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Edited Transcript of EQR earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Equity Residential Earnings Call

CHICAGO May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Equity Residential earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm 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 - First 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

* Hardik Goel

Zelman & Associates LLC - VP of Research

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* John William Guinee

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

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate 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

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Stephen Thomas Sakwa

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

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Presentation

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Operator [1]

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Good day, and welcome to the Equity Residential 1Q '19 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Marty McKenna. Please go ahead.

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

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Thank you, Stephanie. Good morning, and thanks for joining us to discuss Equity Residential's First Quarter 2019 Results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer. Bob Garechana, our CFO, is here with us for the Q&A.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities 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, and thanks for joining us today. We are pleased to have delivered growth in our same-store revenues, net operating income and normalized FFO that exceeded our expectations for the quarter. 2019 is off to a strong start with demand for our product remaining deep and new supply being absorbed well across all of our markets.

We are also benefiting from a sizable drop in competitive -- new competitive supply in both the New York and Boston markets. This strong demand across our markets is creating high occupancy, which is allowing us to push rates. We are just beginning the primary leasing season, but if these trends hold, we would expect to deliver same-store revenue growth and normalized FFO growth near the top end of our guidance ranges.

As is our custom, we will wait until our second quarter call at the end of July to revise our full year guidance. After I discuss our investment activity in the quarter, I'll turn the call over to Michael Manelis, our Chief Operating Officer, to give you color on our operating performance. And after that, we'll open the call up to your question.

So switching to investments on the acquisition side. On the fourth quarter call, I gave you details on 3 apartment properties we acquired early in the first quarter of 2019. We acquired no other assets in the first quarter. But after the end of the quarter, we acquired a 366-unit apartment property in Rockville, Maryland. That's a suburb of Washington, D.C. This property was built in 2016 and is fully stabilized. The purchase price was approximately $103.5 million and the acquisition cap rate was 5.3%.

Our investment strategy for over a decade has been to acquire and develop urban and dense suburban properties in our markets. While we have acquired and developed more urban assets of late, we also continue to seek well-located product in the suburbs that share certain characteristics with our urban assets like being proximate to high-wage employment and other positive drivers of apartment demand, having high-household incomes and where the rent-to-income ratio is similar to our other assets in the market. By that I mean that the rent-to-income ratio is relatively low. Our assets that are walkable are very convenient to amenities by car and where single-family owned housing is less affordable compared to rental apartment housing. The Rockville asset checked all these boxes. We owned other assets in this submarket and think this property complements the existing portfolio. You should expect us to continue to look for opportunities like these in our markets. We did not sell anything in the first quarter of 2019, but subsequent to the end of the quarter, we sold our 806 Avenue asset in Manhattan for approximately $237.5 million. This property is subject to the New York 421a program and its sale will reduce our property tax expense growth rate and improve our NFFO growth rate over time.

We continue to look to acquire properties in Manhattan and elsewhere in the New York area that meet our acquisition parameters. Our guidance continues to call for $700 million of acquisitions and $700 million of dispositions in 2019. The number of assets that were marketed in the first quarter that meet our acquisition parameters were relatively low. We expect the number of suitable assets for sale to grow as the year goes on. Overall, cap rates are holding steady in our markets and values are increasing modestly with growing NOI. There continues to be considerable demand to own higher-quality apartment assets in all our markets.

And now I'll turn the call over to Michael Manelis, our Chief Operating Officer.

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

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Thank you, Mark. So strong demand, better pricing power, lower turnover and record high levels of customer satisfaction continue to deliver strong momentum on the revenue front. Occupancy and renewals were slightly better, but mostly in line with what we expected. Gains on new lease change were stronger than we expected, which was a result of both better pricing power and having fewer units turn over during the period.

In the earnings release, we have included a new schedule on Page 13 that shows pricing trends for the quarter. As I have stated in previous calls, looking at these trends for any given quarter will not tell the complete income story, but they assist in understanding the relationship to previous year comp period and the potential momentum of the market. We included our full year revenue assumptions by market in the March investor presentation posted online.

Sitting here today, our portfolio is 96.6% occupied compared to 96.3% the same week last year. April's achieved renewal increase was 5.1%, and we expect May and June to be approximately 5%. If our current momentum continues for the next couple of months, we would expect our full year revenue performance to be towards the high end of our guidance range. This will mostly be due to stronger new lease pricing and a slight gain in occupancy. It is also important to note that our comp periods for the remaining quarters are more challenging than the first quarter.

So let me provide you some color by market. Boston had a strong first quarter, which was in line with our rental income expectations, with stronger pricing power [gaining speed] throughout the year quarter. While increases in parking and retail revenue contributed to our results this quarter, our portfolio is benefiting from a pause in new competitive supply with the 2,900 units expected in 2019 coming online later this year. Today, the portfolio is demonstrating more pricing power than expected, with base rents in Boston being 4% greater than they were the same week last year. The Boston portfolio is 96.6% occupied and the achieved renewal increases for April are 4.7%. So while we expect competitive supply to increase in 2020, the overall demand fundamentals for this market are very strong and the absorption outlook is positive.

Moving to New York. The 2.4% reported revenue growth was better than expected and was driven by strong, consistent occupancy at 96.5% and improved pricing power. This market also had a 7% increase in foot traffic for the quarter, which was the highest year-over-year gain amongst all of our markets. Market pricing remained disciplined, which will allow us to continue to use concessions at a very targeted level.

