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Equity Residential
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Good day, and welcome to the Equity Residential First Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Marty McKenna. Please go ahead, sir.
Thank you, Angel. Good morning, and thank you for joining us to discuss Equity Residential's first quarter 2018 operating results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Michael Manelis, who will take from David on July 1 as COO. Mark Parrell, our Chief Financial Officer is here as well for the Q&A.
Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
And now I'll turn the call over to David Neithercut.
Thanks, Marty and good morning, everyone. Thank you for joining us for today's conference call. Now as announced last night, the first quarter came in pretty much in line with our expectations. Thanks to occupancy levels are remained quite high, another quarter of very strong retention and having achieved very impressive renewal rates during the quarter, all of this, despite significant new supply across most of our markets.
Now this performance, as a result of the relentless focus on our prospects, residents and properties by our property management and operational teams and everyone across our enterprise that supports those teams. Because notwithstanding, it was very deep and very resilient demand for apartment living in our urban and highly walkable suburban markets.
We’re facing peak new deliveries in many of our markets this year, which means it is a very competitive marketplace for new perspective residents and our existing residents have a lot of options from which to choose when they lease with us comes up for renewal. So I cannot emphasize enough of the benefits revised from the remarkable cost and service delivery each and every day by our dedicated teams across the country.
Now as far as line, I can remember these efforts have been led in part by a Chief Operating Officer, David Santee, who has most of you know is stepping down as our COO on July 1 and he will retire from Equity at the end of the year. Since join the company 23 years ago, David has had a profound impact on all aspects of EQR and it is hard to imagine the company without him. But among a long list of David's accomplishments is a fact that Michael Manelis is ready to step in his role and move us forward without missing a beat.
Now everyone will miss David, and I can tell you, it sure as hell won't be the same without him. But thanks to the work he has done in planning for this event. We will carry on, it only get better from here. So I'm happy now to turn the call over to David for what could be his final quarterly earnings call. The preparation for which I know will be one of the things he will miss most when he's going.
Okay. Thank you, David. Our reported Q1 results leave us very well positioned as we enter the early stages of our peak leasing season. With the elevated delivers across all of our markets, we are pleased with our quarter played out.
Revenue growth of 2.2% was a result of achieving our goals for both rate growth and improved occupancy. Renewal rates achieved for the quarter were 4.6%, which is equal to or better than 2017 quarterly results. Our turnover increased 20 basis points year-over-year, Q1 of 2017 was one of our – one of the best in our history, creating a very tough.
Most of our markets were almost flat or down with most of the increase turnover occurring in Seattle. Moved outs to via home continues to be a non-event declining to 11.2% of move out from the 12.5% in Q1 of 2017.
A while we've had a good quarter on the books, we know that this leasing season will see more new deliveries in a years past. And like last year, we know that is critically important that every team member at every community knows our operating strategy and the role that they play in renewing and retain both residents and employees.
Next week, I’ll join our senior property management leaders to meet with every employee in every market. This is a matter of strategy, communicate our support and learn how we can continue to be faster and better in a very competitive environment.
And before I pass it over to Michael for the market commentary, I'd like to take a minute to first thank all of you in the investment community, with your support and believe in Equity Residential more importantly me. It's been one hell of a ride. We all have our own expectations of ourselves in our careers and I feel lucky and bless to have been COO of the best public multi-family company in the world.
And to all my friends and family at Equity Residential both past and present, I've always been humbled by your passion and commitment to our company and extremely grateful to the tremendous support that you have given me over the past 23 years. It's been passed at times, it's been furious at times, but it has always been fun.
Now many of you on the phone have met Mike over the years. And he and I have spent the last 18 months planning for today. I know I speak for many when I say congratulations and tell you how excited and confident we are in you taking us forward. Michael?
Thank you, David. So you have been an outstanding teacher for us and friend for the past 18 years. I'm very excited by the opportunity to be this great company’s next Chief Operating Officer. And I truly appreciate all that you have done to prepare me for this floor.
So now onto the market. So let's start with Boston. Boston’s residential portfolio performed as expected with occupancy at 95.5% for the quarter and renewals at 4.5%. Our reported first quarter revenue modestly benefited from strong parking garage income.
As we moved into March, demand in occupancy were improving in every submarket, this gave us the confidence to start pushing rate in advance of the peak leasing season. But with 61% of the new deliveries begin in the city of Boston and Cambridge where we have 72% of our NOI. We will be watching our occupancy closely.
Fortunately, job growth remains strong and continues to support the absorption of new product being delivered. Boston, with its well educated workforce continues to attract large corporate expansion and relocation, especially into the Kendall Square and Seaport areas. Reebok recently stated that they already have 750 employees working at their new Seaport location and recent announcements for Max Mutual and Amazon will continue to strength.
As of this morning, I could tell you, we are positioned exactly where we want to be in Boston. Our baselines are up 50 basis points year-over-year, compared to the same week last year. And our occupancy is 96.7%, which is up 40 basis points over the same period last year. Renewal performance remains strong with expected achieved increases for April at 4% and May at 4.2%.
Onto New York which has been the focus of many conversations given the elevated supply in 2018. Overall pricing remains disciplined. Our operating metrics were slightly better than we expected with occupancy at 96.0%, renewals up 2.9% and our use of concessions being lower than we expected for the quarter. And a market with elevated supply, it should be no surprise that you read a lot of headlines about increased concession use.
