住宅地產 (EQR) 2017 Q4 法說會逐字稿

Thank you for standing by. Good day, and welcome to the Equity Residential 4Q 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Marty McKenna. Please go ahead, sir.

Thanks, Neil. Good morning, and thank you for joining us to discuss Equity Residential's full year 2017 results and outlook for 2018. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, 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 law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

And now I'll turn the call over to David Neithercut.

Thank you, Marty. Good morning, everybody. Thank you for joining us for today's call. We're very pleased to deliver operating and financial results for 2017 at the high end of our original expectations for the year. Now obviously, a lot of things had to go right for us to do so because it required every market to achieve our absolute best case level of performance for the year and save one that's pretty much exactly what happened.

Naturally, as we began the year, we were quite cautious about the elevated levels of new supply across our markets, which had begun to impact landlords' pricing power in 2016, ending several years of above-trend performance that had been driven by extremely favorable supply and demand conditions as we emerged from the last downturn. However, while revenue growth certainly slowed as compared to prior years, several factors allowed us to mitigate the impact of this new supply and outperform our original expectations.

First, as everyone is keenly aware, there is clearly very deep and very resilient demand for apartment living in our urban and highly walkable suburban markets, which continues to be powered by an expanding economy, which has driven employment/unemployment to record lows and has ignited wage growth that had been dormant for much of the recovery.

As David Santee will explain in more detail in just a moment, the second factor for our success in 2017 was the relentless focus on our prospects, our residents and on our properties by our property management and operational teams and everyone else across our enterprise that supports those teams. Our 2017 performance was the result of everyone working as one team, providing remarkable service to our residents and sweating every detail. This was a job very well done across the enterprise, and I am extremely proud and honored to give a hearty shout out to them all. However, we don't get to celebrate our successes for too long because as these teams know all too well, 2018 will bring more of the same. New supply will continue to be delivered across our markets, which will continue to pressure new lease rates, occupancy and retention.

Fortunately, all signals continue to point to further economic expansion. Corporate earnings continue to grow and the corporate tax cuts are encouraging companies to deploy capital and increase wages, which are very, very good signs for the apartment business. There is no question that demand for our high-quality rental properties will continue to be extremely strong. Our residents will see their wages increase and will have more after-tax money in their pockets as a result of the new Tax Act while still being disinterested or unable to afford single-family homes, the cost of which continue to rise in our already high single-family markets -- high cost of housing markets. It won't be easy, but you can count on each of our teams across the country to continue to perform at highest levels and deliver optimal results in the new year.

David Santee will now go into more detail about our 2017 results and how we expect our markets to perform in 2018. And then Mark Parrell will give some color on operating expenses, our earnings guidance for the year and the various assumptions that support this guidance. David?

Okay. Thank you, David. Good morning, everyone. A year ago when we laid out our guidance for 2017, I told you that our teams were keenly aware of the challenges before us and that I was 100% confident that they would go above and beyond to deliver in 2017. They did, and I'd like to recognize those efforts, which allowed us to achieve revenue growth at the high end of our original guidance and expense growth that came in well below of the bottom end of our guidance.

In a new supply environment like this one, we know that our customers have many choices. But despite these above-average levels of new supply across all of our markets, our teams were able to deliver 4.6% renewal rate growth while achieving the lowest resident turnover in the history of our company. They also continued to improve our customer loyalty stores, which have increased 25% over the last couple of years. And we did this while also seeing our employee engagement scores remain at peak levels and our property employee turnover decline. Our winning culture and the desire to deliver our best will be called upon once again in 2018 as we face another year of elevated supply. And so our 2000 operating strategy is very simple. Hit the replay button and keep a laser focus on our customers and employees. Renew and retain, combined with market pricing discipline, will be the key drivers in our ability to deliver 2018 revenue results that are very similar to 2017.

Now moving on to the markets. I'll focus my comments on the assumptions that make up our full year forecast on a market-by-market basis. These include new lease growth rates, expected renewal rates achieved and the percent of contribution to same-store revenue growth that, together, get you to the midpoint of our full year guidance. I'll also discuss what we see in markets today and provide color on the new deliveries and how much or little we expect them to impact us based on our geographic footprint.

So I will start with the markets that we expect to have the most positive impact to our 2018 revenue growth and finish up with New York, which will have a negative impact. Before I get to the specific markets, a note on the impact of tax reform. While it's too early to make any conclusions about the impact of the new tax plan, our math in both California and New York, our average single resident will be saving about $2,000 annually; and our average married couple, about $3,500 annually. Also, the new reforms appear to make home ownership look marginally more expensive.

First, Los Angeles, which produced 3.6% revenue growth in 2017, which was in line with our original expectation. We got there through better-than-expected renewal growth, which offset lower-than-expected gains on new leases. In 2018, we expect Los Angeles to produce revenue growth of about 3.25% for the year and contribute approximately 35% of our portfolio-wide revenue growth. With the national economy appearing to be firing on all cylinders, L.A. is expected to see improved job growth in 2018, which should help drive strong absorption of the estimated 14,000 new deliveries. Announcements by Amazon, Apple and others of taking down large chunks of office space in Culver City bode well for both downtown and West L.A. With a favorable geographic mismatch in the new supply versus our footprint, we are forecasting 96% occupancy, 5.2% renewal rate growth and new lease gain of 75 basis points. West L.A., the North and East suburbs will be the strongest as lease-up markets will see virtually no new supply. Downtown, Koreatown and up through Glendale, Pasadena will see the bulk of all deliveries. However, at a much higher price point to much of our existing portfolio.

In 2017, San Francisco produced 2.2% revenue growth, which was better than we expected, but not beyond what we thought could happen. The growth here was again through better-than-expected renewal growth. In 2018, San Francisco appears to be on very solid ground and takes the #2 position, contributing 20% to 2018 revenue growth. With total new deliveries on par with 2017 and spread similarly across the same submarkets, very strong demand has positioned us for a good start to the year. With the new corporate tax plan taking hold, many announcements of [PEC] expansion in the Peninsula and South Bay and San Jose are very encouraging for maintaining solid absorption. With deliveries front-loaded for the year and current occupancy better by 60 basis points versus last year, we check marked San Francisco as the market that has the most potential to surprise to the upside. Our '18 forecast has this market producing revenue growth of approximately 1.75%, with occupancy for the full year at 95.8%, renewals up 4.1% versus the 4.3% growth in '17 and flat growth on new leases versus the negative 1.7% for 2017.

On to Seattle, where the 5.6% revenue growth we produced in 2017, driven by good absorption of new supply, handily beat our cautious forecast. We saw both new leases and renewals in this market perform better than expected in 2017. Now in 2018, Seattle will be our 3rd largest contributor to growth at 16%, driven mostly by our strong embedded growth in the rent roll. But as we start 2018, we are more cautious as a result of the concentrated and elevated supply in all of the urban submarkets. And the persistent moderation of new lease rent, thus, the announcement of HQ2.