During the quarter, we used 50% fewer concession dollars than in 2018. The new supply in our competitive footprint is approximately 50% lower than in '18 with expected deliveries just under 10,000 units. The deliveries are concentrated in Long Island City and Brooklyn and to date, our operations have not been negatively impacted from this supply. In fact, our Brooklyn submarket delivered some of the best revenue results in the market. The New York portfolio is 97.1% occupied and April achieved renewal increases are at 3.9%.

So Washington, D.C. had a really strong quarter. Strength in occupancy and pricing power during the quarter was definitely greater than what we expected. Although the rate of job growth has declined from last year, unemployment remains below the national average. Professional and business services was a bright spot, posting a strong gain of 18,000 jobs or 9.6% increase over the same period last year. Our Northern Virginia submarkets are strong, which is likely being fueled by procurement dollars being spent on defense as well as growth in technology employment.

We were forecasting very limited pricing power for 2019 due to the quantity and concentration of new supply in our submarkets and potential slowdowns in absorption. We continue to be cautious about further improvement in this market. Today, our portfolio is 97% occupied with April renewals at 4.3%.

Moving over to the West Coast. Seattle also delivered stronger pricing power during the quarter than what we expected. Seattle's supply is being absorbed as the deliveries are shifting from the CBD to the suburban East Side. Recently, several articles have stated that the Seattle area is filling up new apartments faster than any region in the country. Strong demand fueled by tech employment appears to be keeping pace with the high levels of new supply in this market. Large employers also continue to show strength and commitment to this market. Amazon has over 10,500 jobs posted in Seattle and another 500 now posted for Bellevue. Facebook also started moving into a new South Lake Union location, which is directly across the street from one of our recent acquisitions. Overall, the next several months could present an opportunity to capture the strength in demand and grow both rate and occupancy in this market. We are 96.7% occupied with April renewals at 5.6%.

Next up is San Francisco. With jobless rates below the 3% mark, companies are running out of workers to hire and it is not a surprise that the pace of job growth is slowing. That being said, demand for our product remains very strong. We had a 6.3% increase in foot traffic for the quarter, which was the second-highest year-over-year gain amongst all of our markets. Our Downtown portfolio, which represents 22% of our income in this market, delivered the strongest revenue growth amongst all of the submarkets in the Bay Area. This is in contrast to our East Bay portfolio, which produced the lowest revenue growth and also had a reduction in occupancy and foot traffic year-over-year during the quarter.

We are confident that whatever short-term pressure may be placed on our portfolio from deliveries in Oakland and the rest of the Bay were more than offset by the insatiable demand for housing in the Bay Area. Our San Francisco portfolio is 95.8% occupied, which is about 20 basis points less than it was last year with gains in most submarket being offset by declines in the East Bay. April renewal increases are 6%, and we continue to see strong retention results.

Moving down to Los Angeles. L.A. performed as expected during the quarter. On the supply front, we continue to see delays in new supply deliveries due to labor shortages on the construction side of the business and we expect that trend to continue. The Downtown Metro submarket for us is a large area, stretching from the core Downtown area, through mid-Wilshire, Koreatown and over to the Hollywood area. With almost 20% of our revenue in this market, we saw over 5,000 units delivered last year and are currently tracking about 5,500 additional units for 2019. Concessions of 6 to 8 weeks appear to be the norm for projects currently in lease-up in the Downtown Metro. Our Downtown Metro portfolio is performing well with 96.1% occupancy and 3% revenue growth for the quarter despite the pressure from the supply. Many of our Downtown Metro assets have a boutique-like feel and are typically at a price point below the new highly amenitized assets.

In addition to Downtown, we believe that the supply pressure will continue throughout the year in both San Fernando Valley with about 15% of our overall market revenue and the West L.A. submarket with about 25% of our market revenue. The major difference between the 2 being absorption in West L.A. will be higher given the strong job growth from online content companies. The L.A. portfolio is 96.4% occupied as compared to 96.1% the same week last year. And our April renewal increase was 5.8%.

Moving to Orange County. Results for the quarter were slightly better than expected driven by higher occupancy. Base rents in Irvine have been decelerating since January as expected due to the pressure from new supply. Job growth is slowing, but the overall outlook for this market remains positive with 3%-plus revenue expectations. Today, we are 96.5% occupied and have achieved a 5.7% increase on April renewals.

And last but not least, San Diego. Military spending remains strong. We experienced some supply pressure Downtown that resulted in limited pricing power and lower-than-expected gains on new leases earlier in the quarter, but we have seen momentum pickup in late March and April. And as of today, San Diego is 96.6% occupied and achieved increases in April are 6%.

On the initiatives front, we are focused on creating the right overall digital experience for our prospects, residents and employees. During 2019, we are launching a number of new initiatives to further enhance self-service and on-demand functionality in the sales and maintenance side of the business, including but not limited to a new resident portal, self-guided tours, mobility for our service teams, testing smart homes and introducing our prospects to Ella, which is our artificial intelligence leasing assistant.

Impacts from operating efficiencies gained will likely be in 2020 and 2021. These are exciting times for our industry from a technology standpoint, and we are confident that redefining the digital experience and leveraging new technology in our industry will create operating efficiencies for the years to come.