We remain focused on competitive net effect of pricing and the use of concessions with our stabilized asset is very targeted and primarily used as a marketing tool for a given unit type or even a specific unit. With yield management in place, the introduction of a concession is not always equate to an exactly reduction in net effective price.
During the first quarter, 20% to 30% of our weekly applications received so form of concession. This is compared to a similar percent of application receiving concessions in Q1 of 2017. Today, our occupancy in New York is 96.7%, which is 60 basis points better than the same week last year.
Base rents are flat. And for the past several weeks, we have issued concessions to less than 10% of our new application. Renewals remain strong with 2.5% expected for both April and May against quote that we’re just a little bit over 5%. Bottom line is that we are well positioned, as we enter the peak leasing season, where the majority of our transactions will occur.
New York employment is at an all time high and we continue to hear stories about companies revving up hiring an increase in compensation. We're going to continue to balance rate and occupancy in strategically utilized concessions only where needed.
Our position today is better than what we anticipated when we gave guidance. But we are still early in the year and have two of the largest quarters of deliveries coming out. The results for the next 90 days will have a significant impact on a full year revenue performance and our local team is highly engaged and ready to perform in this peak leasing season.
So moving to DC. The main headline for DC is absorption. And we're off to a promising start. DC’s apartment market has absorbed more Class A units over the last 12 months than any time in its history. The positive economic conditions that helped maintain Class A absorption at a pace well above its historical average. However the elevated level of new supply continues to have a moderating effect and rent growth. Our first quarter revenue growth was consistent with our expectations, occupancy was 96.1%, which was 20 basis points higher in Q1 of 2017 and renewals were up 4.0%. Today our occupancy in DC is 96.4%, which is 70 basis points higher than the same week last year.
Building up the occupancy in advance of the leasing season was absolutely part of our operating strategy and has allowed us to maintain growth for our ninth consecutive week in a row. Today our base lines are 80 basis points higher than they were the same week last year, we achieved – we expect to achieve a 4.1% increase on renewals in April and are trending to a 4.0% increase in May. Again this is a market where we are well positioned, but we are still early in the leasing season and have consistent levels of new supply and almost 3000 units per quarter coming out.
Moving over to the west coast. Overall the first quarter revenue results in Seattle were as expected. On our last call, we told you that we experienced moderation in the fourth quarter of 2017 and expected that moderation to continue into 2018 and it has. Occupancy for the first quarter was 95.7% which is 10 basis points less in Q1 2017, and renewals average 5.7%. Well, it’s still early in the season our ability to grow rate is somewhat less than we expected.
The good news is the vibrancy of the job market in Seattle remains strong. Amazon continues to show strength and the initial pause from HQ2 had announcement last year is definitely in the past, as today we see over 5,400 open Seattle positions under website. Today our occupancy in Seattle is 95.9%, which continues to be about 10 basis points less than last year and our base rents are down 1.6% as compared to the same week that year. We expect our renewals for April to be 5.8%, and May is trending towards 5.6%. Demand remain strong and the current moderation of pricing power is something that we will continue to keep a close eye on as we move through the leasing season.
Moving down to San Francisco, we said on the earnings call in January that this is the market that has the most potential to outperform, our same store revenue growth expectation for the year and we still believe that to be the case. We continue to see positive news about employment growth in announcements of new job creation. The tech giant’s expansion continues unabated and venture capital spending is on the rise with $6.4 billion being placed in Q1, which was up 23% from Q4 2017.
Our Q1 result in San Francisco were better than expected, primarily driven by our ability to grow occupancy early to gain modest pricing power in advance of the leasing season. We averaged 96.4% occupancy for the quarter, which was 60 basis points better than Q1 of 2017, renewals were up 4.2%. The Peninsula and South Bay are performing the best, South Bay is benefiting from a low and new supply at that sub market is back half loaded with deliveries. Today we are 96% occupied in San Francisco, which is 30 basis points better than the same week last year, and our base lines are up 3.9% versus last year.
This week will mark the eighth consecutive week of incremental increases through our base rents our renewals for April are up 5.5% and we expect May to be up 5.3%. Trends up being positive, but it is still early and I look forward to adding additional color on this market in the July earnings call.
As we’ve discussed prior calls, Los Angeles is a market with significant increase in supply and while it's a large geographic area almost 60% of this new supply will be concentrated in the downtown metro area where we have 18% of our NOI.
Employment growth is diverse and remain strong. Jobs related to online content creation continue to ramp up with Netflix, Apple and Amazon making investments into the area from Hollywood to Culver City. This along with continued strength and expansion of Silicon Beach are aiding in the absorption of the new supply. But we know that the volume of new supply may become a pressure point against our pricing power in 2018.
And that is our ROI guidance was a strategy of increasing occupancy early to position us to raise rates beginning in March. For the quarter, we had 96.1% occupancy which was 40 basis points higher than Q1 of 2017 and renewals were up 5.6%. Overall our results were marginally better than expected, but we are still early in the season and the ability to maintain pricing power will be challenged. Our occupancy in LA today is 95.9%, which is 30 basis points better than the same week last year. Our base rents are up 4.6% year-over-year and we expect a 5.9% increased on renewals in April and are trending to 6.1% from May.
