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Edited Transcript of EQR earnings conference call or presentation 30-Jan-19 4:00pm GMT

Q4 2018 Equity Residential Earnings Call

CHICAGO Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Equity Residential earnings conference call or presentation Wednesday, January 30, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark J. Parrell

Equity Residential - President, CEO & Trustee

* Martin J. McKenna

Equity Residential - VP of Investor & Public Relations

* Michael L. Manelis

Equity Residential - COO & Executive VP

* Robert A. Garechana

Equity Residential - Executive VP & CFO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Hardik Goel

Zelman & Associates LLC - VP of Research

* Jeffrey Alan Spector

BofA Merrill Lynch, Research Division - MD and Head of United States REITs

* John P. Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Equity Residential 4Q '18 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to today's speakers. Please go ahead.

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Martin J. McKenna, Equity Residential - VP of Investor & Public Relations [2]

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Thank you, Mary. Good morning from the Polar Vortex, and thanks for joining us to discuss Equity Residential's full year 2018 results and outlook for 2019.

Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. 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.

Now I'll turn the call over to Mark Parrell.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [3]

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Thank you, Marty. Good morning. Greetings from chilly Chicago, where it's a negative 21 degrees right now with a minus 50 degree wind chill. But while the weather outside is quite cold, our business on the contrary feels quite warm to us, and we'll spend a few moments this morning with you discussing it. But we're pleased to have delivered same-store revenue growth at the top end of our original guidance range as well as solid normalized FFO growth in 2018. We had strong momentum in the fourth quarter and 2019 has started well. Although admittedly, December and January are months with a seasonally low volume of transactions. Both strong high-wage job and income growth in our markets, combined with positive demographics and a consumer preference for a rental lifestyle in our highly desirable cities has created a supported backdrop for our business in spite of elevated levels of new supply. Recent announcements regarding Amazon's HQ2 and Google's continued business expansion are a reinforcement of our belief that the knowledge economy will be focused in the markets where we do business.

In Washington D.C., 70% of our NOI comes within 5 miles of the location of HQ2. In New York, we have more than 20 properties that are short commute from the Long Island City location of HQ2 and more than 20 that are a short commute from the new Google expansion location in the West Village. We expect that 2019 will be another good year for us with strong demand across our markets, creating high occupancy conditions, but continuing elevated supply levels in some of our markets, keeping us from seizing the pricing initiatives. But while our internal dashboards are all indicating green, we're also aware that the economic and other headlines are giving a more cautionary yellow signal.

With that in mind, in a moment, I'm going to turn the call over to Michael Manelis, our Chief Operating Officer, to give you color on how we are looking at revenue growth across our markets in 2019; then Bob Garechana, our Chief Financial Officer, will follow with a review of normalized FFO and expense results and guidance and also discuss our balance sheet; and then I'll wrap it up on the prepared remarks side by speaking to our investment activity; and after that we'll open the call to your questions. Go ahead, Michael.

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Michael L. Manelis, Equity Residential - COO & Executive VP [4]

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Thank you, Mark. So today, I'm going to begin with a quick recap of our 2018 performance, I'll share the assumptions that create the midpoint of our 2019 guidance range, and I'll provide updated commentary and outlook for each market.

Here are a few key takeaways from 2018: first, strong demand fueled by good job growth and record low levels of unemployment in our markets aided the absorption of elevated supply; second, equity employees delivered remarkable experiences to our residents, which resulted in the highest customer satisfaction and online reputation scores and the lowest resident turnover in the history of the company. We reported 51.1% turnover in 2018, which is around 200 basis points less than 2017. And if you exclude turnover for those residents who moved to a new unit in the same community, our net turnover drops to 45%. Finally, our 2.3% same-store revenue growth was achieved with 96.2% occupancy, negative 30-basis-point new lease change and achieved renewal increases of 4.9%, which were all stronger than 2017 results.

As we sit here today, we have strong momentum coming out of the fourth quarter. We've more pricing power today versus the same time last year, which keeps the dashboards blinking green and allows us to remain cautiously optimistic about the outlook for 2019, but we acknowledge that the hard work is still ahead of us in the peak leasing season, but our teams are ready to deliver.

Consistent with our preliminary assumptions that we shared on the last call, our overall guidance assumes approximately the same occupancy and renewal performance as in 2018 with a modest improvement to new lease change, based on expected pricing power during the first half of the year and an embedded rent roll that is better than 1 year ago. Our guidance also assumes that the steady, but lower job growth expectations as being predicted by many economists will lead to the continued efficient absorption of the new supply in our markets.

In 2019, supply will be less in Boston, New York and Orange County, and the other markets are expected to be flat or up, as I will discuss in my market commentary. Our 2019 same-store revenue guidance range of 2.2% to 3.2% has a midpoint of 2.7%, which is 40 basis points better than our 2018 results. The upper end of our range assumes a slight improvement in occupancy, with strong pricing power on new leases staying in place through the peak leasing season. The bottom end of our revenue guidance assumes no intraperiod growth in rents and a modest reduction in both occupancy and renewal performance. All of our markets, except for Seattle and Orange County, are projected to deliver better revenue growth in 2019 as compared to 2018.

So let's move on to the individual markets, beginning with Boston. Boston finished the year strong with continued growth in biotech and other high-wage jobs. Job growth accelerated in the second half of the year, and fourth quarter deliveries were very light. These factors contributed to a fourth quarter performance that defied seasonal trends by growing both rate and occupancy each month throughout the quarter. In 2018, Boston delivered full year revenue growth of 2.5%, with 95.9% occupancy, negative 80 basis points new lease change and a 5% achieved renewal increase. The theme for our 2019 guidance in Boston is modest pricing power. Only a small percentage of the 2019 supply will compete with our assets in Boston and Cambridge, which comprises almost 70% of our revenue in the market. Most of this new supply is expected to deliver later in the year, which should lead to a favorable peak leasing season. The 2019 revenue midpoint for Boston will be 2.8%, which is primarily based on improving pricing power heading into a period with lower overall supply. Today, our occupancy is 95.7% and January renewals came in at 5.8%. Our local team and portfolio are well positioned to capture the opportunity.

Moving to New York, which delivered 80 basis points of revenue growth in 2018, with 96.5% occupancy, negative 150 basis point new lease change and a 3.4% achieved renewal increase. These results were also accomplished with -- using approximately 40% fewer concessions than in 2017. New York's 2018 outperformance, albeit was still the lowest same-store revenue growth in our portfolio, was a major contributor to us achieving the high end of our overall company same-store revenue guidance for '18. We finished the year with strong momentum in the fourth quarter. New supply in our competitive footprint will be approximately 50% lower than in '18, with expected deliveries just under 10,000 units. The deliveries will continue to be concentrated in Long Island City and Brooklyn, where, to-date, we've not seen a significant impact to our operations. In fact, we've been monitoring forwarding addresses from our move outs for over a year now, and we continue to see less than 2% of our residents leaving us for Long Island City. Similar occupancy, strong renewal performance and a proven and new lease change are the foundations to our 2019 revenue guidance of 1.8% for New York. We expect the market pricing to remain disciplined, which allows us to continue to use concessions at a very strategic and targeted level and an amount that we estimate it will be 25% lower than 2018. With 96.3% occupancy today, January renewals at 4.3%, the local team continues to feel the strength that propelled them through the fourth quarter.

So D.C. is a market we definitely have all been hearing a lot about in the news. Our assumptions regarding 2019 do not include the impact from any future government shutdowns. During the initial shutdown, we did not experience anything outside of waiving a few dozen late fees. If there are additional shutdowns, we've a good process in place to ensure that we work with any resident who is being impacted. We finished 2018 with revenue growth of 1% in D.C., which was comprised of 96.3% occupancy, a negative 180 basis points on new lease change and achieved renewal increases of 4.4%. We also saw the Washington region's economy continue its strong performance in the fourth quarter, ending the year with above-average job growth and an unemployment rate below the national average. Occupancy rates remained strong as Class A absorption continues at a record pace. Expectations for new job growth in 2019 still indicate enough demand creation to aid in the absorption of the 13,500 deliveries expected in '19. We are forecasting limited pricing power to continue through the year, and we expect D.C.'s 2019 revenue growth to be 1.4%. The 40-basis-point improvement over '18 is entirely due to growth that is already in place on the rent roll, as our full year assumptions include a slight decline in occupancy and very similar new lease change and renewal performance. Most of the decline in occupancy is expected in the back half of the year, where we have a difficult comp period from 2018. Today, our dashboards are green in D.C. and occupancy is at 96.5% and January renewals came in at 4.5%.