Let me close with a huge shout out to the employees of Equity Residential. We continue to have strong momentum as we enter the leasing season, and their focus on delivering remarkable experiences to our prospects and residents is greatly appreciated.

Thank you. And operator, we are now ready to go to the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question come from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Mark, you sold the New York City asset in April. As you marketed the asset, what did you learn about the current transaction market in terms of interest or buyer pool, given the potential uncertainty surrounding New York rent control?

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

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Sure. Thanks for that question, Nick. Listen, the buyer pools generally have been smaller now than they were a few years ago, but sufficient. And certainly, this asset cleared with relatively no difficulty. I think the asset underwriting process with 421a is a little bit different. Everyone knows what those numbers are and what those increases are. But I think folks that aren't public reporting companies like us have a little bit of an advantage because they are deals that you have a very good IRRs on. I mean between the two 421a assets we've sold, so that's the 101 West End deal last year and this asset, which together -- the 806th asset, which together about $600 million of sale proceeds. We've got a 10% annual IRR on those assets unlevered, so we did very well. So I think the private buyers are very happy with those sorts of returns, very comfortable with those escalations because they understand that the asset is kind of accumulating value for the mark-to-market at the end. And again, the asset -- these are generally salable assets and not with a great deal of difficulty.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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Then you talked about EQR's investment strategy. Are you sort of pricing or IRR differential between urban assets and well-located suburban assets that makes one more attractive right now?

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

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Yes. I know your question's about IRR, but I'll start by saying cap rates in general, across both markets and between markets, between coastal and secondary markets, have really collapsed onto each other. I mean a lot of this stuff is trading in the 4s that didn't trade in the 4s before. So there's just a real compression of cap rates going on. I do think that some of the urban product trades at a lower IRR because it has -- and a lower cap rate because it's got less risk associated with it. But generally speaking, the value-add trades, again, are trading -- continue to trade well, but there may be a little less demand there. But between urban and suburban, right now, again, it's so competitive that there's not a great deal of difference between IRRs demands. But I do think IRRs are still generally lower on the buyer side when you're buying an asset in an urban, center city location.

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Operator [6]

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Our next question comes from Shirley Wu with Bank of America Merrill Lynch.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [7]

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So given the political climate around housing affordability, I think everyone's curious as to what you're hearing regarding, let's say, rent stabilization in New York and even other housing measures across the country like California. So just your latest thoughts on those new assets?

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

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Sure. Thanks for the question, Shirley. So just generally, I mean there is rent control discussions going on in many of our markets. Through various trade associations we belong to, we're very active. We're able to discuss these things with policymakers and just get the point across that solving affordable housing, the affordable housing crisis in our various markets is not about limiting new supply of workforce in affordable housing, but encouraging that sort of supply. Whether it's through zoning reform, regulatory reform, programs like the old New York 421a deal. So we feel like we've got some real traction in that conversation, and we'll continue to press it. As it relates to New York, which was part of your specific question, that's a very complex rent-control regime and there are a lot of things going on. It does need to be reauthorized by mid-June and so we're in the middle of those conversations again through the various trade associations. But we just have to try and get the point across that continuing to limit the incentive for the private side to create new housing will not solve this problem. So that's the message industry has that we continue to sort of advocate.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [9]

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Got it. And so on the other side, I'll ask about the supply. So on your previous call, you've mentioned that, let's say East Bay, the Oakland submarket, as well as Downtown and West L.A., there's been -- markets are a little bit more challenging and that could potentially impact your production. And what we're hearing is that there's been some weakness on -- in OC as well. How do you balance this in your revenue projections against, let's say, a stronger market like New York that's outperforming? And how do you think that's going to impact the projections going into 2Q?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [10]

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I want to make sure I understand your question because it got a little garbled, but you're talking about supply production in Orange County as well as in the Bay Area, specifically in East Bay, and sort of comparing them to the performance in some of the East Coast markets. Is that -- did I catch that correctly?

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [11]

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Yes. And how you think, let's say, the rest of the year is going to play out?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [12]

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Sure.

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Michael L. Manelis, Equity Residential - COO & Executive VP [13]

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Okay. So this is Michael, I think I can address that. So I think on the last call, we talked about slowness that we were seeing kind of in Orange County. And our full year projection actually had lower revenue projected for '19 versus '18. We kind of see the supply and we're tracking, I think just under 4,000 units for Orange County in '19 at a very consistent, competitive standpoint in what we experienced last year. We actually did a little better than what we thought in Q1. But again, that was off of a reduced kind of run rate, knowing that we were going to be facing the competition. Moving over into the Bay Area, I guess I would say we're seeing pressure on East Bay. I don't necessarily point that to the deliveries coming online in Oakland yet. I think that's still TBD as to what that poll is going to be, whether that's going to attract from Downtown San Francisco. But when we build our full year, we kind of anticipated and we looked at when are these deliveries coming to market. So I don't really see any kind of change right now. I will tell you the momentum in Q1 in San Francisco outside of the East Bay may mitigate any impact we're going to have from that supply. And as you move over to the East Coast and you think about New York, we see the reduction in supply in New York. We thought we were going to have better pricing power. We were expecting that. The momentum is stronger than what we thought. So I think as we play out for the balance of the year, as I alluded to in the opening remarks, if these trends continue that we're seeing in these markets for the next couple of months as we start writing more and more leases, that is going to put us to the high end of our income range.

