住宅地產 (EQR) 2018 Q1 法說會逐字稿

Good day, and welcome to the Equity Residential First Quarter 2018 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Marty McKenna. Please go ahead.

Good morning and thank you for joining us to discuss Equity Residential's first quarter 2018 operating results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Michael Manelis, who'll take over from David on July 1 as COO. Mark Parrell, our Chief Financial Officer, is here as well for the Q&A.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

And now I'll turn it over to David Neithercut.

Thanks, Marty. Good morning, everyone, and thank you for joining us for today's conference call. As announced last night, the first quarter came in pretty much in line with our expectations. Thanks to occupancy levels it remained quite high. Another quarter of very strong retention and having achieved very impressive renewal rates during the quarter.

All of this, despite significant new supply across most of our markets. Now this performance is a result of the relentless focus on our prospects, residents and properties by our property management and operational teams and everyone across our enterprise that supports those teams. Because notwithstanding, very deep and resilient demand for apartment living in our urban and highly walkable suburban markets, we're facing peak new deliveries in many of our markets this year, which means it is a very competitive marketplace for new prospective residents, and our existing residents have a lot of options from which to choose when their lease with us comes up for renewal.

So I cannot emphasize enough the benefits realized from the remarkable customer service delivered each and every day by our dedicated teams across the country.

Now as far as long as I can remember, these efforts have been led in part by our Chief Operating Officer, David Santee, who as most of you know, is stepping down as our COO on July 1 and will retire from Equity at the end of the year.

Since joining the company 23 years ago, David has had a profound impact on all aspects of EQR and it is hard to imagine the company without him. But among a long list of David's accomplishments is the fact that Michael Manelis is ready to step into his role and move us forward without missing a beat.

Now everyone will miss David, and I can tell you it sure as hell won't be the same without him. But thanks to the work he has done in planning for this event, we will carry on and only get better from here.

So I'm happy now to turn the call over to David for what could be his final quarterly earnings call, the preparation for which I know will be one of the things he will miss most when he is gone.

Okay. Thank you, David. Our reported Q1 results leave us very well positioned as we enter the early stages of our peak leasing season. With elevated deliveries across all of our markets, we are pleased with how the quarter played out. Revenue growth of 2.2% was a result of achieving our goals for both rate growth and improved occupancy. Renewal rates achieved for the quarter were 4.6%, which is equal to or better than 2017 quarterly results.

Our turnover increased 20 basis points year-over-year. Q1 of '17 was one of our -- one of the best in our history, creating a very tough comp. Most of our markets were almost flat or down with most of the increased turnover occurring in Seattle.

Move outs to buy a home continues to be a nonevent, declining to 11.2% of move out from the 12.5% in Q1 of '17. While we've had a good quarter on the books, we know that this leasing season we'll see more new deliveries than in years passed. And like last year, we know that it is critically important that every team member at every community knows our operating strategy and the role that they play in renewing and retaining both residents and employees.

Next week, I'll join our senior property management leaders to meet with every employee and every market, to cement our strategy, communicate our support and learn how we can continue to be faster and better in a very competitive environment.

Now before I pass it over to Michael for his market commentary, I'd like to take a minute to first thank all of you in the investment community for your support and belief in Equity Residential, more importantly, me. It's been one hell of a ride. We all have our own expectations of ourselves in our careers and I feel lucky and blessed to have been COO of the best public multifamily company in the world.

And to all my friends and family at Equity Residential, both past and present, I've always been humbled by your passion and commitment to our company and extremely grateful to the tremendous support that you have given me over the past 23 years.

It's been fast at times, it's been furious at times, but it has always been fun. Now many of you on the phone have met Michael over the years, and he and I have spent the last 18 months planning for today. I know I speak for many when I say congratulations and tell you how excited and confident we are in you taking us forward. Michael?

Thank you, David. So you have been an outstanding teacher, boss and friend for the past 18 years. I'm very excited by the opportunity to be this great company's next Chief Operating Officer, and I truly appreciate all that you have done to prepare me for this role.

So now onto the market. So let's start with Boston. Boston's residential portfolio performed as expected with occupancy at 95.5% for the quarter and renewals at 4.5%. Our reported first quarter revenue modestly benefited from strong parking garage income. As we moved into March, demand in occupancy were improving in every submarket. This gave us the confidence to start pushing rate in advance of the peak leasing season, but with 61% of the new deliveries being in the city of Boston and Cambridge, where we have 72% of our NOI, we will be watching our occupancy closely.

Fortunately, job growth remains strong and continues to support the absorption of new products being delivered. Boston with its well-educated workforce continues to attract large corporate expansions and relocations, especially into the Kendall Square and Seaport areas. Reebok recently stated that they already have 750 employees working at their new Seaport location and recent announcements for MassMutual and Amazon will continue this trend.