Moving over to the West Coast. Seattle delivered 2.8% revenue growth for the full year in 2018. This was accomplished with 95.8% occupancy, negative 220 basis points in new lease change and achieved renewal increases of 5.8%. Seattle's supply is expected to increase next year to just over 9,000 units, as we saw just over 10% shipped in expected completions from Q4 of '18 into Q1 of '19. In 2019, we expect to see more impact from new deliveries in King County suburban Eastside than the CBD area. Professional and business services and informational sectors continue to lead the way within the area's overall job growth. Major companies continue to announce expansions and new hiring into 2019. Even Amazon is still expanding in Seattle despite their plans for New York and D.C. In fact, last week, they had over 9,200 open positions in Seattle, which is the highest we've seen in a while. In terms of the deliveries, only some of the 3,900 units being delivered in the Bellevue, Redmond submarket will be directly competitive with our well-located Eastside properties. In addition, Downtown Seattle should experience some relief from supply in 2019, and we have almost 40% of our income in that submarket. In 2018, we saw growth slow significantly in this market in the back half of the year, and our 2019 guidance of 2% revenue growth reflects the impact of that second half slowdown. Overall, we expect to see a slight improvement in both new lease change and occupancy, which will be offset by a lower, but still healthy, renewal growth rate. We are at 96.4% occupied today, with January renewals at 5%.

Next up is San Francisco, a market that in 2018 demonstrated strong job growth, 34 new IPOs and a consistent daily stream of headlines about major office leases and land acquisitions to support future expected growth from companies in the area. In 2018, San Francisco delivered full year revenue growth of 2.9%, with 96% occupancy, positive 80-basis-point new lease change and 5.1% achieved renewal increase. The expectation for 2019 is that San Francisco market will continue to enjoy economic and job expansion, albeit at a more tempered pace. Deliveries will be higher in 2019, but the concentration shift to the East Bay Oakland submarket. There is still uncertainty surrounding the broader impact from deliveries in Oakland. To date, there has only been a small deal or 2 come online, and the majority of the deliveries are expected in the second and third quarter of this year. We will be monitoring the impact of this new supply in Oakland market and the overall San Francisco market. Our 2019 revenue growth guidance of 3.4% is built on very similar occupancy, new lease change and renewal growth as we achieved in 2018. Today, we are 96.6% occupied, with January achieved renewal increases at 4.6%.

Moving down to Los Angeles, where our 2018 revenue growth was 3.6%. This was achieved with 96.2% occupancy, positive 140-basis-point new lease change and 6.2% achieved renewal increases. On the supply front, labor shortages continue to create delays and project deliveries, resulting in approximately 2,400 units from 14 projects shifting from Q4 of '18 into early 2019 completions. This brings our 2019 delivery forecast to just over 14,000 units in L.A. As I mentioned last quarter, it is likely that we will see this trend continue, with some of the expected 2019 deliveries being pushed into 2020. The combined total over the 2-year period has not materially changed, and this is a huge geographical area. In 2019, there will be supply concentrations in San Fernando Valley, Downtown and West L.A. The growth in online entertainment content is creating strong momentum in West L.A. and will most likely quickly absorb the new units in the submarket. We are projecting 3.8% revenue growth in 2019 for Los Angeles, with slightly lower occupancy and renewals and the same new lease change as in 2018, which is being offset by gains already in place on the rent roll. The reduction in occupancy is primarily in the second half of the year and is recognizing potential pressure from the new supply in a few of the core submarkets that I mentioned. Sitting here today, San Fernando Valley is starting off a little weaker than expected, but the overall market in L.A. continues to demonstrate strong demand, which should continue to aid the overall absorption. In total, the market is performing very well with 96.2% occupancy and achieved renewal increases for January at 5.7%.

Moving to Orange County. We finished 2018 with revenue growth of 3.5%, which was comprised of 96.1% occupancy, positive 10 basis points new lease change and achieved renewal increases at 5.7%. Our revenue growth for 2019 is expected to be about 40 basis points lower at 3.1%. The decrease is primarily due to recognizing the impact of lower growth from leases signed last year, along with a slight decline in projected renewal increases. 2019 occupancy and new lease change expectations are very similar to 2018 results. Job growth appears to be slowing, but the overall outlook remains positive. Overall, deliveries in Orange County will be less in 2019 with just under 3,000 units expected. But the actual impact to us from a competitive standpoint should be very similar to 2018. Today, we are 96.4% occupied and have achieved a 5.6% increase on January renewals.

And last but not least, San Diego. We finished 2018 with revenue growth of 3.9%, which was comprised of 96.3% occupancy, a positive 160-basis-point new lease change and achieved renewal increases at 6.1%. Our outlook for 2019 will be the same, with revenue growth at 3.9%, with similar occupancy and new lease change projections and slightly lower increases on renewals, which is being offset by gains already in place on the rent roll. Deliveries are projected to be slightly higher at almost 4,300 units, and the impact to us is expected to be very similar to 2018, with pressure on our downtown locations. As of today, San Diego is 95.9% occupied and achieved renewal increases in January are 5.3%.

While we did reenter the Denver market in 2018 and added another property this month, Denver is not part of our same-store pool and is not included in our guidance range. I can tell you that right now the market is performing to our expectations.

So let me close with a huge shout out to the employees of Equity Residential. Their relentless commitment to our residents, which was reflected in our all-time high customer satisfaction metrics, is amazing. We are so proud of their accomplishments in 2018, and we look forward to 2019 being even better. We have strong momentum, and we are off to a great start.

Thank you.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [5]

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Thanks, Michael. This morning, I'll take a few minutes to discuss our guidance assumptions for 2019 same-store expenses and normalized FFO. I'll round out my remarks with a brief discussion of our balance sheet and the capital markets.

Before I begin, a couple of quick comments on the fourth quarter 2018. In the quarter, our same-store revenue grew 2.6%, expenses grew 4.2% and NOI grew 1.9%, putting us generally in line with our full year operating expectations from the third quarter call. For normalized FFO, we delivered $0.84, which was $0.01 shy of the midpoint of our expectation. As we mentioned in the release, this was primarily driven by the negative impact of higher-than-anticipated casualty losses driven by rainstorm damage at several properties in our Washington, D.C. area portfolio.

Regarding 2018 same-store expenses, let me give some more specific color. The relatively high year-over-year expense numbers we experienced in repairs and maintenance and insurance are driven in part by very low or negative growth for the comparable period in 2017. For example, repairs and maintenance grew 1.6% for all of 2017 and only 0.7% for the fourth quarter of 2017 compared to the same period in 2016. Insurance expense for the same periods was negative.

Moving over to payroll. As is typical in the fourth quarter, on-site payroll was impacted by various true-ups on payroll-related reserves like the medical reserve, which we've discussed in the past.

Now onto 2019 guidance. For full year 2019, we expect same-store expense growth between 3.5% and 4.5%. 80% of our same-store expenses come from 3 major expense categories. So let me walk you through how we currently anticipate that to unfold in 2019. At a little over 40% of overall same-store expenses, property taxes drive anticipated 2019 growth. We currently anticipate fewer refunds for the year relative to 2018 because of the great appeal to success we had for that period. Also contributing to growth in 2019 are certain of our New York properties that are subject to the 421-a abatement program and are in various stages of burn-off that we've discussed on prior calls. As a result, we would expect 2019 real estate tax expense growth between 3.75% and 4.75%. In on-site payroll, our second largest category, we continue to experience a very competitive job environment.