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Operator [14]

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Our next question comes from Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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I understand waiting until the second quarter to adjust guidance. But perhaps you could just tell us what would be the negatives that could reasonably happen between now and then that would prevent you from raising same-store guidance? I mean, which markets are the risk here?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [16]

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Sure, it's Mark, and then Michael may supplement this. I mean over the next few months, as you know with leasing season, we have -- approaching half of our leases turning over in the span of a few months. So you've got variables in rate. You've got certainly variables in occupancy that are very relevant. So it's just there's -- and we're talking about pretty fine numbers. When you start talking about whether your growth rate is, at the midpoint of our guidance, being 2.7%, 2.8%, those are very small differences and the level of precision we're talking about here. So what I'd say to you is, well, it can change, push you up or down, or things as simple as a temporary occupancy blip, maybe some undisciplined supply in one of our submarkets, things like that, that could push those numbers down that don't mean that anything systemic has happened in that market. But that -- Nick, you're going to miss -- we're going to miss the very, very top end of the range by something, by some factor. So what I would say is you've got all of that, that you need to consider and that's effectively impossible for us to predict at this early point in the leasing season.

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Michael L. Manelis, Equity Residential - COO & Executive VP [17]

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Yes. And Nick, the only thing I guess I would add to that is just from a downside risk perspective, it's really watching Southern California just to see if there's any additional softening. Because to me, that's where the risk sits right now. The other -- the trajectory of these other markets, it will be -- it'll be remote that all of a sudden we see a very sharp pause that then dilutes our occupancy so quickly. But I think in Southern California right now it's where we need to kind of keep our eyes on it.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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And just following up on Southern California. I mean, I think you said that labor shortages in L.A. are leading to some construction delays. Could you just talk about that? Because I know you're all kind of worried about the supply impact in L.A. I mean is this a scenario where some of that supply maybe gets pushed later this year or into next year?

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

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I think that is what we will see, right? So we saw a shift from -- in '18 what we were projecting for '19. We saw a shift occur, so a lot of the '18 deliveries got moved into '19 and it pushed the number up to I think 14,000 units expected in the market. We expect that trend is going to continue. I think in the first quarter, we saw about 15% of the expected completes in shift and get deferred out. And so my guess is every quarter we're going to keep seeing some of that shift occur.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Okay. And just last question on the new date you're giving on new lease and renewal rates. It's helpful. On the new lease numbers, I guess I'm wondering, would those numbers be that much different including concessions?

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Michael L. Manelis, Equity Residential - COO & Executive VP [21]

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No. They're really -- well, I guess they would be better right now in New York because we're doing about 50% fewer concessions in the first quarter of '19 versus '18. But we really -- I mean, we really don't do a lot of concessions in the portfolio. And so I look at this and I decide that New York, New York would be performing a little bit better than what's on the page.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [22]

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Yes. I think new lease concessions for us are like $0.5 million or something. I mean, it's just not a material number on $2.6 billion of revenue.

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Operator [23]

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Our next question comes from Steve Skawa (sic) [Sakwa] with Evercore.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [24]

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Just a couple of quick questions. I wanted to just talk about the margin opportunity in some of the I guess tech initiatives that you're sort of doing, the self-guided tours and some other things like that. How big or how much of a benefit do you think that could be to margins? And sort of over what time frame do you think we could expect to see that?

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Michael L. Manelis, Equity Residential - COO & Executive VP [25]

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Yes. So I think it's probably too early to know the exact impact from all of these initiatives put together. You need to remember that we've done a lot of centralization and eliminated roles on site in previous years. So for us, our opportunity is figuring out how to leverage this technology to create new operating efficiencies. What's probably most exciting for us and where we'll probably see the bigger return is that we got amazing portfolio of assets that are highly concentrated in very desirable locations. So this close proximity, when we start thinking about self-guided tours or we start thinking about kind of potting our kind of on-site folks, we have -- we will have less windshield time, which is going to allow us to have greater staff efficiencies in both sales and service. And it's also going to allow us to reduce our reliance on contractors for many of the tasks that are getting completed today. So I think the benefit really comes more like 2020 and 2021 as we start deploying this technology and start to see the compounded impact of all of them coming together.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [26]

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I guess how much data testing have you done on the self-guided tours? And what sort of pluses and minuses have sort of come out of that?

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Michael L. Manelis, Equity Residential - COO & Executive VP [27]

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So what we -- we've done a lot where we have concierges, right? Where you don't need the technology in place. And remember, a lot of our buildings, we have concierges so we have staff there. We're now just getting ready to deploy the technology in place so you have the locks in place, you can do self-guided tours at properties after hours where you don't have kind of on-site personnel. We've been testing for, I would say probably about 9 months. On the smart home technology, we've done probably a little bit over a year. We've narrowed it down. We'll have about 2,000 units up and running. On the self-guided tours, we've done this at a handful of properties. We really need to kind of market it better to really see the upside potential of it. But it's big, right? Because a tour takes 30 minutes of time, so you start eliminating those tours, that equals a huge efficiency in your staff.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [28]

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And just -- lastly on the smart-home technology. Can you just sort of give us a rough idea of the cost to put all of the things in the home and sort of the returns that you might expect on that?