In Q4 '17, rumors of a hiring freeze at Amazon appeared to play out, with the number of job openings hitting their lowest level in years at 3,000. As recent as last week, however, open jobs have rebounded to 3,600. And demand in recent week has been good on average, but has yet to be consistent week-over-week. Occupancy and exposure are on top of last year. However, notable moderation in new lease rent remains. With that said, our forecast for 2018 is for this market to produce revenue growth of 3.25% versus the 5.6% growth we achieved last year. For 2018, we are budgeting new lease growth up 70 basis points. We are holding occupancy flat, renewals up 5.4% versus the 2017 achieved growth of 7.5%.

And Washington, D.C. was the only market in our portfolio that did not meet or beat our expectations in 2017. We produced revenue growth of 1.3% in D.C. in 2017 as the uncertainty in the market caused by the political environment slowed activity early in the year. In 2018, D.C. is expected to contribute 11% of our revenue growth as the continued improvement in economic conditions is only sufficient to absorb the level of new deliveries at flat to slightly negative rental rates. With federal government, which makes up 1/3 of the metro economy, not growing, the private sector will need to be the fuel that creates outsized demand, a necessary variable to achieve rent growth that is closer to long-term averages. With almost 12,000 new units expected, the concentrations in the district submarkets of NoMa, Central D.C. and the Riverfront will continue to pressure new lease rents in much of our footprint. The RBC Corridor and Alexandria will see little new supply this year, and that should add some stability to full year revenue growth.

Our expectation for 2018 is revenue growth of 1%. We expect occupancy to be flat at 96.1%; renewals the same as 2017, up 4.1%, a slight improvement to new lease gain at negative 1.9% versus the negative 3% we realized in '17.

In 2017, Boston produced revenue growth of 1.6%, in line with our expectations. We did better than we expected on renewals and occupancy, which offset some softness in rate. In 2018, we expect Boston to contribute 10% of our revenue growth. And like last year, Boston will deliver 4,500 new units spread across the same Metro submarkets with a slight increase in Cambridge. The city will see deliveries front-loaded, while Cambridge is back-loaded and expected to have a greater impact in 2019.

Good news continues to be abundant in Boston as many of the large technology and biotech firms continue to take down large swaths of office space as well as companies like Philips, who are relocating headquarters. All told, 2,000 high-paying jobs will be moving to Cambridge alone, which should continue to support good absorption rate with minimal pricing power on new leases. We expect this market to produce revenue growth of 1.6% this year, similar to what it delivered in 2017. Forecast for 2018 hold occupancy flat at 95.8%; renewals, slightly less than 2017, up 4.3% with marginal improvement in new lease gains of minus 1% versus minus 1.7% in '17.

Orange County and San Diego are 2 smallest NOI markets. Both had very good years in 2017, delivering revenue growth of 4.7% and 4.6%, respectively. Again, better-than-expected renewal growth and occupancy led the way in these markets. In 2018, they should produce our best revenue growth but, due to their size, will contribute the least to our overall growth at 9% each.

Orange County will see a slight reduction in new deliveries that will come online evenly across next 4 quarters, while San Diego will see an increase of 3,700 deliveries that are front-loaded. New deliveries in absolute terms should be easily absorbed without pricing disruption. Steady job growth, coupled with increasing single-family home prices, continues to fuel demand in excess of supply that allows these 2 markets to achieve above-average trend revenue growth. We expect both markets to deliver 4% revenue growth in 2018. Occupancy forecast for both markets are 96.2%, with renewals up 5.9% and 5.4% for Orange County and San Diego, respectively. New lease growth is expected to be 2.1% and 2.2%, respectively.

And then closing with the Big Apple. In 2017, this market exceeded our expectations by producing revenue growth of 10 basis points, driven by less use of concessions than expected as well as better-than-expected renewal growth and occupancy. We continue to be very pleased with the pricing discipline that the market showed in 2017 and that we continue to see today.

In 2018, this market will deliver elevated supply, approximately 19,000 units in our competitive footprint. 62% of this new supply is in Long Island City and Brooklyn. As we have discussed previously, the unknown in New York City is if the level of new supply in Long Island City will begin to attract meaningful demand for Manhattan. Long Island City will see around 4,000 new units come online in the first half of the year, with total expected 2018 deliveries of a little more than 6,200 new apartments.

Brooklyn, a more desirable burrow, will see almost 4,800 new units, with over 1,800 in downtown and 1,400 in Williamsburg. East Brooklyn will see 1,300 new units that are counted separately from Brooklyn. Brooklyn has developed into a destination location, and its downtown has been completely transformed. But it only grew from Manhattan renters seeking value. While Long Island City is far behind in neighborhood amenities and nightlife, the risk of increasing concessions and the potential to bleed into Manhattan pricing is only one train stop away. A short train ride for a 15% to 20% discount on risk -- on rent is a risk that we cannot yet quantify. Manhattan alone has almost 4,000 new units coming online in Midtown West, in Gramercy. In the Hudson Waterfront, Jersey City submarkets, another 2,000.

With peak supply in 2018 and job growth for the year forecast to be below 2017 levels, we continue to be cautious for New York. We expect to produce same-store revenue of minus 75 basis points in this market in 2018, which will result in New York making a negative contribution of 10% to our portfolio-wide revenue growth.

Occupancy forecast is 96.1%; renewals at up 2.5%; and new leases at minus 3.7%, which is a 50 basis point improvement to 2017. We were conservative in our estimate in regards to the amount of concession we thought we would have to use in 2017 and ended up using less than we budgeted. We began 2018 with a similar level of conservatism on concessions.

So in closing, all of our markets will see elevated levels of new supply, but demand remains very good. Job growth continues to be solid, and we are optimistic that the new tax plan will be a very good stimulus to improving the overall economy and the incomes of our customers. Our employees are some of the best and brightest out there, and they know how to do things right. But more importantly, when to do the right things for our customers and our business that, in the end, will produce optimal results for our shareholders. And again, a big shout out to all of our employees out there. I know that you can hit that replay button and do it again in 2018. Mark?

Thank you, David. Good morning, everyone. I want to take a few minutes this morning to talk about our same-store expense, normalized FFO and capital expenditure guidance for 2018. Before I launch into some detail on our 2018 same-store expense guidance range of 3.5% to 4.5%, I want to give some context.

Our lower-than-expected full year 2017 same-store expense increase of 2.7% versus the 3.2% that we expected has set up a relatively difficult comparable period for 2018. We have also benefited from a modest 2.7% average annual growth rate of same-store expenses over the past 5 years. Switching now to 2018, our same-store expense growth this year will be driven as it usually is by growth in our Big 3 expense lines, real estate taxes, on-site payroll and utilities, which together constitute almost 80% of our total same-store expenses.

On the real estate tax side, we expect an increase of between 4.75% and 5.75%, with about 170 basis points of the increase coming from the 421-a burn-off in New York. We face a tough comp in 2018 as we had better-than-expected success on some appeals in 2017 that brought the full year growth rate down to 3.2%. Now it's about 100 basis points lower than we originally thought back in February of 2017. Jurisdictions with the largest expected real estate tax expense increase are New Jersey and New York.

