baltimore proper.
So we had to pick the right submarket. So that's kind of what let us there over the long term no short term volatility obviously it comes through and results, but it's more of a long term play so Gerry wants to close it out yeah I would just that it is one of the markets, we see where there's going to be a elevated supply this year versus last year couple thousand units.
You know when we look at our.
Submarkets got about 700, those units are coming within a mile of our property and the tell scenario. So last year, we did 3.1%.
Revenue growth this year, we expected to be down in the two is so again I think as Joe said, we like the market, but that's that's more of a mid and long term nod to [noise].
How's it going here and I think over the next year, we're going to [noise].
[noise] guys. Thanks.
[noise]. Our next question comes from the line of John Gardening with Stifel. Please proceed with your.
Your question.
Hey, John are you there you might be out there.
[noise] operator, do we have anyone else left in the give us we do our next person in Q is John Polaski with Green Street Advisors. Please proceed with your question.
Thanks, a lot for the time, Harry hoping you could describe for us on the DCP front and the bid intense a year and just last three to six months, how the competition has fared one way or the other.
Sure John I think you've seen supply has been relatively stable other continues to be demand from developers. There's also a.
Additional competition from a number of debt funds. It's been the same the past 12 or 18 months, we're continuing to find opportunities.
That's sort of fit our parameters in terms of assets that we want to own long term they fit our return hurdles that you saw it closed the deal in Oakland last year.
We have others or that we're looking as we look to not only backfill.
Or.
Well I, but also love.
Incremental [noise].
[noise] the a as the pricing within that solid deal flow is the pricing on deals become more competitive.
[laughter].
[music].
I think there are circumstances, where it has been again just as you have at more players and.
In this space, but the.
The deals were doing a were and we're underwriting a consistent.
Our our we're always looking for deals that fit our parameters. So our our expectation is that the transactions we enter into the returns will be very consistent to what we've done historically.
Okay. Thanks.
As a reminder, ladies and gentlemen, it is star one to ask a question.
There are no further questions into queue I'd like to hand, the call back to Mr. to me for closing remarks.
Well a quick closing.
Thank you for your time in interest annuity our.
Clearly here that we're excited about two to.
2020, and certainly our future beyond that.
We have the right team right plan.
Just look forward to executing on it.
And we look forward to see in many of you in the conferences in the near future take care.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.