Moving for Orange County, first quarter results were in line with expectations. Occupancy for the quarter was 96.2%, which was 10 basis points higher than Q1 of 2017 and renewals were at 6.3%. Today, we are experiencing pressure on pricing and occupancy at a level greater than we expected for April. And it's being created from the lease-ups in Irvine area. Our occupancy is 95.5%, which is 80 basis points lower than the same week last year. Our base rents are up 1.7% and our renewals are up just over 5% for both April and May. Demand remain strong and this trend does have a potential to recover through the leasing season.
And last, but not least San Diego. Our results for the quarter were slightly less than expected, almost entirely due to the occupancy of 95.8%, which was 30 basis points lower than last year. Renewals in the quarter were up 5.7%, military spending remains strong in the area, but we are also facing several lease-ups in the downtown area. Qualcomm, Dan Diego seventh largest employer also just announced that they will be cutting just over 1,200 jobs in the market. And while this news is a negative for the market a quick search of our residence with suggests the impact of our portfolio would be minimal. Today our San Diego occupancy is 96.2% which is 30 basis points higher than the same week last year. Our base rents are up 3.9%, our renewals for April are at 6% and May is trending towards 6.0%
So to summarize all you sitting here today, we continue to see strong demand and we are well positioned but leasing season. We have New York and San Francisco trending modestly ahead, Seattle and Orange County a bit behind and the rest of the markets on track and performing as expected.
In closing, I want to give a quick shout out to the entire equity team. Their excitement and readiness for this leasing season is felt throughout the entire organization. Their ability to deliver remarkable experiences to our residents is evident through our strong renew results, and tens of thousands of survey results received. Renewing our residents in the face of elevated supply remains the team's number one goal. Our sincere thank you to each of you that the work that you do each and every day. Thank you, David?
Thank, Michael. Angel will open the call for Q&A now please.
[Operator Instructions] We’ll go ahead for first question from Juan Sanabria of Bank of America. Please go ahead.
Hi, Good morning, thanks for the time. Just on the same store revenues, which you expected to trajectory some here throughout the rest of 2018, do you still see the decline in the second and third quarter mainly due to supply and when do you think same store revenue growth on a year-over-year basis will stabilize?
Hey, Juan its Mark Parrell. So the answer to that really depends on how the leasing season goes. And as Michael Manelis and David Santee just said, we're well positioned going into the leasing season, and so we would hope that our quarter-over-quarter number for the second quarter would be just modestly lower than the number we just reported and then the rest of the year to be approximately equivalent again if we have a good leasing season. If the leasing season is less strong than the numbers will decline towards the back half for year quarter-over-quarter.
Okay. And then they declined is – quarter-over-quarter decline and you're saying is down on the year-over-year numbers 2018 versus 2017?
Yes.
Okay. Got you. And then just on the upside and downside risk for the 2018 same-store revenue numbers, where is that risk is in a concessions in New York or with all Long Island City and Brooklyn supply. And if you could speak to that or what’s more it represents to downside risk from here to the numbers? What will have to happen?
Yes, well. This is Michael. So I guess I would tell you that just based on the commentary, I mean, we have markets with elevated supply coming at us and we’re entering the peak leasing season in the position were Orlando would be – but our risk clearly, I mean, we denoted that I think on the last call is New York. We also have LA with – as elevated supply and while it’s doing well in the absorption and we’re positioned well. Those are markets as we go through the peak leasing season that can have a lot of weight on a full year performance.
Okay. How is New York and Manhattan being insulated as it is from supply in Long Island City and Brooklyn?
Yes. So again, we kind of look at this in a couple different ways – so we know the elevated supply is concentrated with 11,000 of the 19,000 units being in Brooklyn and Long Island City. And as we think about kind of that performance, we’re looking at former residents, the forwarding address that they give us and I think, we said to-date, we have not seen any impact from Long Island city supply. We did a trailing 12-month view back in February and at that time, we had less than 1% of our move-outs, providing us with forwarding address in Long Island city. And we just updated that from a year-to-date basis that trend has continued with less than 1% of our move-outs having that address.
So to-date I would say, the absorption in both Brooklyn and Long Island city is better than what we expected. And it is not impacting the performance in Manhattan and even in our Brooklyn portfolio. Sitting here today for the quarter, we have better position than what we would have thought given the amount of elevated supply that we are facing.
Thank you.
You’re welcome, Juan.
Your next question comes from Nick Yulico of UBS. Please go ahead.
Thanks. David Neithercut, I guess question on supply in 2019. I think you and a lot of others in industry have – as point to supply showing off in 2019 at some point, in terms of delivery, part of the data providers is showing that as well. However, we got some senses your update to national level that shows supply permits and starts from multi-family still doing a bit high since last week. So I guess, yes, how are you thinking about that latest as they came out, as it post some risk on the supply picture still being elevated through 2019.
Well, I think that the data you’re referring to – Nick is national data and the data we give you is that which we see where specifically not just on markets. But in the footprints that we believe compete with our assets. So nothing’s changed from our perspective, with respect to supply we do seeing generally, significantly in some markets like New York. But generally, across our footprint notwithstanding what may be happening across the entire country.