For payroll expense, we expect an increase of around 5% as we face continued pressure to retain our property level employees, especially in regards to maintenance salaries, which we see up over 6%, all in a very competitive labor market.

Switching to utilities. We anticipate an increase of between 3% and 4% in 2018. After some very good years in this category, you might recall we were up 2% in 2017 and we had decreases in both 2016 and 2015. We are now facing a tough comp and increases in trash and natural gas costs.

So now I'll move over to normalized FFO guidance. Our range for normalized FFO for 2018 is $3.17 to $3.27 per share. Comparing our 2017 normalized FFO guidance of $3.13 per share to the $3.22 midpoint of our 2018 guidance, the major drivers are: first, our portfolio of 9 properties totaling about 3,200 units in various stages of lease-up should create about $71 million in normalized FFO. As compared to 2017, this was an incremental contribution to our results of about $35 million or $0.09 per share.

Second, we expect to have a positive impact of about $0.04 per share from same-store NOI growth in 2018, and offsetting this will be a reduction of about $4 million or $0.01 per share from our 2017 and 2018 transaction activity. Our guidance assumes that dispositions are relatively front-end loaded, while acquisitions are relatively back-end loaded.

Also on a negative side, we estimate an impact of about $4.4 million, and that approximates $0.01 per share from higher total interest expense. While we will benefit from our prepayment activity and issuance of new debt at lower coupons, we will feel a large negative impact from significantly lower capitalized interest this year because most of our development projects have now been placed into service as well as higher expected rates on our variable rate debt.

We will also have a negative impact of about $0.02 per share from other items, including higher general and administrative costs and property management costs. Because G&A and property management mostly consist of compensation cost for offsite and corporate personnel, these line items are subject to the same cost pressures that I just mentioned as negatively impacting our on-site payroll number.

And then finally, into our capital expenditures guidance. In 2018, we plan to spend approximately $210 million, which is about $2,900 per same-store unit in capitalized expenditures, which is about 8.8% of same-store revenue. And about 1/3 of this is for improvements that we believe are revenue-enhancing. Included as revenue-enhancing in the $210 million is our unit renovation program, where we expect to spend $60 million to renovate approximately 4,500 units at a cost of about $13,300 per unit and which we expect will produce returns in the low double digits. Also providing a return is our spend of approximately $15 million to $20 million on sustainability-related projects like energy conservation through lighting and water retrofits that both provide the company a strong 20% return as well as further our commitment to sustainability in all that we do. We'll also continue our elevated spending level on customer-facing projects like lobbies, gyms and other amenities to keep our extremely well-located product competitive with new assets being delivered in our markets.

Over the last few years, we have been spending between 7% and 8.5% of our same-store revenue on capital expenditures. Even with a slightly elevated level of capital expenditures in 2018, the company should continue to rank as one of the very best in its peer group in terms of capital spending as a percentage of same-store revenues. We still do expect that over time, our capital expenditure spending will modestly decline as we complete some large ongoing projects and renovate a large proportion of our units and as competitive pressures abate.

I will now turn the call back over to David Neithercut.

All right. Thank you, Mark. I want to spend just a moment addressing the transaction market and development activity. So across our markets, there continues to be a very strong demand for multifamily assets, regularly demonstrated by deal prints supporting all-time high valuations despite slowing revenue growth and rising interest rates. The sentiment across the space is that many investors remain under-allocated to multifamily real estate and that a lot of capital is looking to be put to work in our space. In fact, the Annual NMHC Meetings at Orlando several weeks ago attracted 6,000 registrants. And by some estimates, there were more than 8,000 attendees in total.

Further evidence of the stability of multifamily asset valuation can be found in our own disposition activity. In 2017, we sold 5 assets for $355 million, and the prices realized were 102% of our internal valuations at the time and 105% of our 26 valuations of these same assets. As recently as October last year, we thought we might get closer to our original guidance of $500 million of dispositions in 2017, but had more than $100 million of closings move into January of this year. And these assets will trade at 105% of our most recent valuation expectations.

Now with highly competitive demand for multifamily assets throughout 2017, we closed on no new acquisitions in the fourth quarter, and we closed on $468 million for the full year at a weighted average cap rate of 4.8%. Consistent with last year, we begin 2018 with an expectation for transaction activity of $500 million of acquisitions funded with $500 million of proceeds from dispositions. And like the year ago, we will only conduct this activity if it can be accomplished with a limited initial dilution and result in higher long-term total returns.

Turning to development. It is becoming more and more difficult as land prices remain strong and the growth in construction costs continue to outpace rent growth, significantly reducing development yields in all markets. Nevertheless, development capital appears to still be available in rather abundant supply for the right sponsors with the right deals. For the rest of them, it appears that putting together a capital stack is becoming harder and harder. Our construction financing does remain available, but at lower advance rates and wider spreads while requiring more capital support. To us, this all adds up to fewer starts and hence, fewer deliveries in the very near future.

Now development remains a core competency at Equity Residential, and we have development expertise in each of our markets that continue to underwrite new development opportunities for consideration. But the fact of the matter is that we have not acquired a land parcel for development since 2015 when we assembled a site for 238 units in downtown San Francisco. Since then, we have seen construction costs continue to escalate and revenue growth slow, resulting in development yields that forced us to the sidelines in taking down new land parcels. In the meantime, we've continued to work diligently to create value in our existing land inventory. During the year, we completed $584 million of development projects at a weighted average yield of 6%, which represents a 175 to 200 basis point premium to cap rates in today's marketplace. In 2017, we also started 2 development projects totaling $114 million, where we are targeting 5% to 5.5% returns on cost, representing 75 to 150 basis point cap rate premiums.

At the present time, we have 4 development sites remaining in inventory, representing about $1 billion of total development costs. And we currently expect to start the largest of these sometime this summer because after nearly 10 years of extraordinarily hard work, the team has all the necessary approvals to soon begin the construction of a new tower on the site of our 50-year old parking garage located directly across the street from Boston's North Station and the TD Boston Garden. At 44 floors, this 469-unit property will be Boston's tallest department tower with fantastic views, and located in an exciting and growing Boston neighborhood. As I said, we expect to begin demolition of the garage sometime this summer and deliver the tower in late 2021 at a cost of $410 million. Our current underwriting point to a stabilized yield in the low 6s.

Before we open the call to questions, I want to quickly comment on the change in the company's dividend policy that we announced last night. Coming out of the Great Recession with uncertain cash flow and an elevated level of development opportunities, we adopted a conservative and totally transparent dividend policy pegged off of the midpoint of our initial annualized normalized FFO guidance. When our development spend reduce significantly, we will have a meaningful increase in uncommitted cash flow going forward and believe that increasing the distribution to our shareholders under this new policy is a very good use of cash at this time.

So with all that said, operator, we'll be happy now to open the call to Q&A.

(Operator Instructions) And we'll take our first question from Nick Yulico with UBS.

David, I just want to go back to the comments you had in the press release, where you talked about the outlook in your coastal markets with high homeownership will soon improve significantly as new supply reduces. And I just looking to hear your view as to when you think this might happen, if you're seeing any light at the end of the tunnel on supply in the second half of this year, or is it more of a 2019 impact?