Many of our markets are experiencing elevated supply, as Mark and Michael mentioned, which is competing with us not only for residents but also for our highly skilled employees. That, coupled with a strong general employment backdrop, means we continue to focus on retaining our colleagues on-site. As such, our expectations on payroll for the full year 2019 is for growth between 4% and 5%. Finally, our last major category, utilities. Utilities should benefit in 2019 from a couple of factors that reduce our expected rate of growth relative to the 4.5% increase we posted in 2018. First, in 2018, we experienced higher-than-usual growth in (inaudible) through our expense in Southern California that shouldn't repeat itself in 2019. Secondly, we experienced some very extreme weather in the first half of 2018 in the northeast that we did not include in our 2019 forecast. We aren't in the business of forecasting weather, but our guidance does assume a more traditional run rate. Finally, we continue to benefit from our forward electricity and gas purchase contracts, along with our investment in LED lighting, cogeneration and other initiatives to manage this expense. As a result, in 2019, we expect utility expense to grow between 1% and 3%.

Our guidance range for normalized FFO in 2019 is $3.34 per share to $3.44 per share. Major drivers for this change between our 2018 normalized FFO of $3.25 per share and the midpoint at $3.39 per share for -- from 2019 guidance include: a $0.10 contribution from same-store NOI and our same-store properties based on the revenue and expense assumption that Michael and I just outlined; a $0.04 contribution from our leased up properties, which are anticipated to generate $40 million in NOI in 2019; a $0.01 contribution from the timing of our acquisition and disposition activity in both 2018 and 2019, offset by $0.01 in higher expected interest expense. While we continue to benefit from favorable refinancing activity, we do anticipate short-term rates on average to remain elevated in 2019 relative to 2018. This expectation is driving the negative impact.

Final note on the balance sheet before turning it back to Mark. Our financial position remains the strongest in the company's history and one of the strongest in the REIT industry. During 2018, we not only issued $900 million in unsecured bonds, we retired over $1 billion in higher coupon secured debt. Our NOI is now over 80% unencumbered, creating ample capacity to opportunistically access either the secured or the unsecured market. We issued an unsecured bond early in the year at one of the lowest 10-year REIT credit spreads ever and were the first multifamily REIT to issue a green bond. In addition to being an attractively priced piece of long-term capital, the green bond is a reflection of the many sustainable projects and initiatives that we have and continue to undertake balancing people, planet and profit.

For 2019, we anticipate issuing between $700 million and $900 million in debt capital to refinance debt that either matures in 2019 or matures in 2020, but it's prepayable at par in 2019. We have very manageable development spend that we anticipate being funded entirely from free cash flow, ample debt capacity and industry-leading access to the full spectrum of capital. As I just mentioned, we also have plenty of capacity to issue either unsecured or secured debt capital. For the first time in quite a while, we've also seen a convergence of pricing between the unsecured and secured markets for lower levers of high-quality borrowers like ourselves.

With that, I'll turn it back to Mark.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [6]

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Thanks, Bob.

Just quickly on the investment front, we had a relatively quiet fourth quarter with no transactions. But as you saw in last night's release, we had a busy January. We acquired 3 properties. We continued to our push into Denver with the acquisition of a newly constructed property in the Golden Triangle neighborhood, which is near downtown Denver. This 274-unit property was completed in 2017 as a 90 Walk Score and is slightly less than 90% occupied. We acquired it for $110.5 million at a 4.4% cap rate on the current rent roll and a 4.6% cap rate once fully stabilized. We see the price is at about a 7% discount to current replacement costs. We now have 3 properties or about $385 million of capital invested in Denver, but we'll continue to look for opportunities to expand our presence in Denver, as we think that asset's in the right location will produce excellent long-term returns. We do note that similar to many markets, Denver has experienced -- is experiencing significant new supply. This is both a challenge to near-term operating fundamentals that we do reflect in our underwriting and also an opportunity for us to buy well-located product at modest discounts to current replacement costs.

Moving over to Seattle, we acquired 174-unit property constructed in 2016 in the South Lake Union neighborhood. This asset was acquired for $74.1 million at an acquisition cap rate of 4.6%. The property has a tremendous Walk Score of 97, and we were able to acquire it at a discount to current replacement cost. We like this property's location, which is in walking distance of many major employers, parks and other attractive amenities.

We also added to our New York metro area portfolio, with the acquisition of a 131-unit property in the desirable Paulus Hook neighborhood of Jersey City. We acquired the property for $74 million at an acquisition cap rate of 4.6%. The property has a 92 Walk Score and easy public access -- transportation access into much of Manhattan.

On the disposition side, we're in the process of disposing of several assets with closings expected in -- late in this quarter or in the second quarter. This includes the sale of an asset in Manhattan that was reported in the press. I'll have more to report on this transaction once it has closed. We have given guidance for $700 million of acquisitions and $700 million of dispositions in 2019. You can expect us to continue our selected portfolio pruning as we find attractive opportunities from both an acquisition and development perspective for new investment in our markets. Overall, values and cap rates are holding steady in our markets as there continues to be demand to own high-quality apartment assets.

On the development front, during the fourth quarter, we completed the development of our 100 K Street property in Washington, D.C., which we expect to deliver at a stabilized yield of 5.6%. We also stabilized our Cascade development in Seattle at a yield of 5.8%. We did not start any developments in the fourth quarter.

So now let's go to the Q&A session. Operator, if you could begin?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Nick Yulico of Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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This is Trent Trujillo here with Nick. Thanks for first, all the market-level color in your prepared remarks, that's great. A kind of big picture question related to supply. It seems like a theme that we continue to hear is more of it being shifted from one quarter to another, from one year to another. So now 2019, based on industry level data, it seems to be the new peak for supply deliveries at the national level. And we appreciate you do your own internal analysis of supply, but we've been talking about this for a while as it gets pushed and pushed further into the cycle. So when do you think we truly see the peak supply as it pertains to your markets?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [3]

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Trent, it's Mark Parrell. So it seems that we do have this conversation every year. We always seem to have the highest supply numbers right now for the year. So our internal estimates now for 2019 are give or take, 77,000 units. But we fully expect 10% or 15% of that to move because it always moves. So again, we do think something will move into '20. Right now, our 2020 numbers are lower, and we will be putting out an update on our numbers a little bit later in the quarter. But again, we see continual pressure on construction costs. Labor costs, materials costs, land prices have not really declined at this point. We see all that. We also see rents not growing as quickly as construction costs are, and we see the pressure on developers, and we see that growing over time. When that really comes to pass in a very significant decline, we would expect that to occur at some point, but I just can't hazard a guess at this juncture. But at this point, we do think '20 is lower than '19.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. And just a quick follow-up, something relating to your guidance. It looks like you have a 25-basis-point dilutive cap rate spread between acquisitions and dispositions. And you've already announced a healthy amount of acquisitions in the mid-4% range and you have that Chelsea asset pending sale, which we'd assume would be something in the low-4% cap rate range. So I guess, the question is, what are you planning to buy or sell that would flip this dynamic from being accretive to dilutive, just to get some details on that?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [5]

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Sure, Trent. Yes, thank you. All we do with our guidance is give you the number that's in our estimate. So it doesn't mean that that's where we'll actually end up because we don't know exactly what we are going to buy and sell during the year. At this point, we do have somewhat of an accretive trade going on. But there are other assets we've identified for sale that would be higher cap rate assets. So I could tell you, there is almost equal probability that we could be 50 basis points accretive as 50 basis points dilutive. I mean, it's just a pretty small margin in between and in terms of the impact on this year's numbers, which I don't think was exactly what you asked, it's really minimal because it's really about the timing of these trades. And because we're buying relatively early, we're going to be slightly accretive. My guess is, in 2019, almost no matter what.