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

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Yes. So -- I mean, that's a tough one. I guess I'll just throw out an average per door of about $800, but it does swing depending on what kind of lock you're putting in. If you've got a mortice lock, it's more costly than if you just have a standard lock. As far as the return goes, I think we've seen out in the industry the $30 a month premium getting charged. On yield management, it's hard to say that, that's really a sustainable kind of return that you're getting on that. So I think we need to get some -- we need to get more concentration of these in a portfolio to really be able to answer that question to tell you what we expect from it.

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

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Yes. And Steve, I'd add -- some of this stuff is going to be get to [be cable] stakes in some of these markets, where people just demand this sort of stuff. So it's really hard to tell what it is and it'll vary a little bit. In some markets, we'll install one thing, in some we'll install another. But it's certainly an opportunity for us to the positive.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [31]

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And then last question for Mark, maybe. Just on strategy, I mean as you kind of hear about these coastal markets and these rent-control initiatives, I know you've tried to move back in the places like Denver and some other markets. Do you sort of think about the footprint of the portfolio any differently moving forward?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [32]

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Rent control is a risk just like climate change, just like the financial strength of our various municipalities we operate in, Steve, that we have to take into account. We've managed that risk very well. New York's had rent control the entire time we've been in that market, though it's certainly something we're aware of. But again, we hope to have these and continue to have really good dialogues with policymakers and hope to have a conversation that really involves more workforce housing, not just regulating prices and ending up with less workforce housing, less housing in general and kind of the worst problem. So do we take it into account? Absolutely. Is it compelling us to move into other markets? These other markets, there's -- the reasons we're not in those other markets have a lot to do with the quality of demand and the type of customer you have and the ability to build in those markets and the fact that rent control maybe isn't a threat in those markets I'm not sure offsets the other disadvantages we see.

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Operator [33]

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Our next question come from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [34]

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Just sticking with New York rent control. Curious, your political contacts there in Albany, what's your base-case scenario for what does change on the ground, come middle of this year?

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

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Yes. Thanks, John. That's really hard for us to guess there. There are so many proposals that are active right now. The governor has talked about a number of things, other legislators have talked about a number of things. It's just -- to be honest with you, impossible for me to tell you that we have a good handle on the exact proposal that's likely to be enacted. When something does seem close, then we'll have a firmer view.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [36]

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I guess my pushback is it's getting close and there is -- I mean, there is hearings this week, and I know legislation can change, but there are details being crystallized. So just curious, maybe not base case, but is there any risk to your portfolio on NOI these next 3 to 5 years as you see things playing out today?

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

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Not only does it depend on the category of the change, because there are broad -- I don't disagree with you, there are broad things being discussed, some of which, like capital improvement changes, aren't particularly relevant to us. But if you change the preferential rent scheme, it depends how you change it. And I've heard so many different variants that it's really hard for me to react and give you a view. I'll tell you that a good portion of our portfolio in New York City isn't rent controlled at all, it's market rate units. Those units may be benefited from all this additional control. So I -- it's just -- I appreciate the desire to get some underwriting number right now, but until we have more certainty, it's just hard for us to give you that kind of answer.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [38]

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Okay. That's fair. And Michael, on D.C. and just the supply dynamic across various submarkets, permitting is starting to pick up meaningfully, which probably won't hit for another few years. But as 2019 and 2020 unfold, where are the pockets of oversupply coming and where are the pockets of relief coming for your portfolio?

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Michael L. Manelis, Equity Residential - COO & Executive VP [39]

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So I think really, we're looking at this supply kind of concentration on top of us in these submarkets in the District and in Virginia. And really, this market has delivered almost 4,000 units a quarter, and we kind of anticipate that to continue. So I -- from a concentration standpoint, I would say it still sits on us in the district, it still sits on us in the Northern Virginia and we expect that to continue. It's just we're performing better than what we thought despite the supply sitting there.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [40]

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I don't know, John, was your question only D.C. or was it broader than that? I apologize.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [41]

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Sorry, D.C. I know there's a bunch of waterfront revitalization projects. And I'm just wondering, because permitting is accelerating, where are the big supply shocks hitting? Not necessarily '19, but beyond this year, where are the big supply shocks hitting across the Metro?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [42]

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Well, D.C. is a market that has the ability to deliver rapidly in new areas. I mean, again, you talk about the waterfront. And this union market area is certainly going to get a lot of supply as well. So these new areas are terrific in the sense that they're making the district so much more livable, a much more dynamic place. There are a lot of reasons for people to live there, more reasons than even before. But these areas do draw, these new areas. So I'd tell you it could spring up in a lot of places and I wouldn't be surprised if we're not talking in 2 years about the amount of supply in union market because of all the stuff going on there. I also think you can deliver in Arlington pretty easily, and you may see a little bit more delivered in and around the concentration around HQ2 at Amazon. So I think it's just everywhere. I mean honestly.

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Operator [43]

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Our next question comes from Richard Hill with 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 [44]

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Maybe just following up on that question in a broader context. Recognize that you're focused on SoCal near term, I want to see how that plays out. And until you do, could take any action on guidance. Sounds like New York City is rebounding pretty nicely here. But as you look out over the next 2 to 3 years, what markets get you the most bullish? And maybe what markets do you have a little bit of maybe more caution on, either because of supply versus demand type of goals?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [45]

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Rich, it's Mark. So to us, there's sort of 3 inputs: demand, supply, and I'll call it other. When you think about the supply picture, it's probably, I would say slightly more discouraging in Washington, D.C. And the ability, as we just talked about in the prior question, the delivery in many submarkets and in brand-new submarkets large amounts of supply in relative short order makes that market a little more difficult than some of our other markets on the supply side. Most of the other markets have I think a little bit more in terms of structural limitations or land limitations on supply.