Well, we really look at 2019 deliveries, Nick, as the beginning of the reduction. I mean, look, in 2018, we'll still have 2017 deliveries sort of spill over into this year. And I will tell you, in 2019, we will still have 2018 deliveries spill over. But the number of deliveries that we count as competitive to our assets, we see diminishing considerably in some markets, less so in others. But we do see kind of light at the end of the tunnel with elevated level of new supply beginning in 2019. I'm not suggesting that's going to 0. But clearly, while we look at what we think will be and should be continued very strong demand, we do see the supply reducing in 2019 and believe that, by that time, we'll begin to see pricing power kind of return to the landlords.

That's helpful. And then on New York City, in the past, you've talked about Long Island City/Brooklyn as having the bulk of the supply delivering this year. It feels like you're now saying that, that competitive impact could be a little bit worse, or at least your guidance is factoring some of that in. So perhaps you can just tell us some more about how you thought about Long Island City/Brooklyn pricing of the competitive new supply impacting your portfolio in terms of your guidance for New York this year.

This is David. We -- at this point, we have a lot of anecdotal stories. We have some examples of residents who move out of our communities in Brooklyn up to Long Island City but after several months choose to move back. But as I said, I think the long-term outcome of 6,200 units coming online is very hard to quantify. So we prepared for it last year. Certainly, the number of units that are going to be delivered this year, especially in the first half of the year, are very elevated, and we planned accordingly. And we hope the discipline stays in the market and owners remain -- sticking to their guns on pricing.

I guess I'd add to that, Nick, that these developers that are delivering this product have not seen a lot of rent growth from their original pro formas. And for them to meet their expectation, meet their investors' expectation, meet their refinancing expectations, they're going to be forced to toe the line on pricing. Now that doesn't mean that some of them won't get aggressive and we may not -- won't feel that, but I just -- I think that unlike what we experienced in San Francisco in 2016, there's not a lot of cushion from the pricing expectations of these few folks that are delivering these [new] products in Long Island City. And that may be very well why we saw discipline throughout the market in 2017.

And just a follow-up. That's helpful. So it sounds like you factored in a fair amount of conservatism in New York relative to how this pricing impact could play out.

Well, I guess, we've -- we're as conservative going into this year as we were last year. And obviously, we outperformed our expectations, notwithstanding the fact that New York was the worst-performing market. So this performance is all relative. We still expect New York to be our worst-performing market. But if pricing discipline holds throughout the marketplace maybe for the reasons that we've noted, maybe New York could do better. But I will tell you, if there's a crack in the dike, that we could have an outcome on the downside.

And we'll go next to Juan Sanabria with Bank of America.

Just following up on Nick's question on New York. Just hoping to better understand the same-store revenue build where you guys are building in maybe potentially more concessions that you didn't necessarily see in '17. If I didn't mishear, I thought you said your expectation is for new leases down 3.7%, but you had a 50 basis point increase in '17. So I was hoping you could just kind of walk us through that a little bit just to understand the assumptions in why you're starting out more conservatively than you ended up in New York for '17.

Well, I think it's more driven by what potentially could happen in the summer months. A lot of these deliveries will come online starting at the end of Q1 end of Q2. That's when a lot of your lease expirations occur. The other thing is, is that New York has the lowest turnover of any market. So consequently, renewal increases have a bigger impact and have more staying power in New York. So when a new lease turns over, the drop in the difference between the current rent and the new lease rent is much greater. So you'll just have more roll-down in the rent world, so to speak, than we saw last year. And then we forecasted -- we're prepared with the concessions, we think, are necessary should the market see pricing contagion with regard to concessions.

And I just wanted to follow up on that '19 supply comment. Any sense portfolio-wide at this point what the expected decline in units across your competitive set would be looking at '18 deliveries versus your initial expectations for '19 at this point?

I guess I would say '19 numbers are definitely more biased towards the estimate than fact. But today, based on our boots on the ground and data that we reconcile through Axiometrics, we're showing almost a 30% decline in new deliveries in 2019 versus 2018.

That being said, there are some markets that might be consistent deliveries '19 over '18 and -- but more significant drop in other markets. But as David said, it's difficult to make a real call on '19 in markets in which, align like New York, where it doesn't -- it can take less than 24-or-so months to deliver a product. Certainly, New York, we have an expectation of a material decrease, and I think we'd probably be pretty close for both anything to be delivered in 2019. It's got to be underway in some fashion today. Our guys are covering all of this stuff very closely for us.

And we'll move next to Rich Hightower with Evercore ISI.

So a couple questions here. So I want to follow up on some of the market commentary. But just to stress test the guidance a little bit, and you've spent a lot of time talking about New York, but maybe some of the other markets. Just what generally would have to happen for you to hit the bottom end of the range versus the high end of the range? I mean, how do you guys probability weight the different outcomes? And then maybe further on those supply comments. I think we know with certainty that every time we look at these numbers, at the beginning of the year, the actual deliveries end up, in some cases, meaningfully less at the end of the year. And I'm wondering if you've baked in that, that same sort of assessment to the way you've envisioned these markets playing out in 2018.

Well, I'll let David answer the first part of your question. I'll answer the second. So if there's any meaningful change at the end of the year, it's just because that product got pushed into the next year. And as I think we talked about on one of our last calls, a lot of the data you look at is based upon when properties receive their final C.O. That doesn't necessarily mean that the opening of the door and their first availability for actually occupancy were pushed back any. And we do track that very, very closely, and we track not completions as defined by final C of O's, but when, in each quarter or each month, properties will actually be open for business and able to begin to compete with us. Actually thinking that occurs 60 or 90 days actually beforehand. So we've got our hand on the pulse of that competitive product. But as it relates to what kind of has to happen for us to be at the low end, I'll let David address it.

Yes. Well, to be at the low end, we'd have to pretty much miss in every market. But I mean, as you referenced, we do pressure test. I mean, the art of forecasting in a market is really the gut feel, which way the winds are blowing, and that's why we kind of check marked San Francisco. I mean, we feel very good about San Francisco. The headlines are positive. We had a strong start to the year, probably our best start in the last 3 or 4 years. So we feel that when you consider all of the variables, that San Francisco has very positive momentum. Relative to our forecast on Southern California, based upon where our properties are located, the general direction of the economy, we feel that it would be more difficult to outperform. But on the other hand, lower risk to underperform. Washington, D.C., for the last 3 or 4 years, it's been pretty much flat revenue growth, and there's uncertainty with the federal government and what the new budgets will look like. That could pressure jobs. I mean, I think 1/4 of all jobs in D.C. are directly related to the federal government. So we see -- when we look at D.C., we see that risk. We see continued elevated supply. And when you look at even the suburbs, even the suburbs in D.C. is stretching far out to Reston and what have you. Those markets are not generating revenue growth as well. So D.C. would probably be more at risk to the downside. And so -- and then New York, it's -- it just comes down to concessions. I mean, we feel very good about what rates will do, what have you. The #1 variable of New York City is, does pricing, remain disciplined and can we manage through these elevated supplies without new deliveries or lease-ups increasing concessions to a point where it creates contagion across the market.