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Operator [6]

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We will now take our next question from Nick Joseph of Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [7]

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In the last 2 years, you've been pretty conservative with initial same-store revenue guidance, this should ultimately finish at the high end of your initial expectations. So first, did anything change this year with how you set guidance? And then which markets have the largest potential variance that would drive you to the high end or low end of the range?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [8]

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It's Parrell, and Manelis, we're going to kind of split this one up. So in terms of anything changing in our process? No. Our process is sort of both a bottoms-up and a top-down process, and we sort of arrive at a consensus number. So no, the process is the same. We talk to our filed personnel, and there is often asset-specific positive and negatives going on, new supply, where they know sort of the exact impact, maybe a renovation at a property, things of that nature. All the top of the house, we're looking at supply numbers, job growth, we're thinking about how the market moved the prior year, and we sort of merge those 2 together and reach consensus. I'll let Michael speak to the markets with positives and kind of [the negatives].

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Michael L. Manelis, Equity Residential - COO & Executive VP [9]

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Yes. So I think that the one way to just start thinking about this is there are 4 core markets that are driving 18% to 20% of our revenue, which would be kind of D.C., New York, San Francisco and L.A. So obviously, those are big focal points because if any one of those markets kind of either outperforms or underperforms, it has more weight into the overall company. I guess, I'm just going to tell you sitting here today, I think we're off to a great start, right? You've got Boston, San Francisco and New York that we feel like we've got good momentum and would tip us towards kind of the outperform state. So -- again, we're very early in. I think on the downside, we're going to be watching D.C. and L.A. just for any signs of softening and the absorption of the supply, which could impact our projections. But as of right now, we're not seeing anything to suggest that that's occurring.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [10]

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So then, with the supply coming to Oakland and the East Bay, do you think that the new product will pull demand from San Francisco? Or do you expect it to be more muted, similar to what you've seen in New York with Long Island City?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [11]

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I think that's a great question and that's something obviously that we're going to be looking at. I think I even said that on the last quarter, which is -- it's a little bit different than Long Island City because Oakland does have areas to go through today. So it's a little bit more established than Long Island City. It's something that we've got to watch. I think in the next, probably, several weeks, we're going to have one of the first deals, bigger deals, 420-unit start do their pre-leasing. So it's just going to be interesting to see kind of that price relationship to San Francisco. My guess is it will come out of the box somewhere 15% to 20% discounted in rents, but we'll see. And then we just got to watch their ability to absorb, what happens with them. To see if they do start to draw from San Francisco.

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Operator [12]

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We will now take our next question from Jeff Spector, Bank of America.

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Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [13]

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Mark, just stepping back from results for a minute, now that you are in the CEO seat, I just want to confirm from a strategy standpoint, has there any potential change or anything you've been wanting to do, whether it's more development, less development, market exposure? And I hate to even say it, but even the balance sheet increasing leverage possibly at this point?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [14]

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Thanks for the question, Jeff. I've been at the company 20 years and was the CFO for 11. So I'm fully invested in the strategy. I mean, the strategy has always morphed and changed over time and it, undoubtedly, will continue to. Even last year, we went back into Denver, we telegraphed that, we talked about it. We continue as we did under David's time at the helm as we will undermine. We always think about markets and different types of assets we can buy in our markets. So I think that sort of evolutionary process will continue, but in terms of some dramatic changes that the board and I are contemplating, that would not, at this point, be the case.

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Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [15]

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Okay, great. And then just 2 quick follow-ups. On Oakland, I was just going to ask, historically, have you seen an impact when there's a new supply in Oakland in your San Fran portfolio? Or are we saying that it's really not a good comparison to look in the past, given the changes going on in Oakland?

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Michael L. Manelis, Equity Residential - COO & Executive VP [16]

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Yes, I think so. I think you've got to wait and see. This is some concentrated new supply, high-end stuff coming online. So I think in the past, I don't know that they've ever had this wave of the concentration all coming online in a couple of quarter period but really have an impact and really test the ability to absorb.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [17]

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And, Jeff, if I can just add to that a little bit, it's Mark. We do see maybe 3,500-plus units being delivered. This is into the -- a market that has -- by that, I mean, the Bay Area in general, the least amount of housing in the country. I mean, it needs more housing. So whatever little blip this might cause or might not cause to the operations of our assets across the Bay and San Francisco where the few assets that we do have in East Bay, in the long run, this market will absorb this product readily because it's just an area where there is just incredible demand for housing, it's very undersupplied. And so we don't look at it as some kind of permanent disability or even, frankly, much more than a temporary blip.

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Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [18]

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Okay. And then my last follow-up is just on supply in New York City. You commented that you're still expecting a decline of 50% in '19. We hosted a broker call last weekend, we heard '18 supply was down more than we expected. So we weren't sure if the slippage into '19 would decrease that estimate. But it sounds like you're sticking with the 50% decline in New York City's supply?

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Michael L. Manelis, Equity Residential - COO & Executive VP [19]

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Yes, so actually when I look back at where we thought '18 was going to be, we really have not seen a significant change at all. So the 19,000 units that we expected kind of came in maybe 1 unit slipped out or 2 units, small units but we really didn't see that kind of slippage in New York. And again, as we think about the 2019 landscape it's against our competitive footprint.

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Operator [20]

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We will now take our next question from John Kim of BMO Capital Markets.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [21]

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Based on your market commentary, it looks like the biggest improvement that you're seeing in 2019 in the same-store revenue guidance will be coming from New York. But when you look at the earn-in from blended lease growth rates from last year, it does not appear to be that strong. I'm just wondering if you could provide some more commentary on your confidence level in achieving this other than just supply coming down.

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Michael L. Manelis, Equity Residential - COO & Executive VP [22]

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Well, so I guess, I would say, from an earn-in perspective, New York's contributing -- we've 70 basis points stronger embedded growth today than we did at this time last year. So we do have some embedded growth in the rent roll from leases that were signed, call it, midyear to the back half of the year, and we've got good momentum right now. We've got demonstrated pricing power. It's not robust pricing power, but it's more pricing power than we've had in that market in a long time. And if that momentum can continue, I think we're going to be just fine with this range that we've put out there.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [23]

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You had strong momentum in the fourth quarter versus, I think, your prior guidance in New York? Just want to make sure that was the case.

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Michael L. Manelis, Equity Residential - COO & Executive VP [24]

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Yes. Yes, both from a demand, from an occupancy, from a renewal, everything.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [25]

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Okay. Also there was commentary on waiving some late fees in D.C. I'm just -- I wanted to make sure that we understood your revenue recognition when a tenant is late in paying rents. And also is your expectation that government workers will be fully current on rents when the government shutdown is permanently over?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [26]

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Yes. So I'll take real quick the revenue recognition [coverage on] late fees. So we recognize the late fee when due. So we'd recognize that through revenues, almost like on a cash basis. Obviously, if we didn't collect it, we would not recognize it.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [27]

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So just to give you an order of magnitude, John, to help you a little here, and we're talking about like 2 dozen people. So we're not concerned about it, we waived those late fees, so we're not going to get them, so that's undoubtedly true. So we do charge the accounts the late fees, we do recognize that through revenue. And if they aren't paid, we have a process where a couple of months later it all gets written off. We've very low write-offs in this portfolio. One of the advantages of the portfolio shifts was to have a portfolio where you didn't have a lot of people that move out in the middle of night, you didn't have a lot of people who don't pay the rent. So write-off this portfolio effectively de minimis. So I don't expect that to change as a result of this recent incident.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [28]

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But the workers, to your knowledge, they will be caught up in rents once they go back to work?

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Michael L. Manelis, Equity Residential - COO & Executive VP [29]

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Yes, I guess, at this point, there is nothing out there that would suggest that even if there are additional shutdowns that there is not going to be a retro pay catch up. And therefore, that the residents won't be in a position to get caught back up on rent.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [30]

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Yes, we've -- our family members are government workers, that were furloughed, and they know they're getting their money and they've been told that by their union [side] I guess between that and reading the paper, I expect they'll get the money and then we'll get the rent.