In terms of demand, we like the picture across all the markets. New York feels very good. We feel very good about -- very bullish on New York, long term. I mean the financial services employment sort of -- headache is over, we think. I think that the city has -- is reborn with an emphasis on technology and new media jobs, and we see that across our resident base in the amount of demand. So we like New York a lot. We like Boston a great deal. We're building a big tower there, so we see feel terrific. Our West Coast markets have done very well. So we like the demand picture across the board, including in D.C. A lot of our better D.C. numbers are because frankly the supply was there and we knew it would be, but the demand is just terrific.

And then other, which I define as both the rent-control concerns we've discussed on the call and then just thinking about whether our jurisdictions are investing in their infrastructure. On that point, D.C. is to be commended because they just got a new package of reforms in place to fund a renovation of the Metro system, which is badly needed. And now they have -- on funding -- assured funding from the 3 governments to do that. So again, we see a lot of good things in our markets across the board. And I would say that the picture in supply in D.C. is just a little bit more challenging than any other markets.

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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 [46]

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Got it. And one follow-up to that on the demand side. There's obviously been a lot of talk about the aging millennial population. We've been talking about the Gen-Z population that's coming behind that, that's even bigger. Do you have any thoughts on the millennials' and Zs' propensity to rent versus own? And are -- do you expect that they're going to rent more than own? Or is it too early to tell at this point?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [47]

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Well, I've got a couple of Gen-Zs living with me, so I can speak [anecdotally] to that. I think the continued creation of jobs in dense suburban and urban settings in these cities that we operate in, I don't know why that dynamic changes. I don't know why people don't want to live there. Like I can't see what that inflection point would be. Again, provided these cities continue to invest in this attractive infrastructure, parks and transit and the like. So I mean we're very optimistic. I'd point out that our average resident is a little bit older, at 33. So we haven't even seen the height of the millennials yet through our system. I think the biggest cohort might be 28 years old or so now. So we're going to continue to feel good tailwinds from the millennials and have no reason to believe that the Gen-Zs wouldn't act similarly. But they are. They're just entering college, I mean, they're just coming out -- this is a young group yet and we -- I guess to be fair, we haven't really seen their preferences in housing expressed very well yet.

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Operator [48]

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Our next question comes from John Kim with BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [49]

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Michael gave some pretty interesting data on foot traffic by market. I'm wondering if you found this to be a good indicator of new lease growth rates historically. And then, specifically to New York, what is driving the 7% increase, do you think? Is it broad-based? Or is it specific to some of your submarkets?

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Michael L. Manelis, Equity Residential - COO & Executive VP [50]

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No. So I would say to you it was pretty consistent across the submarkets, just the demand being strong. I think foot traffic in and by itself is not the only thing you would look to, to see demand. Because there is things that we could do based on how many available units we have to sell, how much advertising dollars we're putting there that can influence those numbers. I think for us, we were fairly consistent in our marketing strategy. And you can see these areas that have the kind of strongest growth on a year-over-year basis allowed us to kind of get in a position where we can grow occupancy versus the prior year and then start pushing rate. So it's like a leading indicator.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [51]

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Okay. Couple of questions maybe for Bob. Was your same-store revenue this quarter -- or this year, will there any benefit from the accounting change as far as uncollectible [lease] revenue being moved up to revenue?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [52]

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Yes. So there's no change. We've always accounted for our bad debt expense as a contra revenue. So the lease accounting implementations didn't impact the income statement in any regard.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [53]

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Okay. And then looking at your second quarter guidance -- this is more like the Nareit FFO, not the normalized. But the Nareit FFO coming down the second quarter versus first quarter. Is there any onetime items or expected debt extinguishment costs that you're expecting in the second quarter?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [54]

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Yes. There's one debt extinguishment cost, which is fairly sizable. It's noncash. It actually relates to the payoff of some tax-exempt bonds on the sale of 806. We acquired that property as part of Archstone, so that debt was mark-to-market. So there's a fairly sizable discount that had to be written off when we paid off that debt in conjunction with the sale.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [55]

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And then, finally, I know it sounds like revenue is going to come out at the high end of your guidance for the year. Expenses have also come in at the high ends of your guidance range in the first quarter. Do you expect that to continue for the remainder of the year?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [56]

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Yes. So we're comfortable with the -- kind of call it the midpoint of our guidance range on expenses. We always assumed that the expense growth would be front-end loaded in our original forecast. So we're comfortable kind of where the range sits kind of around the midpoint.

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Operator [57]

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Our next question comes from Rob Stevenson with Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [58]

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Turnover was down pretty meaningfully again year-over-year. Anything in particular driving the continued decline overall? And how much of an impact is that having on NOI versus if it was 100 or 200 or 300 basis points higher?