Yes, that's helpful. Can you guys specify where you are in terms of an overall earn-in so far for '18?

You mean embedded growth?

Embedded.

I'm sorry, say that again.

So you're asking about sort of what we thought are embedded growth was beginning the new year?

Yes, that's right.

Okay. So for the portfolio, it's 70 basis points.

It might -- just might describe exactly what that means, David.

Yes. So what we do is really just take the value of the rent roll for the portfolio on 12/31 for the month, annualize that and divide it by full year 2017 at rent roll value. And that generates 70 basis points. So -- but on the assumption that all other income components stay equal, you would generate 70 basis points of revenue growth.

You got another question?

Yes, I do. One separate question on the dividend. So after the prepared comments, just maybe give us a little more color as to the decision there, how increasing the dividend and maybe making the policy a little more flexible compare to other avenues to return shareholder capital, including share repurchases. And then, Mark, I want to fold you into this as well. Can you remind us where EQR is in terms of run rate free cash flow versus the taxable income, dividend requirement and some of those other elements as we think about the calculation? So it's a bit of a multiple question.

Yes, I think it will be best maybe for Mark to answer that question with the statistics, and then I'll talk -- and I'll share with you how the board thought about those as it changed this policy.

All right. Well, let's start with just free cash flow, then talk tax, and then David will interject the policy overlay. So the number to probably start with for 2017 is something around -- or 2018, pardon me, is something around $270 million of cash flow after the dividend, assuming the run rate dividend when we hadn't increased it. We have some additional CapEx spend that we disclosed in the release that uses up $10 million, call it. The incremental dividend is another $25 million use. So now you're down to about $235 million. Then you have development spending of $100 million to $150 million. It's closer to the high end of that range because of the addition of the Boston Garden garage that David Neithercut described in his remarks, which leaves you $80 million to $100 million of excess cash flow that now, in our model, effectively reduces debt. So if you look, you'll see that we're paying down $1.2 billion in debt this year, but we're only issuing $900 million to $1 billion. So that difference is partly a draw in the line of credit, but it's also partly the application of this excess cash, at least in our model and guidance, to repaying debt. In terms of taxable income, we've got plenty of room. We distribute already significantly more than we're required to under the REIT tax rules. So every year, just to give you an approximation, we can sell about $400 million of assets and retain the cash without affecting our dividend policy, meaning without forcing the dividend higher. With that, I'll turn it over to David.

Yes. So with all that in mind, I think we have had conversations on these calls for at least the last year and certainly, conversations with our board for the same time period. Giving everyone the heads up that as our development starts, we're rolling down. That as we were looking forward beginning sort of 2018, that we were looking at elevated levels of sort of uncommitted cash and discussing -- sharing with you all and sharing with our board what our range of opportunities were with respect to that cash. And one of those always was an increased distribution or annual dividend to our shareholders, which has resulted in this new policy. We also did share with the board that in doing so, it didn't preclude us from doing anything else with excess cash. That by doing this, that did not preclude us from buying stock back, did not preclude us from starting some additional development transactions like the deal in Boston that we've talked about or buying other deals or taking down new land. So this is just one way once -- that we're using this excess, and we still have excess capacity to explore any other options we think it's in our best interest to do so.

We'll take our next question from Rich Hill with Morgan Stanley.

So I think there's been a few questions about this. I just want to get a little bit of a better sense of cadence as you think about same-store revenue growth between 1H and 2H. And it seems to me, and I don't want to put words in your mouth, but seems to me maybe still some bumpy roads in the first half with improvement in the second half as we start to get past the supply. Is that fair? And could you give us any more color about that?

It's Mark. I'm going to start, and I think David Santee may end up contributing as well on some of the details. But that isn't quite right. Sort of as we sit here in January, David talked about the embedded growth. We feel pretty comfortable with our level of first quarter growth. And we came into 2018 with pretty good momentum with 2017 and then this relatively good embedded growth that David Santee just mentioned. In light of some of the upcoming supply headwinds and sort of increased move-in and move-out activity that you always see from us in the second and third quarter, we believe that sort of a step-down in our numbers for the remainder of the year is prudent and is what is implied in our guidance. So if you look at the way our quarter-over-quarter revenue numbers moved in 2017, there's likely to be a great deal of parallelism in how those numbers move in 2018. Now if we're able to both hold occupancy and increase rate as the year progresses or utilize fewer concessions, we may very well end up at the upper half of our revenue range. But at this early point of the year, our guidance kind of is our reasonable best view of what can be achieved in the year.

Got it. And so that was sort of my follow-up question. I think there was a question about what would be the low-end of the guidance range. But the top-end of the guidance range might -- I think there's an expectation that pushing supply out in 2017 helped you achieve the upper end of that range. This year, it's going to be really driven by you achieving the top-end of the occupancy range as supply is coming for the most part. Is that fair? And how should we be thinking about it?

No. I mean, this stuff doesn't turn on and turn off. This is a -- supply is out there. We're still dealing with supply delivered last year, and there's sufficient supply now that is -- we're dealing with it. And it doesn't -- there's not a first half and a second half. I mean, we do track when these things open every quarter. But the fact -- the belief out there that somehow our performance this year was a result of new supply sort of being pushed back is just not correct. It's just that the markets performed better than we thought. The teams did a great job. And it's not because, for some reason, there was not as much new supply as we might have thought at the new year. There's sufficient new supply in the marketplace that we're dealing with. But that -- whatever "got pushed back" -- and again, I note that pushing back is the pushing back of the completion, not necessarily the pushing back of the delivery of new product that's competing with us.

We'll move next to you Dennis McGill, Zelman & Associates.

Actually, just clarifying that last statement, David. So when we think about the comment earlier about 2018 supply being pretty similar to 2017, I think at this time last year, you would have had more of an optimistic view that '17 would've been the peak. So as you weigh what's different today versus a year ago as it relates to '18, how much of the higher level of competition in '18 is a reflection of '17 stuff being delayed versus more being in the pipeline than was visible at this time last year.

Yes, again, it's the former, not the latter. I mean, it is just -- and again, I want to just emphasize this notion of delay. When properties are completed, which is how everybody tracks this. All the third-party densities track this. It's by completion, which is when they get their final C of O. That does not mean that they were delayed in opening their own doors. We have -- our own, we had a couple of properties ourselves in San -- one in San Francisco last year and one in Seattle last year that was "delayed" or the completion pushed back. But the opening of the door, the day on which these properties became available for rent was not delayed. It was simply the "completion" that was pushed back for various reasons. We -- on one of them, we didn't get some streetscape work done because of some issues with the city. But the property opened its doors and was available for lease right on time. So I just -- I want to just get away the people thinking about that stuff was delayed, which means it wasn't competitive in 2017. It was competitive even though it was pushed back. As we add up the completions of '17 plus the completions of '18, the total, there really has been no change in our view and the way that we look at competitive product.