Okay. And then just question on capital use, as I think, you had recently or are in the process of having your annual board meeting, where you talk about where you think NAV is for the stock and how that would take your capital strategies and I guess latest thoughts on how you think about it as some of the development pipeline is really slowed in spending as slowed as well. You reserves – the excess free cash flow there whether it goes to upgrade or did it then grows to stock buyback, other uses, how should we think about your order of priorities, right now?
Well, let me first say it, that’s not an annual conversation, it’s a quarterly conversation with respect to my deployment of capital. And we did in fact have that in our most recent meeting in March. And Mark went through just the cash flow and as know the fact that their cash flow allocated to development is coming down considerably, which it does create some more optionality with respect to where to invest that. And we’ve taken them through the choices and all those conversations are ongoing. Nothing is changed at the present time.
I think it’s a – as I shared with the investment community on this call many times over the last year or so. We’re certainly aware of where we trade relative to what the Street things and then what we think are NAV is. We have watched stock back in the past. We won’t hesitate to do so in the future. But it’s our belief of where kind of that discount needs to be relative to many others, as just a wider discount. So we would continue to have 13 million shares available under our announced plan and at the appropriate time, we won’t hesitate to take advantage of that.
And I guess just following up lastly on that is, I mean do you think at some point of – if the stock had discount NAV, I mean, does it – do you think about selling even more to capitalize on what seems like so strong pricing in the private market versus where the stock is trading. And then also do you think about looking at perhaps some of the newer development you delivered where you don’t have as much of a tax gain to deal with? And so perhaps that could be more attractive to sell some of the development, you delivered in New York City over the last several years for example.
Yes. Hey, Nick, it’s Mark. I appreciate you starting by noting that assets we’ve owned implicitly room for a while have a great deal of tax gaining in fact the $300 million or so. We sold in the first quarter, I have about $210 million of gains just to give you a sense of – when you own assets, you buy right, you hold them for a while, you do have quite a bit again in them as well as our frequent use of 1031 exchanges. In terms of selling newer assets, whether it’s New York or San Francisco, I mean those assets we think are the ones that will drive long-term growth for the company and its shareholders. We feel at some extent that you’re selling your seed corn. We’d suggest to you that if we sell these better assets in bulk and that would affect our multiple at some point as well. So again, it’s not something as David said the board are financially teams are willing to give, but it just isn’t costless either to sell even the newer assets that have less been in them.
Yes. And I guess joining, I add to that. Nick is that the development that we’ve done coming out of the great recession has been extraordinary profitable and notwithstanding the fact that it’s brand new, we’ve made a lot of money on those and there’s a lot of built in gaining those assets as well.
Thanks everyone.
Thank you, Nick.
Your next question comes from John Pawlowski of Green Street Advisors. Please go ahead.
Thanks. Mark, I think last call you mentioned that 421-a burn-off in New York, it was got an increase 18 same-store expenses by 170 bps. Can you give us an update on what think were earn in that burn-off across your portfolio and will that impact a grow moderate or stay pretty consistent over the next couple years?
Hey, John thanks for the question. Just to clarify the 1.7 percentage points of the fact is to real estate tax number, not for overall same-store expense growth, so just to give you a sense of that. That outcome will persist for a while. We have about 1.7 to 1.8 percentage points for the next three, four plus years in terms of these abatements burning-off. Again as I noted in the prior call, every increase in net abatement does certainly hurt us on same-store expense growth. But the assets become more valuable, the cap rate declined. So it’s like you’re paying off, any expense of loan of sorts. You are creating value in these assets. It’s just not as visible to the P&L.
Understood. And moving on to the Boston development, right across the street in TD Garden is that stated to still start this summer. And then could you – if it’s – could you just remind us late 2021 delivery, I think you mention a low 6% stabilized yield. What kind of rent and construction cost growth rates are you underwriting between now and then?
You’re correct on all that, John. And we’re in the process of starting at, it will likely – I’d expect that to be on the development schedule at our second quarter call. So we’re now in the process of preparing the sites, the demolition of the garage. So we’re for full steam ahead on the second quarter. So that is a $410 million of project. It is a – we do expect it will delivered in late 2021. And as you note, it is currently a low 6 or so – low 6% yield. On the construction costs, we are all sort of bided in. So we’re not facing any meaningful – a lot of risk with respect to the construction cost and so I don’t have at my fingertips, what we might be projecting for revenue growth there we feel very good about the market as Michael said in his opening remarks. But we’re quite comfortable with that low 6% number.
Okay. And then I know you’ve been working on a deal for the better part of a decade. So is that could fall in construction cost of fully loaded number of that contemplates, all of the LIBOR corresponding to the deal?
That contemplates all the capitalized costs that we’ve been incurred during that timeframe. Yes, I bet your question.
Okay. Thank you.
You’re welcome.
And your next question comes from Nick Joseph with Citi. Please go ahead.
Thanks. David, you guys were active in the first quarter in terms of acquisitions and dispositions. Just wondering, if you’re seen any change either in cap rates or buying interest across multi-family.
No, Nick. We continue to see a great deal of demand for the product we’re willing to sell as well as for the product that we’d be willing to buy. There may not be as many bidders but there’s certainly sufficient number of bidders to continue to validate the pricing in the valuations that we’ve been looking after quite some time.