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Michael L. Manelis, Equity Residential - COO & Executive VP [59]

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So, yes. I mean it was 9.9% for the quarter. It was roughly just over 600 fewer units turned over in Q1 of '19 over Q1 of '18. So from an NOI perspective, I mean, the cost to turn -- the actual physical cost to make ready a unit is not significant. So I don't think that's a big driver to the NOI. The benefit for us is we reduced our vacancy loss on those units. And we also -- right now, you have more people renewing, right? And renewals were coming in at a 4.9%. So that to me is the lift that we're seeing kind of into the NOI contribution from that. The drivers to that, I think is very consistent to what we've said in the past, which is we are delivering strong customer service to our residents, our satisfaction scores are at the all-time company high and that's being fueled with people out there deferring life-changing decisions to later years. They're marrying later, having children later. So I think we're benefiting from all of those things coming together. How much lower it goes, I don't know.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [60]

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Okay. Any -- Orange County was the one exception, was up. Anything that sticks out about that market? Or is it just noise at this point?

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Michael L. Manelis, Equity Residential - COO & Executive VP [61]

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It was up. And it equated to 27 more move-outs during the first quarter versus the first quarter of last year. It's something that we're watching, right? We knew we were facing some pressure into that market. We forecasted that in our guidance. But it was down and it's something we just need to watch (inaudible)

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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 then, San Francisco and L.A. had positive new lease growth in the first quarter as per your new schedule. What markets -- I assume that those markets are likely to have positive rent growth for the full year. What other markets besides those 2 could flip and be positive for the entire year when you -- when all is said and done on a new lease basis?

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Michael L. Manelis, Equity Residential - COO & Executive VP [63]

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Yes. So we put the guidance out there for -- in the March Investor Presentation for the full year, so you kind of get a sense. I will tell you sitting here right now, San Francisco, New York and D.C. are probably the 3 that have really outperformed the first quarter from a new lease change perspective. And I think you could just look at the March guidance and kind of understand that, that would impact those full year numbers. The rest of this stuff, let's call it 20, 30 basis points better than what we expected in the quarter. And when you stretch that out over the full year and you put in all the quantity of new leases that we're getting ready to write, it's just not as meaningful.

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Operator [64]

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Our next question comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

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A few quick questions. First, is the $800 unit a digital experience or smart tech spend included in your $2,600 per unit CapEx guidance?

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Michael L. Manelis, Equity Residential - COO & Executive VP [66]

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Yes.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

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And then, second any -- it is?

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

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Yes.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [69]

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Okay. Great. Then second, any change in asking or taking rents in your assets contiguous to Amazon HQ2 headquarter location yet?

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

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No. And I think they actually -- they just announced that they're going to start putting some employees in there in June in some temporary office space. To me, that HQ2 and I think what we're seeing, it's a psychological lift, right? It's good for long-term fundamentals for those submarkets. And I think what you're going to see as the year progresses and more and more jobs, you're going to see the demand number go up. And you'll probably see pricing power strengthen from that.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [71]

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Okay. And then last, Boston tower under development, $850,000 per unit. Refresh our memory as to expected yield and then rents on a per square foot basis needed to hit those yields.

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Michael L. Manelis, Equity Residential - COO & Executive VP [72]

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All right. Bear with me for a second here. So -- yes, so the tower -- what we expect to stabilize at is about a 6 -- little over a 6% yield. The current yield, so on current rents and current construction costs would be a bit over 5%. So just to give you a sense of that. Not sure I have here the actual rent. I don't have the underwriting for that asset here with me, but we can certainly talk through that with you at a later point.

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Operator [73]

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Our next question comes from Hardik Goel with Zebra (sic) [Zelman].

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Hardik Goel, Zelman & Associates LLC - VP of Research [74]

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Can you guys hear me?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [75]

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Yes. Yes, we can.

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Hardik Goel, Zelman & Associates LLC - VP of Research [76]

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I just had a question on some of the comments you made on D.C. and L.A. supply. So we know that D.C. hasn't typically had an issue with delays and supply comes on there at a pretty healthy clip. And at the same time, we have markets in California where supply is really difficult, even ones that started to kind of deliver on time. And what's driving that difference really? How much of that is just people looking at construction costs and having to revise the capital stack versus labor? And just -- if you could add some color and insight into what's going on?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [77]

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Sure. Well, a couple of different things are going on. One is similar. There are new neighborhoods. I mean Downtown L.A. is a new destination of sorts, so you see a lot of construction there. And there is not as much entrenched opposition. When you go to D.C, there is a lot less effective entrenched opposition to these new neighborhoods. Like again, the area by the ballpark and you see very significant amounts of construction. It's relatively easy to build in Northern Virginia, Maryland is a little more difficult, but it is relatively easy. So I would say to you that generally speaking, in terms of governmental restrictions, land availability, availability in D.C. of a good-sized subcontractor base, all of that is easier, I would say, to execute on in D.C. than it is on the West Coast. We have maybe more limitations in terms of local government rules and regulations you need to work through. You have more significant land limitations, maybe a more effective NIMBY-ism view on additional units. So I think it's a combination of all those things.

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Hardik Goel, Zelman & Associates LLC - VP of Research [78]

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What about -- just as a quick follow-up, what about once [you're already] approved and started? Is there a difference in how long it takes to just complete the unit and get it done on time? Does the regulatory environment affect that as well, you think?

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

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I don't -- I have not heard that to be the case. It's more about you're building. Are you building a high-rise? Are you building a mid-rise? [Wrap] product? You're building garden? What are you constructing? So if you're building a high-rise, it's going to take longer. And so a lot of our supply numbers we think are pretty accurate when we have markets like New York where everything is high-rise. And we're in markets like D.C where there's a lot of gardens, a lot of mid-rise, it takes less time. So I have not heard that there is a material difference once construction starts in, say the completion of a mid-rise in the L.A. area and the completion of a mid-rise in D.C. And if there is, it's probably weather-related or those sorts of things, but I have not heard a great deal of difference.