Okay. And then similarly, as you talk about the very preliminary look into 2019 and the step-down, is that from the competitive side or from the actual completion side?

The stats we would give you would be on the completion side. We do give you data, it may not be the same footprint as the third-party services, but it is defined the same way as with third-party services. Okay. Because we don't look at, say, New York metropolitan area. We look -- we draw a different boundary and consider that product that we believe would be impactful to our market. But we do track "completions" in the matter in which I described to you as completed and final C of O, which is consistent with the third-party service providers.

Okay. That's helpful. And then second question, just as it relates to the fourth quarter, sorry if I missed these, but do you have the renewal and new lease numbers for the fourth quarter? And then maybe any color you can provide on January thus far as well?

Sure. Renewals for Q4 were 4.6% -- I'm sorry, yes, 4.6%; and then lease-over-lease was minus 4.2%.

Now as David has mentioned several times on these calls, those new lease rates reductions always are sort of wider than on average. Because you're often re-leasing units in the down of the winter versus the up in the summer. And so when people, for whatever, have to come in and term their lease, they leased it at the peak of the season, where we got the highest pricing. They're giving it back to us in the lowest time of the season. So it's not uncommon for that delta to be the widest when it's happening in the wintertime or in the 4th -- or first quarters. And it also does not account for any prepayment penalty or cancellation fees that we might have received.

Right, right. And then let me give you January and February renewal numbers. January closed out at 4.6% on renewals. February, thus far, which is early, and we would expect this number to jump up again another 20 basis points, is 4.4%.

And then new lease on January?

We don't track the new lease numbers on a month-by-month spread basis.

We'll take our next question from Conor Wagner with Green Street Advisors.

David Santee, on the Bay Area, could you break out your expectations by the 3 submarkets there, San Francisco, San Jose and Oakland-East Bay?

Well, let me say this, I mean most of our portfolio is in the Peninsula and South Bay. We have a few assets in the East Bay Berkeley that should do better this year. So really, all -- I mean, most of our assets in downtown San Francisco are still new store. So when you think about same store, it's really the Peninsula, South Bay, which we feel should do very well, as I stated in my comments. So the driver of the full market would be greatly influenced by Peninsula and South Bay.

And then within your Bay Area forecast, what are you thinking about the impact of H1B? And do you have any sense for how many of your residents are H1B holders?

We measured that before. I mean, we really haven't seen any material impact from that. I mean, a lot of the H1Bs were kind of the $60,000, $70,000 a year jobs. I think that we -- employers typically get Social Security numbers, and what have you, for the employees after they move in. So our proxy is really to kind of measure the number of residents that don't have a Social Security number. And that number has been consistent, but we really haven't seen any negative fallout from all the H1B headlines.

And you're not forecasting anything really to change on that this year.

No. I mean, the only thing that's changed really last year was this express approval process. I don't -- I think the actual number of visas really remains unchanged in the big scheme of things. So it's really more about -- I think they kind of all get approved in like the end of Q3 versus companies paying up $15 to $1,000 for this express approval, which I believe that was, well, it was eliminated, the express approval.

And then, David Neithercut, you mentioned on development, 5% to 5.5% return on costs, and the spread that is to cap rates and the bid that you've received on your dispositions. With your stock trading at and above 5% implied cap rate, how attractive is even a small share buyback, given Mark Parrell said you have $400 million in annual capacity to do that.

Not terribly attractive at all at these levels. And as you know by your own math that you've shared with us, that the after taxable gains and being balance sheet neutral, there's just not a lot of capital left after dispositions to make a meaningful impact. And the impact that it has just generally on the enterprise going forward, we don't think it makes sense at these levels. That being said, we have bought stock back in the past, and we won't hesitate to do so in the future. But the levels at which we traded off of NAV today, and this was about the level that we experienced 6 or so months ago, the management team here, Sam, the board, just don't believe that the discount is enough to have it make sense, particularly given the taxable gain that's embedded in the assets that we own today.

And -- so then any use of the free cash flow, even like $100 million buyback doesn't look attractive to you.

I think that, that's an option. With free cash flow, I guess, I was responding more to the notion of selling assets to buy stock back. There's not a lot of capacity there. But from a free cash flow perspective, that is certainly a prospective use of that capital.

And I mean how prospective?

Well, I mean, it's just an option on the table. I mean, we'll act, and we'll let you know when we act. We don't let you know ahead of time. But it's certainly an option that we have with that capital, and as we've said for the last year, remains an option. And as I noted in the response to one of the earlier questions, nothing that we've done with respect to the increased dividend nor the commencement of this deal in Boston has precluded us from having ample cash capacity to do anything else.

And we'll take our next question from Nick Joseph with Citi.

It's Michael Bilerman here with Nick. I'm curious, David, how you feel about sort of the overall private equity and just other money looking at multifamily in a large-scale transaction. To date, a lot of that capital has gone to higher cap rate product, value-add, secondary markets or southern assets, B assets. And pretty much everyone's been playing in that and maybe been able to get the leverage, and you get pretty attractive ROEs. You've got the deal you did with Starwood. In that sale, do you think there's capital for any larger-scale, core-type transaction of the product that you own today?

That's hard to say, Michael. And I guess I'd first add that as you noted in the Starwood transaction, I'm not sure anyone who still exists today has done more in that space than we have with the sale we did to Starwood. Anyone who might have done more doesn't exist as they've gone public to private. But we're a big company, and it's hard to say. Just because Brookfield might be thinking to do something with GGP doesn't mean that same level of capital is available to do large transactions. So I guess, I'd leave that to you and the other sort of pundits to suggest. It's tough for me to say.

Well, I'm just wondering whether you see that core building up in core assets in the markets that you have. Whether there's appetite that you're seeing from capital resources to buy that product. Because most of the capital has been targeted towards higher-yielding product. I just didn't know whether there is any [interest there].

Well, I -- look, I think most of maybe the big capital investments have been, but there has been plenty of one-off capital acquisitions of what we'd consider to be core product. I mean, there are prints every day of core products. It might not be billion -- multibillion dollar transactions of core product, but we think that there's a lot of demand for at least one-off core product that continues to print on a regular basis, showing very strong values and cap rates in the, you know in the 3s and certainly low 4s across our portfolio. Now whether or not that's available in scale, which is your question, I just I can't comment. I just don't know.

And your Chairman's been pretty vocal about his view on equity markets and also selling a lot. And certainly, he's doing that through -- on a real estate basis, through EQC, liquidating a lot of those assets. How does his views sort of translate into your strategy from an asset-recycling perspective and narrowing this above-average discount to your peers as well as above-average discount just to pure NAV?

Well, I guess, if my math is correct, we've sold more in the last couple of years than EQC has. Not as a percentage of the company, obviously, but I think the $6 billion sale we've done in 2016 is more than EQC, and probably worth more than EQC's total valuation. So it may not represent as large a share of the company, but we've been as active as anyone. Look, I...

I'm not insinuating that you haven't done a lot of things. I'm saying that...