Thanks. So then guidance assumes 50 bps spread between the acquisition and disposition yield, most actually inverted I think 20 bps the other way in the first quarter. Was that something you need to the assets, if you sold relative to what you’re expecting to sell remainder of the year?
Yes. We sold a deal in the Upper East side of Manhattan had a sub-three cap rate, which had a big impact on the weighted average cap rate for all the dispositions for the quarter.
Thanks. And just finally on the good development that delivered, you increased the cost by about $20 million for amenity in apartment improvements. I just want to get your thoughts on why you did that and what the additional benefit of kind of increasing the scale of that loss.
Well, we just felt that putting the hard surface flooring and upgrading the kitchen cabinets, doing the countertops rather, I think stepping up the overall quality of some of the amenities all made sense to continue to have some cost relative to the late addition of air conditioning into that property. So they were all things that we felt made a great deal of sense for that property just given more pricing, it is there today.
Thanks.
You’re welcome.
Your question comes from Rich Hightower of Evercore ISI. Please go ahead.
Hi, good morning everybody. First really quickly just to congrats the David Santee on a long successful career at EQR, just wanted bring that up. It’s been a real pleasure working with you. So on to the Q&A here, really quickly within the embedded guidance for the year, where do new and renewal rents factor into the guidance range. What are you assuming for those metrics?
So for the full year, for the portfolio, the new lease changed guidance was at negative 60 basis points. Renewals were up 4.2%.
Okay, perfect. And then just back to the question on discounts in NAV and share repurchases. So coming out of the fourth quarter earnings call and then coming out of the Citi Conference. The stock was much lower than where it is today. I think the commentary was a little more forceful in terms of the discounts NAV, there was a board meeting coming up. If you don’t mind give us a little sense of maybe if any thinking at the board level change from one-time period to the other in the fact that no shares were repurchased in the interim period. Just help us understand the thinking there.
I don’t think there was any change in thinking Rich. Look at the board, I think very appropriately looks at the capital, Equity capital is very precious resource and while I understand the arithmetic just believe, again, that we’ve done it in the past. And I think what we did in some of the stock we bought back in all 10-plus years ago. We were buying at 30% and 40% discount to replacement cost. That one only get limited opportunities as we’ve talked about limited by sort of bites at this apple and we just felt like it was not appropriate at this time. I don’t want for a minute to have anyone believe that we're unwilling to. I'm not sure anybody bought more stock backs than we have over the history of the company. As you know we returned a great deal of capital back to our shareholders in the big disposition strategy that we undertook in 2016. So these are – just there's not an unwillingness on our part, is just an – I believe that this discount needs to be greater than what it is today.
Okay. Thanks for that guys.
You're, welcome. Thank you, Rich.
Your next question comes from Rich Hill of Morgan Stanley. Please go ahead.
Hey, good morning guys. I'm sorry if you've disclosed this previously. Obscure fresh on what your rent to income ratios are across your portfolio?
Yes, we can. The number has been fairly consistent David.
Yes. I mean – over the years we've always used kind of the same multiplier. So the percentages don't necessarily change over the past two years the most notable change that we've seen was in Seattle, where rents had grown but the absolute level of grants have been lower, but you've seen this influx of high paying tech jobs. So over the past two or three years Seattle was kind of come down in near – New York City which is our lowest at 17% of rent to income. Everything else is kind of in the 20s and we're at 22% rent to income to that.
Got it.
That’s been pretty consistent for quite some time. And in the low 20s given the portfolio we have today.
Got it. And so when I hear those numbers, I don't see any issue with continued pressure to push rents you would agree with that?
Well not from an income standpoint.
Yes, correct.
From a supply chain, but not from an income standpoint now.
Got it. And one more question on the job front you guys have a really great chart. I guess on Page 27 on one of your recent decks, illustrating that your medium resident age is 33 and primarily focused on millennials. I'm curious how much is population migrations factoring into some of the job growth that you're seeing. You mentioned Boston, is it really job growth that’s driving this or jobs becoming – or jobs coming, because you're seeing population migrations to certain markets. I came to think that given your millennial population you're in a really interesting position to maybe address that question?
Well, I guess my question will difference that makes. A lot of the businesses are going to the talent, and the talent is going to these high densities urban environments and so therefore the companies are having to go there. So – I mean we're just seeing very. very, very strong absorption of this new supply it negatively impacts pricing power, we believe that the tide will turn from 2019. But we're seeing an extraordinary absorption of this new product, certainly from millennials having and profound impact but as I – we have mentioned a lot of the our nearly 20% of our residents are 50 years of age and older. So we really do believe that we have appeal to anyone who's interested in living that sort of high density urban lifestyle.
Got it. And so maybe putting on inside, are you seeing these signs of population migration out of New York City? We've heard anecdotally some of that, but we personally haven't seen a lot of evidence of it yet. Are you seeing any signs of population migration out of high cost areas?
Well, I guess people try, if you look at the larger SMSA that may be the case, but that doesn't mean that you're not adding population in the urban core, but you may be losing population in some of these markets within the entire footprint of SMSA, but we continue to see what we think is increases in households in density in the urban core. I think Washington State is a perfect example. I mean much of the new construct has been in the district to district is now providing a lifestyle, but it not been available for a long time and you're seeing extraordinary growth within the urban core of the of the district.