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Operator [31]

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We will now take our next question from Steve Sakwa of Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [32]

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I just wanted to touch on the investment market and just maybe get your comments on kind of unlevered IRRs today? How you guys are underwriting sort of acquisitions this late in the cycle? And do you guys think about a downturn? Do you put that in? Or how do you sort of think about the next possible recession?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [33]

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Steve, it's Mark. Thanks for the good question. This is much art as science. As you know, we got people on the ground really looking at this hard, we underwrite every deal. We end up bidding on a select group of them. So I give you a little bit of flavor of how we're thinking about things. When you're talking about revenue assumptions in the next few years, we do feel like we've more visibility there. So for example, the Denver asset that we just bought a few weeks ago, we effectively assumed because we know there's near-term competition, no revenue growth for a couple of years and concessions. We understand that market, we know where it's going in the next few years. And then over time, at some point, things will balance themselves differently and you'll have a year with a 6 in it later on. So what generally happens is in the near term, you have whatever you really think is going to happen in that market from your knowledge on the ground from our investment and property management teams. Going forward, you sort of revert to some sort of average in the market, which generally, for us, on revenue growth in your (inaudible) might be somewhere in the 3s depending how we feel about the markets long-term prospects. And then you look at your cap rate, your reversionary cap rate at the end. Because a lot of the products we're buying, like the stuff we're buying in Denver, are high-rise, we don't see as much cap rate widening in the sale as maybe you'd see if you were buying garden product. So that gives you just a framework for our thought process. But again, picking what year 7 revenue growth is going to be is definitely an estimate.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [34]

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So no effective real downturn in a market like or just nationally 2, 3, 4 years out, there isn't sort of a down 4%, 5%, 6% with then a strong bounce back? Do you kind of just kind of look at that [usually]?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [35]

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What we accomplish -- yes, well, and you just said it, you look through that. I mean, if you think the number is going to be 350 in a market for revenue growth over a long period of time, you may have underestimated it in year 4 and you overestimated in year 7 and it just kind of averages out. So again, the near-term stuff, we underwrite tight based on having products in these markets, knowing how it's performing, having a real good feel. As you go further out, it's a little bit more of an averaging effect.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [36]

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And then just in terms of unlevered IRRs, where on -- the things that you've been buying or the things that you've underwritten but haven't won, where would you say the market is today and your kind of core 5 or 6 markets?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [37]

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Yes, I mean, we are seeing trades go off, but we think unlevered IRRs may be in the 6s, the stuff we've been willing to purchase has been in the 7s. Again, some of that is skewed by Denver maybe being a little bit higher cap rate market. But stuff we're buying in the 7s, but we do see product trade into the 6s, maybe even in the 5s or high-5s in terms of IRRs, but again, those would be deals we wouldn't play on.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [38]

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And then just lastly on development, I mean, obviously the pipeline for you is kind of dwindling down here. How do you sort of think about new land sites and new development starts over the next couple of years?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [39]

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Yes. Thanks for that question. So on development, we've had a terrific run. We've a great team in place, we do think about it as a long-term value creator for our company. Right now, our development folks have mostly been busy with adjacent land sites, the properties we already own. We do have a couple of other land sites on the West Coast that we're thinking about. But we made a decision a few years ago as we saw these costs really go up, as we saw rents kind of flatten out, that it really wasn't worth the risk. We completed, I think, a very lucrative development pipeline for the most part. We do have a couple of things still in process. I guess, the way we think about it right now, Steve, is we think about it as part of long-term mix of capital allocation for the company. I don't think you'll see us accelerate that in the next year or so. We just don't see an opportunity to do that at yields we're willing to accept to take that kind of risk. But I do think you should expect that there'll be a time and a place where we'll do more development for sure, and I think we'll constantly do these densification plays, where we take a property and it's the parking lot, the back parking lot or the garage, and we'll do something there where we're adding units or we're adding a new building or whatnot.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [40]

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Okay. And then just one quick one for Bob. Just on the debt that's expiring this year and kind of your new debt that's in guidance, just kind of from a timing perspective, how should we think about that? And to the extent that you were to come to market with, say, a new 10-year deal, where do you think pricing is?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [41]

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Yes. So real quick on the timing. So there are 2 components of debt that are either maturing or prepayable at par are kind of midyear. At the end of the day, one of them is an unsecured bond that's floating, swapped to floating. And another one is that big secured debt deal that I mentioned. It's prepayable at par. So that's kind of midyear. So I think from a modeling standpoint, mid-ish year is probably pretty close. We obviously could be opportunistic if the markets present an opportunity to go a little bit earlier and take some off the line, et cetera. But overall, that's a timing plan. From a pricing perspective, I'd say, and this probably applies to secured and unsecured, low-levered secured for borrowers like us because as I mentioned in my comments, the spreads are pretty tight to each other. I'd say we're probably a little bit under 4 overall. So sitting here, at, call it 2.75 treasury, you're in that kind of 1.15 area for either one.

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Operator [42]

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We will now take our next question from Drew Babin of Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [43]

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Moving past the earn-in assumptions, moving into 2019 and looking more towards peak leasing season and the potential for continued second derivative leasing spread improvement, I guess, are you assuming that most of your markets or your markets kind of on average are roughly in line with '18 as far as renewal and new leasing spreads? Or are there certain markets where you're assuming some incremental acceleration or deceleration?

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Michael L. Manelis, Equity Residential - COO & Executive VP [44]

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No. I would say, and I went through each kind of market as to what those overall assumptions were. But I would say, clearly in New York probably stands out, where we have significant improvement in the new lease change assumptions. The rest of the markets, I would say, are pretty close. Boston, where you have pricing power existing is going to generate improvement in new lease change as well. And I think as we get closer into March, we'll have an investor presentation deck that goes out. You get to see a little bit of those assumptions as kind of they lay out by quarter as well. But I really point to the markets where I talk about kind of having some pricing power momentum. Those are the ones that our expectations are kind of geared towards improvement in new lease change and the rest is probably just holding the line on the occupancy and renewal.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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That's helpful. You talked some about the repair and maintenance costs being relatively high in 2008 (sic) [2018] off of difficult comps. I noticed that the building improvements and replacements capitalized per unit were down about 9% year-over-year in '18. Can you talk about how the capitalized expenses are kind of going down while the expense ones are going up? Is anything different on the accounting side? Does it reflect the younger portfolio? Just curious kind of why that bifurcation is occurring?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [46]

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Drew, it's Mark. So specifically, when you look at building improvement, building improvements are large-scale systems, so that's like air conditioning unit replacements on top of buildings, elevators and things of that nature. So there is a -- there is some interplay between that. There are some things that when you do a big capitalized project end up falling into expense. But there isn't -- that interplay isn't quite right. There is -- that isn't -- there wasn't a switch there. As much as I'd like to tell you, that's what happened. It really was just the sort of additional expenses relating to the flood damage that hit same-store and otherwise non-same-store. So that really was more of it.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [47]

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So nothing changed on the accounting front or a capitalization policy at all.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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Okay. So what do you attribute the 9% decline year-over-year, is that just sort of asset mix over the years? Is there anything kind of behind that?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [49]

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Sure. Those are generally big projects, in a few cases big window replacements or siding deals on a few kind of midrise units we own. So those just slide, just move down a little bit, and they'll get done in the next year. So it's really more about just timing of some big chunky projects more than anything else.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]

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Okay. And then one more for me. Obviously, there have been some headlines about tech companies kind of reaching out and hoping to increase the inventory of affordable housing or in some cases kind of medium-income-type housing projects. Has there been any talk of them partnering with other capital to potentially do larger projects that might deliver more units than we're kind of currently talking about? Do you think there's any potential that these companies might reach out to EQR or other public REITs to kind of partner in these projects? And would you say that the rents on them are probably a little bit too low, kind of considering EQR's target customer? Is there anything developing on that front? Or is it maybe just too early in the process?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [51]

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I'm thinking it's too early. I mean, we certainly know these people in our markets, but we don't have a lot of detail on those programs at this point. We've run very affordable product before, we own some Bay Area stuff that I would characterize as highly affordable product. We have affordable units throughout the whole portfolio as well. So I think we have the ability to manage in our markets all types of price points if the returns make sense. So would we be interested in it? Sure, possibly. But I guess I just don't know enough to react to that yet.