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Operator [80]

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Our next question comes from Alex Goldfarb with 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 [81]

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Mark, just going to New York for a minute. You mentioned that the majority -- that most of your New York assets were market rate, not rent control. But can you just -- maybe on a percentage basis, your New York portfolio that's either 421a or pre-1974 rent-stabilized units, what percent of your New York portfolio would fall into either bucket?

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

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Sure, Alex. So I'm going to give some general numbers and I'll admit that this is all very technical. It's a little bit subject to correction here as we -- some of these properties are shifting. For example, they are completing their rent-stabilization period and they'll move into market rate. So we have about 9,500 units in Metro New York, call it 3,500 or so aren't even in New York City proper, so they're not part of this conversation we're having right now. Call it 3,300 units and that number is going down shortly because we have some deals moving out of the rent-stabilization category. So maybe 3,300 units or so are rent-stabilized in one fashion or another. You know as a New Yorker, there's a lot of variations on what that means and whether those restrictions are very significant or less so, but effectively 3,300. And the remaining, call it 3,000-odd units are market-rate units. And the number of market-rate units from now to, call it '23 is going to keep increasing as we burn through some of these rent-stabilization periods and these 421a assets go through their cycle.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [83]

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Okay, so just to clarify, the 3,300 includes units that are subject to preferential rate rents, the legal caps as well as the rent-stabilized units, correct?

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

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Yes.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [85]

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Okay. And then second question is, I don't think I heard you guys talk about the new energy initiatives that were just passed in New York. But maybe if you could just talk about -- I know they are recent, but how you view your portfolio as measuring up against what the City Council and the mayor has signed in, both on the 2024 mandate and then the 2029? And then just reading -- the way it looks, is that -- buildings with regulated units are exempt, but the market-rate units -- market-rate buildings are not. So maybe if you can just talk about sort of how your portfolio lays up again against the 2024 and the 2029 thresholds?

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Michael L. Manelis, Equity Residential - COO & Executive VP [86]

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Yes. So, sure. So let me just give a little bit of context. So really the bill is trying to measure those greenhouse gas intensity, they've come out with a calculation that has kind of a mandate for 2024 and then another decline really beginning in 2030, I believe. So I think just looking at the portfolio and thinking about where we have properties rolling off kind of the 421a that won't be subject to this stuff. We're anticipating about 4,500 units or about 70% of our Manhattan and Brooklyn unit in 2024 will only need to take prescriptive measures as they will still be subject to some form of kind of rent stabilization. So that being said, I would say the company, we've always been focused on energy consumption and efficiency. So we're not -- we're still working through with a consultant to understand our baseline, but we are not as concerned about this 2024 requirement. But it looks like it's about a 40% reduction in their calc as to where this benchmark is for 2030. And I would say that reduction is going to take some work to achieve, but we're just -- we're up for the challenge, but we're not really sure yet how much work we're going to have to do to be able to hit that benchmark.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [87]

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Okay. But basically -- so the initial part, 70% of your portfolio is effectively shielded because of (inaudible).

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Michael L. Manelis, Equity Residential - COO & Executive VP [88]

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Yes. I mean it's still -- you still -- yes, but you still need to take prescriptive measures in there. So, yes, you're shielded from the actual calculations or the penalties from it, but there's still things you're going to need to do. But we have a lot of confidence just given our focus over these years that we've already done most of those.

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

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Yes. And we've got a lot of [co gen] that we do in New York. We've got a lot of -- with the sustainability and efficiency initiatives we had, we've done a lot of work on these assets already that has gone well for us. You'll see us do some more. A lot of that, Alex, I bet you we would've done anywhere.

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Operator [90]

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Our next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [91]

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One quick follow-up on the New York City disposition. The 4.4% disposition yield, could you share the -- like the seller's cap rate? And what the impact from burn offs of 421a would be on a cap-rate basis?

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [92]

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Yes. We try to, based on what the sellers -- or buyer, pardon me, is willing to tell us, John, understand what their cap rate is. We think it's about the same as ours initially. There might be about the same thought process. Again, we don't know what the renovation thought process is. So I don't know -- I don't have right now with me the step-up schedule for that specific asset. We certainly could have that conversation with you later. I don't know, Bob, you've got any detail on that specific asset?

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Robert A. Garechana, Equity Residential - Executive VP & CFO [93]

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Yes. The only thing I can say is, as it relates to our own kind of rate of growth from '18 to '19, it was about $900,000, was the step-up from the real estate tax fees, but that's all the color I have at the moment.

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Operator [94]

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At this time, I'd like to turn it back to our presenters for closing remarks.

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Mark J. Parrell, Equity Residential - President, CEO & Trustee [95]

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All right. Before we end the call, I want to give a very special thank you to John Lennox, our Senior VP of Financial Planning and Analysis, who is retiring today after 35 years with our company. John has been a valued friend, colleague and teacher to so many of us in our company and a mentor to both me and Bob Garechana as CFOs. We wish him the very best in his retirement.

So thank you all for your time today. And have a good day.

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Operator [96]

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Thank you, ladies and gentlemen. This concludes today's presentation.

You may now disconnect.