Got it. Really, really helpful guys. That’s it from me. Thank you.
Thank you, Rich.
Your next question comes from John Kim of BMO Capital Markets. Please go ahead.
Thanks, good morning. In New York the 32BJ, union of workers’ strike was recently inverted have an agreement on salary increases. And I'm wondering how much of the Union impacted in your New York portfolio and also if you could just give us an update on what you think labor cost growth over the next couple years?
This is David Santee. Yes. We’ve seen – we renegotiated contract best part – if you want to call it elevated payroll growth for this year. We have a very good team that works very closely with 32BJ, hence lot of these 421-a buildings require unionized labor. As far – what was the second part of your question?
Do you see this issue in other markets are there in New York?
Just overall labor. I mean well – if you look – overall our labor costs in our industry we've talked about this for the past couple of years, but when you're building 10,000 units, 20,000 units in New York, you’re creating tremendous numbers of jobs in our industry. I would tell you that with the impact of retail our ability to attract and retain our office folks has been fairly reasonable. But on the service side with levels of construction, some of the immigration issues, some of the high costs in some of these urban cores it becomes more challenging do to attract and retain the service side of the equation. So when you look at our overall salary growth this year I mean office, administrative function is very much in line, but we're seeing the elevation on the service side.
And John just to give you some more detail, it's Mark for New York. If real estate taxes were really driving. So New York reported a 5.3% quarter-over-quarter number. They did an exceptional job managing payroll in New York and it was flat for the quarter. It was really about real estate taxes being up 13% and dragging that number up.
Okay. Thank you for that. And then turning to the development pipeline, it’s now stands at $1 billion which is less than half, it was the couple years ago, and it’s very consistent with what your guys saying. But how low are you comfortable with the pipelines going to give the core confident competency, but development cost remains elevated.
Well. Its $1 billion pipeline, but what is truly under construction is meaningfully less than that. I mean we're comfortable having that development pipeline be whatever it needs to be. That allows us to commit capital in appropriate sort of risk adjusted manner. Development remains core competency, we've got terrific group of development folks in each of our kind of core markets they continue to look at product for us, and it’s difficult to actually justify any sort of transactions today. They do other work for us, they've been involved in capital projects deals, and they even work underwriting potential acquisitions. So it's a group of people of resource that will retain, and we'll look forward to building that business back up, but only if we want to make sense to do so. We're not going to change products just because we've got folks who would like to be building it. We put those folks who work and doing some other things in addition to them underwriting product and all the time will come and we’ll look forward to doing that business backup.
Great. Thank you.
You’re welcome.
Your next question comes from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Thank you. Yes, David discussed, best in your next and the assume that your handicap will improve. Just two questions. First, David Neithercut you mentioned the Sub 3 on the UPREIT side which sounds like that asset had a lot of growth in it. So if you can comment on how you think about selling assets that may have a lot of embedded growth and how that effects FFO growth for the company, but also given – I would assume the desire to have a mix of assets in your markets of As and Bs. How selling an asset like this fits into that strategy of trying to straddle a number of price points to maximize the portfolios performance.
Well. I guess you presumed there's a lot of growth in that because of the cap rate. Obviously we feel it was less a growth in that – and that the asset and perhaps the buyer did at. I think that there's a great deal of demand across the space today for “value add product” and I think this fits squarely in that. While we're certainly capable of undertaking that work ourselves, oftentimes we think someone will pay us a nice premium to take better risk and work on them and this is one of those situations.
And then just, I mean take an example of the kind of trading that we've communicated the street that we're – they should expect us to be doing by selling assets that we believe will be slower growth and reallocating that capital hopefully assets that will be higher growth. And it be interesting to note that we were under contract to buy another asset a much newer asset in the New York metropolitan area, not in Manhattan specifically but in the New York metropolitan areas. So it's not a retreat from New York but it’s just the reallocation of the capital in New York. And what we own properties across sort of the spectrum in terms of quality, we're not – I like to consider ourselves as agnostic in that regard, well certainly we've got a lot of very good quality property, we also do have these and perhaps even a season where the process of bringing to be. So we're happy to invest across the spectrum.
Okay. And then the second question is. You guys have 25% of your exposure in California the rent control proposition seem to be gaining steam. So if you could just comment one on how you guys are viewing it, efforts and your thoughts on if this does succeed how this impacts the growth profile of your California assets?
Well. California does represent a meaningful share of our invested capital one of our revenue and net operating income and we were working very closely with the group that includes other public reach and other large private owners of multifamily. To address this referendum to appeal the cost of Hawkins' law. And for those who are unfamiliar with that, cost to Hawkins's is the law in the state of California that limits rent control only up to be delivered before February 1995. And it restricts, it actually requires vacancy decontrol on those properties are subject to rent control. So it's important to note, the rent control exists in California today, and municipalities can adopt rent control today, it is just subject to cost of Hawkins.
So while we certainly don't think the repeal cost of Hawkins's is a good thing, we also don't think that it's a disaster, because you can have rent control today many, many, many municipalities have decided or opted not to. And in those that have actually been on the ballot measures over the past several years many, many of those have actually been defeated. So it's certainly something that we're watching very closely. We’re aligned with the our peers and others that have got to significant investments in multifamily in California and also to see where it goes.