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Operator [52]

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(Operator Instructions) We will now take our next question from Rob Stevenson of Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [53]

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What's your expectation for fee growth in 2019, the application, pet and all that other stuff? And are there any new ones that you guys have recently implemented or will implement in '19?

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Michael L. Manelis, Equity Residential - COO & Executive VP [54]

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So I would say, I think right now, if we look through the guidance, I'm guessing it's 3%, which is kind of in line with kind of where we see these other income lines going. From an initiative standpoint, I'll tell you, we did a hard look at the parking many years ago. Our parking revenue is up to $54 million. In 2018, we actually grew parking by $3 million or 6%. We have basically the roadmap laid out for every single property, and some of that just takes some turnover, some renewals, some changes in the leases to get that income. But I think we still have a little bit of room left to optimize some of the parking income, but it's not like there's significant kind of opportunities in front of us. The rest of the fees, I mean, it's a very strategic review asset by asset to try to understand where do you have opportunities, where do you have levers to increase. I don't think I'm aware of anything, kind of, on the new fee side coming in that's worth talking about on this call.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [55]

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Okay. And then, what are the expected stabilized development yields on the 3 properties in the current pipeline?

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Michael L. Manelis, Equity Residential - COO & Executive VP [56]

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Sure, bear with me for a second here. For West End, 6. For 249 Third Square (sic) [Street], 5. And for 1401 East Madison, 5.8.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [57]

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Okay. And what's the $0.08 gap between Nareit and normalized FFO guidance for this year?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [58]

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Yes, so for 2018 or for 2019, sorry?

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [59]

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For '19, the guidance.

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Robert A. Garechana, Equity Residential - Executive VP & CFO [60]

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Yes, so for '19, the guidance, and there's a page in the very back. The biggest issue, and as we noted on the disclosure, the biggest item is the writeoff or anticipated writeoff of an unamortized discount on a tax exempt bond that we would expect to incur in conjunction through a planned disposition that Mark may have alluded to in his comments.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [61]

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Yes, it's a noncash charge, Rob. So it's cost we incurred when we bought this asset a long time ago and when we sell it, we have to write it off. So that runs through the Nareit and EPS versions of FFO, not through our normalized version, and that's the biggest item.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [62]

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Okay. And I now know that there hasn't been any sort of formal plan put out there yet, Mark. But given that the administration says that they have the ability to do something with the GSEs, I mean, what's the -- how are you guys thinking about that? And does that impact any of the timing for you guys in terms of dispositions and/or the way that you guys think about financing in the space through the remainder of the year?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [63]

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Yes, I'll take this real quick, and I'm sure Mark can piggyback on it as well. So we're familiar with the same kind of media reports that you guys have seen, and it's been all over the page, right, in terms of the as of late, most recently, it's been the privatization kind of rumors. What I'll say kind of more specifically, and I think answering your question on '19 is, at the moment, we see no disruption to the GSEs and so kind of the operating business as usual. They had very large production volumes in 2018. Prior to the change of the regulator whose term expired at the end of 2018, they put out their caps, which were very similar to what they were previously. So for '19, we wouldn't expect anything to kind of impact our position or their, kind of, operations overall. I guess, what I would say kind of longer term is, who knows, right? I think the bigger issue that will drive, kind of, GSE reform is both political but also probably single-family finance -- financing in this country. And so it's unclear. From a specific standpoint, I'd say, for us, we would certainly be less impacted or less negatively impacted by GSE reform, I would say, for 2 reasons: The first, as it relates to funding ourselves, we have very strong access to capital as I alluded to in my comments, particularly strong relative to the private market, which is very reliant on the GSEs, whether it's for stabilized assets or for refinancing their construction loans. I mean every bank in the country basically when doing a construction loan underwrites the takeout to the GSEs. So we benefit kind of from a direct standpoint of having all of this access. The other thing I would say is our portfolio on the secured debt front is very attractive to other secured lender types as well. So we're -- we don't have a lot of the large-scale suburban kind of stuff that is probably more of the core GSE product today than what we might have had 10 years ago.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [64]

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Yes. And that's a point I just want to emphasize, Rob, without beating this to death is, we got rid of a lot of the product that we thought was more susceptible to GSE risk some time ago. Some of these dispositions, including Florida and the Denver suburban stuff was product that we thought the really only financier was the GSE market. So we don't deal in it. So it's not changing our plans. Most people who buy assets from us are buying free and clear, and they may finance it later at some point. But the financing market is not particularly relevant to them, they're cash buyers.

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Operator [65]

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We will now take our next question from Alexander Goldfarb of Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [66]

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And I guess given the temperatures, maybe that those Florida assets look a little attractive now. Just got 2 questions. First, you guys are not alone in facing operating expenses and taxes are what they are. You can grieve them all you want, but that is what it is. But wages, especially with the sustained -- with this economic recovery, you have ultra-low unemployment and the fact that you'd a lot of local mandates for higher minimum wages, just seems to be something that's continuing to weigh on the apartments. Some talk about more automation, but still you need people at the properties to run them, to fix them, et cetera. So do you expect that for the next few years, we're going to see 4-ish type percent expense growth driven by payroll? Or do you think there's some offsets here?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [67]

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Yes, I believe in the mean reversion theory on these long-term expenses. I mean, over the last 5 years, our expense growth rate is average 2.5%. Certainly, we're expecting it to be higher in 2019 than it's been. Real estate taxes are what they are, but some of these sales in these New York assets where we have affected the 421-a growth in our real estate tax line item, that stuff, Alex, is going to help us over time, so we expect that number to go down. [Most of] these appraisers have noticed how well apartments have done. They've raised their values, they taxed us more. At some point that will change and those values will go down, and we'll have more appeal success. That's just the cycle. In terms of headcount and wages and stuff, I would say the same. Right now, with so much new product being built, there's just a lot of competition for talent, as Bob suggested. At some point, that will wax and wane. So I don't know, I don't feel like 4% is a run rate. I feel like that's just kind of this year's number, and I think there's some good chance it could be lower depending on how things break during the year. I don't know, Michael, if you got anything you would add?

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Michael L. Manelis, Equity Residential - COO & Executive VP [68]

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Yes I think, you're -- I guess, I can bring up that. Obviously, from an automation standpoint, we are about to introduce pilots to kind of go after mobility on the maintenance side of our business. I don't know if that -- that's really not a headcount thing. That's more around utilization. So it's allowing us to maybe get some more stuff done in-house and have less dependency on contractors. But I think, Alex, you're right. Some of these minimum wage increases, and they are not done in '19, they're going to continue going, and that is going to continue to keep pressure on any of the contract labor services that we utilize. So I think we're taking a hard look at all of that, trying to make sure that we've optimized, trying to make sure that the staff is as utilized as possible. But I think there will be things that come out of the learnings from '19 that will get folded into 2020. But I don't think we're in a position to really impact the 2019 with any of these types of initiatives yet.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [69]

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Okay. And then, the second question is, as you look here in New York, obviously, Albany is now all Democrat. Rent control is up this summer. There's a lot of talk about a lot of -- taking out a lot of things that were more favorable to landlords. For many of your local real estate contacts, especially who deal with Albany, is there any concern at all that rent control may spread to market rate units and/or that they may start to limit the ability to raise rents within existing 421-a deals on either the 20% restricted or I think someone mentioned that 80 -- the other 80% is still subject to some qualification? But just sort of any commentary of what you're hearing as Albany debates renewing the rent control this summer?