No, I appreciate that. I'm not suggesting you insinuate that, but I just think it's important to communicate to everybody else on the call to just kind of put some of these things in perspective. And so I think, Sam, obviously, he's -- has his view. Much of his view of what you hear him talk about on Squawk Box or Bloomberg or whatever is a general view. He has more of his net worth away from real estate than he does in real estate. I mean, it's just more of a sort of a general view. And obviously, I have conversations with him more specifically with respect to Equity Residential. And I can tell you that Sam is not concerned at all about a discount to NAV. He's suggesting to us, after having done the dispositions we did a couple of years ago, in his understanding about the arithmetic relative to buying stock back at the current discount, which we believe is insufficient, Sam says go run your business. He plans on being around for a long time and encourages us to kind of run our business without regard to where the stock price is. That being said, if the discount widens, we'll begin to maybe, perhaps need to have a different conversation. But right now, it's go run your business.

The last question's in terms of capital. You talked a little bit about the equity side of the house and unsure whether there's large pockets of sovereign or private equity that would be willing to take down large-scale portfolios versus single assets. I'm curious what your views on the lending market. I mean, Fannie and Freddie certainly bumping up to over 50% of the multifamily lending market last year. And whether you think there's appetite and what you're seeing sort of on the mortgage side to fund core-type deals.

Michael, it's Mark. Fannie and Freddie, as you said, have just been extremely active. We anticipate them being extremely active in 2018. They have a slight preference probably, and their pricing reflects it, for certain types of affordable product. But they're certainly a very significant lender on our kind of product as well, and I think they're able to do things in size. I would caution, however, that their ability just really for political reasons to do very large loans on very visible transactions is something I can't -- I've not discussed, and I can't underwrite or explain. I mean, their ability to just finance our product in the ordinary course, I think is unfettered. We have very little secured debt now, especially by the end of this year. So we've got plenty of room with them, and I think others do, too. But to do very, very large loans that I think you're talking about is both an underwriting decision, and in their case, due to conservatorship a political decision. And that, I can't give you any opinion.

Well, but -- that's true, but we'll just sort of add. There's not been a transaction in the multi space of public to private that was not significantly financed by those agencies. Now again, to your point, Michael, that was smaller sizes, but they played a very significant role in, I think, in every public to private event that we've seen in our space. Now again, there's political issues. That doesn't mean it will continue. But they have played that role.

We'll go next to Rob Stevenson with Janney.

Just a couple of questions left. In terms of the $0.04 negative impact in the first quarter on a sequential basis from same store, can you talk about whether or not that's more revenue or expense driven? And what markets are predominantly driving that as well?

It's Mark. It's really about some real estate tax refunds that we got that I sort of alluded to in my remarks in the fourth quarter. So that just meant that the usual decline we have between the first quarter and the fourth was a couple pennies larger. Rob, it really was just those couple of large refunds running through the system in Q4, increasing FFO in that quarter and just making it look like that difference was larger instead of sort of that being spread out probably in '18. It just kind of moved forward a bit.

Okay. And then, Mark, can you help me understand the -- what the next couple of years on the New York tax abatement stuff looks like? I mean, you guys have a lot of assets in the city. I mean, is it just a constant roll of those programs down to over the next couple of years? Or does the pig go through the python at some point in time, and you get back to a more -- you sort of normalize the tax abatement stuff in your same-store expenses and your same-store property taxes?

I think it's completely fair to assume there's 150 basis points to 200 basis points for the medium-term of growth in our number due to New York 421-a burn off. There isn't a particular year, Rob, that's -- it all ends in the next year, and it's all done. It does go on for some number of years. But I also want to add a remark. It's sort of like prepaying a loan. Every year, you get closer to the end of the loan maturity, the prepayment penalty goes down. Every year we get closer to the end of the 421-a period the cap rate on these assets declines. So NAV is being created because they trade, as these assets get stabilized, at a lower cap rate. But in the meantime, you do feel it through the P&L in property tax expense.

All right. And then last one for me. Any update on the relationship with Airbnb? And how that's progressing relative to expectations?

Sure. This is David Santee. We completed the rollout of additional pilots on the 18 properties in Q4 -- I'm sorry, 14 buildings in Q4. And there's not a lot of activity in Q4 as a lot -- most of these buildings that we put on this portfolio were more corporate housing, company-type properties that typically will Airbnb some vacancies. And that's why we selected these -- the specific group of buildings. So it's more about just getting visibility into what these companies are doing. And I don't think there's been any surprises, but it's doing exactly what we thought it would do, which is give us transparency into the entire process.

We'll go next to John Kim with BMO Capital Markets.

David, 4 of your 6 core markets are finalists for the Amazon HQ2. I was wondering if -- what your thoughts we are on which market, if it were announced the winner, would be the best for your company.

Would be the best for the company?

Would benefit you the most.

Well, I suppose that market in which we've got the highest allocation of capital deployed. I think everybody is having a great deal of fun trying to figure this out. We think the D.C. market identifies 3 sort of submarkets within D.C. We think that there's a possibility there. That would certainly be good for that marketplace. It would be good for any market. But certainly, it would be most beneficial in those markets in which we have the most NOI coming out.

Okay. And then the second question is, on your on same-store rental rates, it declined a little bit this quarter to $27.20. I was wondering if in your 2018 guidance, if that contemplates an increase in rates?

The average rent. Well, so for full year, when you look at [2 5] -- when you smooth out the leases on renewals and new lease expectations, it doesn't show much growth.

The $27.20 is the GAAP number. Is that effective rental rate?

Is that the number from the press release.

I'm sorry, you're on $27.20 for the fourth quarter.

Yes. Sorry, this is Page 11 of your supplemental.

Yes, I mean it customarily goes down in the 4. It's not a stunning thing for it to decline in the fourth quarter a little bit. I mean, it's not as transaction intensive a quarter. I mean, David's given some of the parameters about renewals and new lease rates and the rest. And I think that what you're going to see in new lease rates there on average rental rate is it'll go up, but only very modestly.

Yes, and we talked a little bit about how -- previously about how lease-over-lease rent, that delta is the widest during this time of year when we're often re-leasing units that had been leased previously during the best time of the year, meaning the summer, due to lease cancellations or for whatever reason. And those numbers, again, as I noted, don't include the breakage costs that we receive from the person walking out. So it's -- the delta, well, yes, lease to lease, but that's not the full economic impact of the company because of the lease breakage costs that we recover.

And just to add, John, I mean, it went down in 2016. I mean, this is not, like I said, an uncommon thing to have to happen. So I wouldn't take it as a read through as to anything that this year, in '18, is particularly ominous. It's just sort of the way the fourth quarter compared to the third sequentially often play out.

We'll move next to John Guinee with Stifel.

John Guinee here. Let me just focus on 2 things. First, operating expenses. You mentioned real estate taxes, 4% to 5% to 6%; utilities, 3% to 4%; personnel, 5%. And, we fully expect personal to continue to go up at least 5% annually. They do a great job, deserve it. Do you think we should be thinking that real estate taxes and utilities are all going to go up at these sort of levels for the next 3 or 5 years? Or is this a onetime aberration?