But you have a view on what do us with the rent profile? Your growth?
Well, again may cost to Hawkins is not introducing rent control. So the fact that cost to Hawkins is repeal does not mean every municipality which we operate will automatically adopt rent control. So most of our cost to Hawkins has to be repealed and then municipalities have to decide whether or not they want to adopt some form of rent control an option that they currently have, but again I mentioned many of them don't. So it's very difficult to sort of tell you what the impact would be. I could tell you if you wanted to ask them keep a particular municipality adopted rent control what that impact might be, but this sort of suggests would be an entire state would be impossible.
Okay. Thank you.
Your next question will come from the line of Omotayo Okusanya of Jefferies. Please go ahead.
Yes. Good morning. Two quick ones from me. First one I just wanted to confirm for the quarter interest in other income was about $5.8 million. It seems to be like someone time item and then could you just let us know what that was and whether that being backed out of normalized FFO per share?
Thanks, Tayo. Here is a schedule we prepare for that on Page 22 and those are lawsuitsthat were settled in our favor relating to some development activities, but we do take those out of those recoveries in our favor out or normalized FFO and that is on Page 22 that $5.3 million almost all of that is really that nature.
Okay. All right. That’s helpful. So that’s number one. And then number two, heading into spring leasing season. I know it’s just a April assets point, but any insight assets point, that you can give into a new lease rent growth. I mean its sound like it was negative again in 1Q and just some sense of if it’s possible for it to turn positive in 2Q or given the supply constraint just to kind of processor making that’s a statement.
Yes. So this is Michael. I do want to started out and I wanted to share – I do not believe that looking at the results for just the first quarter is the best way to think about, there’s new lease change metric. I will tell you that every market others in Seattle and Orange County was on track or slightly ahead with our Q4 – Q1 forecast, even though those were negative numbers. And really there has been no change to our full year new lease guidance assumptions that we shared in the investor presentation back in March.
I can also tell you that Seattle and Orange County, which we talked about. We’re also offset by greater than expected performance on the renewal side. And since the volume of transactions during this quarter is low, a lot of this stuff can change on us. We start moving through the leasing season. And I think what you just alluded to if you just go back to some of the commentary for each one of these markets. We are on like our eighth consecutive week of incremental rent increases, week over week over week and that absolutely manifest itself into improvement in this new lease change.
But sitting here today like we look at that every single week, this last week we were positive. Doesn’t mean that that friend old, it doesn’t mean that it can’t get even more positive, but that those are the kind of indicators that we have right now in the fact that rents have been moving up, kind of do help fuel performance on the new lease change metric.
That’s helpful. Thank you.
You bet, Tayo.
Your next question will come from Dennis McGill of Zelman & Associates. Please go ahead.
Hi, thank you guys. First question, so just carrying forward on the new lease questionnaire, I appreciate the clarification. But do you have what the new lease – in the first quarter and then how that spans across markets.
Yes, sure. So I’m just going out kind of rattled off I will tell you for the entire portfolio same-store we were negative 2.6%. And I’ll just move kind of market by market real quick. So Boston was down 4.2%, New York was down 5%, Washington D.C. was down 4.8%, Seattle was down 4.5%, San Francisco down 1.5%, Los Angeles was positive 20 basis points, Orange County was negative 40 basis points, San Diego was positive 50 basis points. And again I just want to make sure everybody realizes that standalone quarter is not a really good indicator and I think we’re more relevant as whether or not the assumptions for the full year are changing based on what has occurred in the first quarter and outside of that trajectory for Seattle and Orange County, I will tell you these are exactly where we expected them to be.
That’s very helpful. And just for comparison sort of minus 2, 6 across the whole portfolio that’s comparable to what you just referenced has been slightly positive in the most recent week.
Yes. So I don’t have that in front of me, but I think we were positive 20 basis points for the last week for the entire portfolio and that will be saved metric.
Okay, thank you. And then second question, can you maybe to share what you’re hearing and seen with respect to capital availability for the development side.
Well, I think everybody just only has sort of anecdotal sort of things about that. Dennis, I can tell you that we have received – so our investment team has received inquiries about our interest in providing some equity capital for developments from sponsors that never would have called us 12 or 18 months ago. We’ve just – we’ve seen, we’ve heard about things being marked all and things being put on the back burner et cetera. Now that doesn’t mean that well capitalized people can’t find the capital. Can’t find the institutional partners, we’ve heard of some big institutions sort of stepping aside. Mark can you talk about maybe other debt side.
Sure. So what we’ve seen is generally steady, ability of developers who are able to obtain equity to finance themselves in the debt market. At this point, we see some banks for example, Fifth Third just announced that they are reducing their multifamily lending, the other banks we survey generally say they’re going to be in about the same places, they’ve been in the recent past. There may be a touch more focus on suburban deals that are tending to pencil better.
So that they're doing a little bit more development in the suburban areas that are being financed, but it doesn't seem that the banks are the restrictor at the Equity. Because the banks are only loaning it, 50% to 60%, so it's easy for them to make that loan and feel confidence, the Equity that set material risk. It get us really quickly. I mean, if you just have a situation where development costs continue to rise, rental rates continue to be pressured, yields, note to yields getting compressed and adjusted. We just think it's going to a point, where a lot of equity is having their sidelines.