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Michael L. Manelis, Equity Residential - COO & Executive VP [70]

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Yes. Thanks, Alex.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [71]

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Listen, this is a very complex area. New York rent control regulations are very involved. We have several full-time staff members who administer this, it's that complex, who're used to these regulations. The Governor was rather general is his remarks. I don't have anything specific to react to. We will continue to advocate through our local trade association as we did very effectively in California, that rent control in the long run, and New York, I mean, listen, they've had rent control in New York forever and it hasn't helped keep prices down to somehow lower level on workforce housing or produced more affordable and workforce housing, I would argue. I think enlisting the private sector by having incentives like the Affordable New York program, by having zoning that's more inclusive, things like that, are how you're going to make a real dent in it. The industry does want to be helpful, both in New York and otherwise. And in fact, Alex, the annual trade show event for the industry is going on right now in California. And I know right now, because we've got senior people attending, that there's conversations about New York, about California, about all the places that have these affordable housing issues. But this isn't an area where you can legislate a good outcome. You need to really enlist, I think, the private sector. I think the industry is willing to do its part. So I can't answer your question specifically because there's no details. Once there are, we will be on it. But our sense is in New York that the industry association has been pretty effective in education, and we'll hope the same occurs this time.

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Operator [72]

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We will now take our next question from Hardik Goel of Zelman & Associates.

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Hardik Goel, Zelman & Associates LLC - VP of Research [73]

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Thanks for putting color on your markets earlier regarding 2019 guidance. And as I look across them, I'm just wondering where are the ranges the widest? Which markets do you see potential for upside and also on the other hand, potential for downside? And what are the factors influencing you there?

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Michael L. Manelis, Equity Residential - COO & Executive VP [74]

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This is Michael. I guess I would say, from a range perspective, we have equal upside and downside in almost every one of our markets relative to our midpoint. I think as I alluded to earlier in one of the questions, the markets that have the elevated supply, so we will -- we have D.C. and L.A., and they are driving 18% of our revenue, are the markets where the range could be tested, both on the up and on the downside. So it's the markets where we need to watch the absorption of the elevated supply, and we need to balance, kind of, the pricing power that we have in place. Right now, like I said earlier, the dashboards are all green, we have got good pricing power in those markets. So sitting here today, I would say, we have minimal on the downside risk. But I think the way to think about it is the markets that are contributing to the majority of the revenue growth and where is their elevated supply, and that's kind of how we're thinking about it.

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Operator [75]

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We will now take our next question from Rich Hill of Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [76]

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Wanted to just come back to 2 things, one of which you've already spoken about, maybe some of that at length. But New York City, looks like you put up a really nice number in 4Q and expect that acceleration to occur. One of the things that I know you and I have chatted about in the past is, sort of, how neighborhood by neighborhood New York City is, and certainly our own analysis supports that. So I'm curious, when you think about the various neighborhoods and where your properties are located, what's driving that outperformance relative to maybe what we see in trends in overall New York City? Is it lack of supply? Or is it just people unwilling to move or a little combination of both?

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Michael L. Manelis, Equity Residential - COO & Executive VP [77]

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I think it's a little bit of a combination of both. And then you also got to remember what our earn-in or what our embedded growth is sitting in some of these neighborhoods that maybe didn't have as much pressure on supply in '18 that allowed us to start getting some momentum on raising rents and getting some momentum on pricing power. So Manhattan still has an attractiveness to it, at least we see it in our foot traffic, we see it in the demand for our product types. And sitting here today, when we look through New York, and I go through almost every submarket, every submarket is demonstrating more pricing power today on where our rents are in the marketplace than where they were this time last year. So I think you're right to think about at a submarket level, we could see kind of deviation in the projections. And in fact, our own projections have ranges going down to 1.5% up to all the way up to a 4% based on various submarkets. So I think some of it is what is embedded with us and some of it is what do we see as the competitive landscape that we're going to be facing in '19.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [78]

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Got it. That's helpful. I mean, I wanted to come back to the supply comment. One of the things that we focused on and we keep hearing a lot about is the tremendous amount of private equity dry powder that's on the sidelines. I'm wondering if you get any sense that the supply, which continues to get pushed out, is really driven by builders anticipating that maybe that private equity wants to go into apartments and they can't find enough apartments to buy. So is there a chance that developing maybe last longer than we're all anticipating because of all this dry powder that might be attracted to multifamily? Or do you think that's maybe misguided?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [79]

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Yes, I'm not sure that dry powder is looking for development exposure. I mean, some of it is, but I think some of it is probably interested in value add and some of it's interested in core and different flavors and the continuum there. I would say that lately, we've had more anecdotal evidence to the contrary in terms of more inbound calls to Alan George, our Chief Investment Officer, and his team of people that have sites tied up, but can't find the equity to do it or their equity went away and they're looking for someone else to jump in and wondered if we were interested. So I'm not suggesting that's yet a full trend but we are hearing more of it. We're also seeing, and again not yet meaningfully, but we're also seeing land come available at prices that were lower or less high than before. So to us, I'm not sure that, that dry powder is waiting for development. I think if you really wanted to do development and you didn't care too much about the yield, you figure out a way to do more development. I think a lot of that is probably interested in other kind of plays in real estate in general or in apartments. And right now, I kind of see equity. Equity is probably a little bit more hesitant, in our opinion, on development now than it was a year ago. But until something dislocates, they're still going to put some measure of capital into that because the play has worked so far.

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Operator [80]

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We will now take our next question from John Guinee of Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [81]

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Just -- nice quarter, by the way, guys. Just building on the last couple of questions on development. The merchant builders dominate the business. What do you think the yield on cost that they are willing to accept versus the yield on cost that you're willing to accept? Is that overall a 25 basis point gap or a 150 basis point gap?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [82]

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That's almost an existential question for us because when we think about development, it isn't with the merchant builder mentality of what's the cap rate, if the market is trading at 4.25, we need to get 5.25, and otherwise, we won't build it. We're looking at a price per unit, a price per square foot, a feeling that this location has been hard to buy. I mean, a lot of what we built coming out of the Great Recession that we got from Archstone was properties in San Francisco because we'd had such a hard time finding stuff to buy. We figured we had to build it if we wanted to own it. So I guess, I'd tell you, I think we the REIT industry, in general, and Equity Residential for sure on the apartment development side just thinks a little bit differently and more like a long-term investor. So I think the -- most of these developers that are private guys will build until someone doesn't give them the money. And I -- they can have different yield expectations that they are what they are. I think for a company like ours, we are very disciplined, that's one of the advantages, and we are perfectly willing to sit on our hands and, like I said, continue to look at things that are already in the portfolio to create densification and/or buy assets that already exist. So I don't know that it can be reduced to the manner you just reduced it to.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [83]

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If you try to reduce it to that manner, could you?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [84]

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It's probably too cold outside for me to think that way. Well, we might be willing to accept a little lower spread than they are if it's really hard to build asset in like San Francisco. We might require a lot more in a place that maybe is a little bit easier to build like D.C. because we have the ability to go optionally between buying existing streams of income and buying -- and building on new streams of income. So I guess, that would be my full answer.

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Operator [85]

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We will now take our next question from Tayo Okusanya of Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [86]

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First question, the $700 million to $900 million of debt you are planning to raise in '19 and the debt you're planning to pay off, I just wanted to confirm, from a payoff perspective, it's the $450 million notes due July 1, 2019? And also the $500 million due July 1, 2020, is that what you're planning to pay off?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [87]

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That's correct.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [88]

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Okay, perfect. Second question, the green bonds, congrats on getting that done. Just kind of curious, what kind of buyers you're seeing for that specific type of bond? I think generally the type of rates you're getting on them, whether they're more advantages than just issuing regular way unsecured bonds?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [89]

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Yes, so I'll cover kind of the buyer base and the differentiation between a green bond and a conventional bond. Obviously, with the green bond, you do attract a different type of buyer base in part, but not in total, is what I would say. So in part, this deal that we last did, did probably have 15% or 20% of capital that came from dedicated, kind of, green institutions that had a mandate from their stakeholders to invest in these types of bonds and that is certainly helpful to the overall demand as you're issuing a bond. To kind of get to your second point, which is, from a pricing perspective, it is really hard to quantify whether or not you get, kind of, any differential between the spread on a conventional bond versus a green bond. That being said, obviously, demand for our paper, which has been high, given our credit quality and kind of our reputation in this space for fixed income, is very good. It's helpful to always have more buyers. It was certainly helpful in the market in the fourth quarter because the market in the fourth quarter was pretty choppy. So it did assist us in that regard.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [90]

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Got you, that's helpful. And then another one for me, if you don't mind. Appreciate the information about renewal rates in January and kind of an overall sense of what it could look like this year. Could you just talk a little bit more around kind of new rates, kind of new rent growth and what's that shaping up to be there in 1Q overall at least for the year.