Thanks for that question, John. It's Mark. And I think David Santee will also contribute to this answer. But on payroll, just to give you a little background, certainly, a lot of that is the very deserving pay raises to our on-site personnel. But a portion of these estimates we've given you reflect our estimates, and it's very difficult to estimate this, of changes in our medical insurance reserves. Like most employers, health care costs are very significant to us, and we're effectively self-insured. And so large claims, which are lumpy, can really move our numbers. So we made an estimate of that in there, and we had a good experience towards the end of '17, and you saw our payroll number decline. And depending on how that goes, that can move that number a lot. So I don't know that 5% is actually a terrific run rate going forward. I think it's probably a good estimate for this year because of, in part, these medical costs as well as these pay increases. On utilities, I think our estimate at 3% to 4%. We hope to be near the lower end of that range, but it's more based on just having terrific results over the past 3 years where we were negative in 2 years and up 2%, and seeing some increases in trash in Los Angeles and a few small things. David Santee and his team do a lot of prepurchases and hedging of utility costs, and that's been very effective. So I don't think you should think of utilities as a run rate 3% to 4% necessarily. It could be lower. And finally, on real estate taxes, the big 2 things that we were trying to handicap this year -- because the 421-a stuff is understood, is in New Jersey, there's submarkets that we're in that are having their first reassessment in a generation. It's very hard for us to guess how that'll turn out. We may have been too cautious. In which case, our number's too high, or we may not have been. We also have to take some guesses as to how many of our appeals are successful. We're good at that. We pay a lot of attention. We've had some success of late. We hope for more. Depending how that goes, you could see that number decline as well from the range I gave you in the script. So a little bit of color for you. But for your run rate, I'm not sure 5% is the right number for payroll. That's probably the one comment I'd give you.

U.

Then the second question, merchant builders, as you know, are about 95%, 98% of all development starts. The REIT crowd is relatively insignificant. And they've been -- they used to underwrite to 100 and 150 basis point spread, and they were getting 200 basis points spread and creating a lot of value. Do you see any signs that the merchant builders are closing up shop, laying off people? Or do you see any signs that equity investors are just shutting down their interest in multifamily? Or do you expect maybe these spreads just to come down and the merchant builders may be building to a 50 to 100 basis point spread instead of 100 plus?

Well, I guess, I'd say, perhaps all of the above. There are certainly, we believe, equity capital that is now sitting on the sidelines because of the sort of shrinking deals. And we do believe that there are some lesser, well-capitalized merchant builders that might have to be forced to the sidelines. At the same time, there are certainly well-capitalized, experienced folks that continue to have access to capital. And they may not be building at lesser yields. They just need -- may be building different product in different locations or different submarkets or further away from their urban core. So I think it's a little bit of everything.

We'll go next to Alex Goldfarb with Sandler O'Neill.

I'll try to be quick with my 2 questions. First, David, assuming that Amazon doesn't pick the D.C. area for HQ2, you guys have almost 20% of NOI there, and yet that market just continues to produce a huge amount of supply every year. And the job outlook that you provided, based on the government hiring, doesn't sound so great. So if Amazon doesn't pick there, would you guys consider paring some of your exposure in that market?

Well, sure. I mean, we'll consider paring in every market, Alex. But what you say is true. We've got a big exposure in D.C. That market has really underperformed and we believe will continue to underperform, given what we see hiring in the government as well as our outlook for new supply. And those are one of those markets that we think will not see a reduction in new supply come 2019. So it's certainly a market that we believe is going -- will continue to be under pressure. All that being said, there are trades being printed in that marketplace that continue to support valuations. So while that the top lines and bottom lines might not be growing, we've not seen any real diminution in sort of -- in valuations. And I guess I'll say also that these tides turn. We saw phenomenal results in D.C. coming out of the Great Recession. And my guess is D.C. has been, over the long term, a fantastic apartment market. We don't think it will be anything other than a fantastic apartment market. But that doesn't mean it doesn't have periods of time in which it doesn't do well. So we've got great assets in the district, and we think, again, as more and more demand for people wanting to live in the district or in the close in, sort of walkable communities in which we've got assets in Alexandria and Silver Springs and Bethesda, et cetera, we think that market will do okay. But we do acknowledge that it's going to underperform, at least in terms of revenue growth, for the next several years.

And we did, just to remind you, Alex, we did sell a fair amount of D.C as part of the Starwood transaction. And where assets packaged up, most of them are further out, suburban stuff that we got rid of as part of that deal as well.

Okay. That's helpful. And then the second question for David Santee. You talked about the revenue trend expectations for the year. But as far as pricing power, do you foresee that you'll have your normal peak leasing season pricing power? Or is there a concern that just given how the markets are shaking out, that you may not be able to fully push as much as you would normally would like as you head into the peak later this spring?

Well, I think the lease-over-lease numbers that I gave you on a market-by-market are indicative of the curve that we expect in each market. But nevertheless, there will be a curve, and the shape of that curve is going to be a little bit different in each market. So yes, we expect peak pricing in the, call it, April through August periods. And to what levels those rise will determine the outcome of our full year revenue growth.

So if I may add on that, Alex, for just a moment. Certainly, pricing power is the issue that we have, but demand is not the issue. Occupancies remain very, very strong. So this is just not a function of attracting traffic. It's just how much pricing power will we have, and we're seeing less today, obviously, than we did in the 5 or 6 years immediately following the Great Recession.

We'll go next to Tayo Okusanya with Jefferies.

Just 2 quick ones for me. The first one, in the markets where you are seeing increasing supply, could you talk a little bit about just how the local developers or the merchant builders are behaving in regards to lease-up? How aggressive they're getting with pricing concessions? And is there any concern, even in the first quarter, that you guys may have to kind of compete at that level if they get irrational, like they did a year ago?

Well, as we see the markets today, we believe that they have been, very similarly to 2017, acting quite rational. I think as David Santee said in his prepared remarks and in responses to some previous questions, Tayo, that could change, particularly in New York. But we believe that developers are offering the normal sort of levels of concession they offer in order to stimulate lease-ups. But we're not seeing anything that we would believe would be concern for us today. But we remain very cautious about New York and how that might change. But as I noted earlier, the fact that rents haven't moved much since these deals started, we believe, gives them very, very little cushion on the ultimate net effective lease rates they need to achieve to meet their expectations for their investors and to meet their expectations for their refinance amounts.

Very helpful. And then my last question. Just to confirm, in 2018, you do not forecast or have any development starts in your guidance?

I did. I noted that we expect this summer to begin the demolition of our property in Boston. And to begin, that demolition of that old garage is going to be the start of that process. It does not require a great deal of capital this year, but we will begin -- our expectation's we will begin construction on that project this year.

There's no questions remaining. I'd like to turn the call back to management for additional comments or closing remarks.

Great. Well, we've been at it awhile, and I appreciate your patience, and look forward to seeing everybody around the [Seasons]. So thank you very much for your attention today.

Thank you, sir. That does conclude our call for today. Thank you for participating. You may disconnect at this time.