Okay. And just follow-up with – if you look at the non-bank resources. Is there anything that would vary from what you just talked about sort of this stable availability?
Yes, there is more. And there is certainly more involvement from them. But they're capital so expensive that they're more of a substitute for that for the equity than they are for the deck. And again, they are pretty pricey alternative. So again, well the cost pressures, we just see this general cracking down of yields and IRRs in with revenue growth being modest across the country. We do just generally feel like those numbers are just not going to add up and we would expect them to decline over time.
Okay. Thank you, guys.
Your next question comes from Wes Golladay of RBC Capital Markets. Please go ahead.
Hi, guys. Just a follow-up to that last question. Have you expect to see a meaningful uptick in current developers getting in trouble, the whole backdrop are right in cost, higher financing costs delay. What you seeing on the ground?
I guess we've not seen much, really if any of that at least at this juncture. As we mentioned earlier, the products, projects that have been delivered are being absorbed. They may not be achieving the rental rates that they might have expected. But they're being absorbed and my guess is that there being they're far from being in distress. They may not be making their every return that they had hoped. They may not be able to refinance out every sort of nickel of construction loan that they had had hoped. But I mean, we're a long way fighting from this distress in the space, just given the – a very, very strong demand that we're seeing for good quality multi-family today.
Okay. What if we fast-forward, call it two years from now, if you’re having a hard time penciling in developments and I’d say you have a purpose superior to your cost of the capital, you just raised that around 3.6 pertained to your money. You see the people are going to bode down the date getting that any issues?
I mean, again, if they're breaking ground today and they're being finance, as Mark said, it 50% or 60% there. They're not going to be distressed, they may not achieve their equity returns. But they will not be in distress.
Yes, just to give a little color around that. We're seeing spreads of 250 to 300 basis points above LIBOR. LIBOR is around 2%, we call it 450. You imagine that rates are up 2%, you could have a situation where the debt rate of developer is staying at 6% and 6.5%. That said, there are underwriting the debt yields of 7% or 8%. So I think the lenders are – at 50% leverage are probably okay. I think the equity, we will get pinched at some point and you feel it. But I think the lenders at this low leverage. Frankly, as David said, probably in adequate position or coverage.
Okay. And then looking at the deliveries for the peak leasing season, that share many of the markets. Do you see any risk at least – at some markets, where it will be – can be pushing at the back half of the year, where it's not ideal?
Any of the new product being pushed in the back half of the year, there is plenty of product being delivered every quarter, that it's – whether or not something's opens their doors, 30 or 60 or 90 days later than expected is not going to be a windfall for the states. I mean, there's just – a lot of product kind of coming and when something opens its door, I’m not choosing have much of an impact.
Okay. Thanks.
And your next question comes from Steve Sakwa of Evercore ISI. Please go ahead.
Thanks. Obviously, you guys are reforming the portfolio from a geographic perspective last year. And I’m just curious, if you’re the board had any thoughts about reconsidering markets. Are you pretty contend on kind of the markets you’re currently in?
I think the board asks us Steve, on a regular basis to sort of test our thesis and it have asked us repeatedly, if you were to add some additional markets, what might they be? And why are you not entering those today? If you look at the heat map, we've shared in all of our brochures that there are certainly some markets that on some characteristics. Look I think very attractive for one reason or another either too small or single-family home ownership is price of single family homes as is too cheap or whatever. But we are not committed, we’re not choose to lose stone, where we are if it makes sense for us to add another market or two. We won't hesitate to do it and we continue to do that work to determine whether or not that's meant in our shareholders' best interests or not.
David, could you just maybe share with us kind of the one or two markets that you might go back into where and would you go into that through acquisition or through development?
Well, look, I guess, one of the things that we have to be thoughtful about Steve is just given our size for us to go “into a market”. We've acquires a very meaningful amount of capital to have it make sense for Michael and his team and for investment team and for all the support that one needs to give. So my guess, if we went into a market, it would be with a hopefully, some sort of portfolio acquisition that would then be supplemented by one-off acquisitions. And certainly, we would consider development. I would say that Denver is a market that when we exited that market as part of the large sale of the assets to various – Starwood several years ago.
We’d always consider that not to be a market exit but rather to be a portfolio exit. It was a portfolio of 30-year old quite suburban, surface park walkup kind of product that we knew we would not own long term. We did not see at the way at the time. So having this sort of portfolio that we want to have in that marketplace and so we took advantage of what we thought was very attractive pricing to sell those assets. And it's certainly a market that we would consider going back into if I want to make sense to pick so.
Great. Thanks very much, appreciate the time.
Gentlemen, there are no further question at this time. I’d like to hand it back over to Mr. McKenna for closing remarks.
And I will thank you very much everyone. I'll let you know that David Santee will be in attendance at the NAREIT's meetings in New York and you'll all get a chance to say a goodbye and wish David well and we look forward to seeing everybody at that meeting in June in New York. Thank you so much for your time today.
This concludes today’s call. Thank you for your participation. You may now disconnect. Have a wonderful day.