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Michael L. Manelis, Equity Residential - COO & Executive VP [91]

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So the projection for the first quarter, is that what you're asking, that new lease change?

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [92]

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On new lease change, yes, just some general thoughts about -- for the year that's built into your forecast.

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Michael L. Manelis, Equity Residential - COO & Executive VP [93]

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So I don't have it broken down by quarter in front of me. I know that in the fourth quarter of '18, the new lease change was down at negative 2.4%, and I think I've said on previous call, not really thinking that, that metric should be looked at on a quarterly basis as much as it should be looked at kind of the annual year-over-year basis. If -- I'm happy to kind of share it as we get through the first quarter, I don't have it down with me right now, as to how we broke that improvement up. My guess is most of the improvement in new lease change that I talked about at the top level is occurring in the second and third quarter, as we start to experience pricing power and the peak leasing season. But I'm sure it's an improvement over Q4, and that I'm sure we stagger it up as we work through the year and then we take Q4 of '19 back down.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [94]

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Okay. And kind of on a -- but for '19 over the last 12-month type basis, are you expecting that number to eventually turn positive?

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Michael L. Manelis, Equity Residential - COO & Executive VP [95]

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Yes. So for the full year revenue guidance, we would expect new lease change to be positive 10 basis points.

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Operator [96]

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We will now take our next question from Wes Golladay of RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [97]

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Looking at the wage growth you're seeing in your markets, I know it's at your property level, you've seen 4% to 5%, but can you give us a sense of what you're expecting for the overall markets or the EQR markets? And which markets are you seeing the biggest buildup in affordability?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [98]

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So it's Mark. So you're asking Wes, about high, like, wage growth in general of our residents?

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [99]

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Yes.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [100]

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So just to be clear, the data we have is a little bit limited on this. So we only poll our residents. The only [thing is] we’re able to effectively request what they pay when they first apply to lease with us. They are not as forthcoming afterwards. We are trying to do renewal negotiations. So we don't necessarily know what happened. So again, it's a little bit of an estimate. Generally speaking, as we see it, the portfolio has had higher wage growth by our residents. And certainly, the best way to look at it is that affordability statistics compared to our rents continues to be pretty low. There's room, we think, to raise rents the old-fashioned way because of the wage growth. And just the fact that in our segment, our more affluent renter segment, there is room to raise rents because that rent to income ratio is not terribly high.

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Michael L. Manelis, Equity Residential - COO & Executive VP [101]

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And it really hasn't moved much either. On a trailing 12-month, we're at 19.3%, and the ranges in our market go from 17.5% to 23% with Washington, Seattle and New York kind of being the lowest at like that 17.5% to 18% ratio and Southern Cal averages at the highest at 21.3%.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [102]

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Is that helpful, Wes?

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [103]

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That is -- that's exactly what I was looking for, so fantastic there. And then for your employees now, the 4% to 5% wage pressure you're seeing, is there any markets that stand out or maybe West Coast versus East Coast?

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Michael L. Manelis, Equity Residential - COO & Executive VP [104]

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No. I would say it's kind of just across the board that we're experiencing that.

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Operator [105]

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We will now take our next question from [Jamie McDavis] of (inaudible) Capital.

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Unidentified Analyst, [106]

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Just a question on the Tax Cuts and Jobs Act. There was clarification about 2 weeks ago on some of the deductions and the pass-throughs. Has there been any adjustment on your side? Have you guys gone through all the new legislation and these clarifications? Has there been any updates on your side for any implications on that?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [107]

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No, I mean, there's macro implications, and Bob may supplement my answer, but there's sort of big and small implications. I mean, what the Tax Cuts did is actually give our residents on average more cash, and I think you are asking a more technical question, but I'm going to answer it in a more general way initially. It gave our residents more cash because they weren't taking -- they were now able to take a larger standard deduction. So for us, it's generally been okay. A negative in our markets could be that some of these jurisdictions we're in are relatively high state local tax jurisdictions, and if those taxes aren't deductible, is it harder for those jurisdictions to raise capital, to renovate subways in places like New York and D.C. and things of that nature. In terms of the technical aspects, again, Bob and I can go back and forth a little bit with you. But generally speaking, they have not been terribly meaningful to us. We appreciate the work the industry association did on the pass-through stuff. There are some technical depreciation things that still need to be resolved, but there's nothing that we are watching with a great deal of concern at this juncture.

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Unidentified Analyst, [108]

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Yes, that was -- it was more on the technical side, seeing if there was any kind of additional pass-throughs that you can take advantage of. But on the -- obviously, on the FF&E, there's a bit more flexibility on that side as well. Has that created any opportunities for you to perhaps move into furnishing, moving into furnished departments in greater scale? Or are you guys still pretty comfortable where you are?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [109]

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Our tax person will be so excited to talk to you about it. So certainly, we can do depreciation studies. If we needed to lower our taxable income, and that's why people do these sort of studies and we've done it before, so you can reclassify some things into a faster depreciable class. What's possible, we could do that, we're aware that, that exists. We don't need to do that right now. So it's fine to sit where it is, and if we need to do that study, we will.

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Unidentified Analyst, [110]

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Great. And just, the last thing is also on legislation, but it's more Boston, Cambridge-focused. And I know you got a question earlier about some of the rent control concepts there being thrown out there. The Mayor of Boston recently is trying to impose a cap of 5% on tenants that are over the age of 75, which is effectively a stealth rent control. And things like right to purchase and, of course, Cambridge being what it is, is -- they're also trying to impose some things like paid relocation expenses for evictions and larger rent increases. How -- I mean, as you have more pricing power with your tenants, and there's going to be more -- there's really more ability to push up the rents, obviously, the governments are going to get more involved, particularly in Boston and Cambridge. So I mean, is -- how worried are you about this? Is this -- I mean, this is something that's going to gain a lot of steam.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [111]

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Yes. Well, people thought that in California, and we won a resounding victory, the industry did through, I think, a good education campaign. Once people understand that this is not a productive way to solve a problem, you tend to get a better reaction from voters. I mean, Cambridge had rent control for a long time and it worked very badly. And in fact, there is academic studies about it, and that was one of the reasons they got rid of it some years ago. I realize memories are short. The industry does need to stay very engaged, you can expect we will be. We've very senior guy in Boston who is involved with the Boston Apartment Association and the different functions, groups in Boston that are involved on the industry's behalf, and we'll continue to have that conversation. But again, I think enlisting private industry and creating more workforce and affordable housing is the way to solve a problem. I think a lot of the things you mentioned certainly are negative, and it's our job to have a conversation about those. And they're not just negative for us, we think they're just negative in general. I think they're not going to provide more affordable housing. I think they're going to do the opposite over time.

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Operator [112]

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We will now take our final question from Tayo Okusanya of Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [113]

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2019 guidance, does that have any expectations forecast in regards to any benefits from HQ2 or Google which you did discuss in your comments?

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Michael L. Manelis, Equity Residential - COO & Executive VP [114]

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No, there's nothing embedded in our guidance, either in New York or D.C. regarding those expansions. I think our view right now is the positive psychological impact that reinforces, like Mark said in his opening remarks, as to why we're in those markets to begin with, and I think it's -- like I said, it's too early to kind of see any economic impact from that.

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Operator [115]

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This concludes today's question-and-answer session. I'd like to turn the call back to your hosts for any additional or closing remarks.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [116]

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Well, we thank you all for your time today for sticking with us. I know it was a pretty long call, and we'll see many of you out on the conference circuit over the next few months. Thank you very much.

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Operator [117]

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Ladies and gentlemen, this concludes today's conference call. You may now disconnect.