As of this morning, I could tell you we are positioned exactly where we want to be in Boston. Our base rents are up 50 basis points year-over-year compared to the same week last year, and our occupancy is 96.7%, which is up 40 basis points over the same period last year.

Renewal performance remains strong with expected achieved increases for April at 4% and May at 4.2%.

On to New York, which has been the focus of many conversations, given the elevated supply in 2018. Overall, pricing remains disciplined. Our operating metrics were slightly better than we expected with occupancy at 96.0%, renewals up 2.9% and our use of concessions being lower than we expected for the quarter. In a market with elevated supply, it should be no surprise that you read a lot of headlines about increased concession use. We remain focused on competitive net effective pricing, and the use of concessions at our stabilized assets is very targeted and primarily used as a marketing tool for a given unit type or even a specific unit.

With yield management in place, the introduction of a concession does not always equate to an exact reduction in net effective price.

During the first quarter, 20% to 30% of our weekly applications received some form of concession. This is compared to a similar percent of applications receiving concessions in Q1 of '17. Today, our occupancy in New York is 96.7%, which is 60 basis points better than the same week last year. Base rents are flat and for the past several weeks, we have issued concessions for less than 10% of our new applications. Renewals remain strong with 2.5% expected for both April and May against quotes that were just a little bit over 5%. Bottom line is that we are well positioned as we enter the peak leasing season where the majority of our transactions will occur.

New York employment is at an all-time high and we continue to hear stories about companies revving up hiring and increasing compensation. We're going to continue to balance rate and occupancy and strategically utilize concessions only where needed. Our position today is better than what we anticipated when we gave guidance, but we are still early in the year and have 2 of the largest quarters of deliveries coming at us. The results for the next 90 days will have a significant impact on the full year revenue performance, and our local team is highly engaged and ready to perform in this leasing season.

So moving to D.C. The main headline for D.C. is absorption, and we are off to a promising start. D.C.'s apartment market has absorbed more Class A units over the last 12 months than any time in its history. The positive economic conditions have helped maintain Class A absorption at a pace well above its historical average. However, the elevated level of new supply continues to have a moderating effect on rent growth. Our first quarter revenue growth was consistent with our expectations. Occupancy was 96.1%, which was 20 basis points higher than Q1 of '17 and renewals were up 4.0%. Today, our occupancy in D.C. is 96.4%, which is 70 basis points higher than the same week last year.

Building up the occupancy in advance of the leasing season was absolutely part of our operating strategy and has allowed us to maintain growth for our ninth consecutive week in a row. Today, our base rents are 80 basis points higher than they were the same week last year. We achieved -- we expect to achieve a 4.1% increase on renewals in April and are trending to a 4.0 increase in May. Again, this is a market where we are well positioned, but we are still early in the leasing season and have consistent levels of new supply at almost 3,000 units per quarter coming at us.

Moving over to the West Coast. Overall, the first quarter revenue results in Seattle were as expected. On our last call, we told you that we experienced moderation in the fourth quarter of '17 and expected that moderation to continue into 2018 and it has. Occupancy for the first quarter was 95.7%, which is 10 basis points less than Q1 of '17 and renewals averaged 5.7%.

While it's still early in the season, our ability to grow rate is somewhat less than we expected. The good news is the vibrancy of the job market in Seattle remains strong. Amazon continues to show strength and the initial pause from the HQ2 [heads] announcement last year is definitely in the past as today we see over 5,400 open Seattle positions on their website.

Today, our occupancy in Seattle is 95.9%, which continues to be about 10 basis points less than last year, and our base rents are down 1.6% as compared to the same week last year. We expect our renewals for April to be 5.8% and May is trending towards 5.6%.

Demand remains strong and the current moderation of pricing power is something that we will continue to keep a close eye on as we move through the leasing season.

Moving down to San Francisco. We said on the earnings call in January that this is the market that has the most potential to outperform our same-store revenue growth expectation for the year, and we still believe that to be the case.

We continue to see positive news about employment growth and announcements of new job creation. The tech giants expansion continues unabated and the venture capital spending is on the rise with $6.4 billion being placed in Q1, which was up 23% from Q4 of '17.

Our Q1 results in San Francisco were better than expected, primarily driven by our ability to grow occupancy early to gain modest pricing power in advance of the leasing season. We averaged 96.4% occupancy for the quarter, which was 60 basis points better than Q1 of '17. Renewals were up 4.2%. The Peninsula and South Bay are performing the best. South Bay is benefiting from a lull in new supply as that submarket is back-half loaded with deliveries.

To date, we are 96% occupied in San Francisco, which is 30 basis points better than the same week last year, and our base rents are up 3.9% versus last year. This week will mark the eighth consecutive week of incremental increases to our base rents. Our renewals for April are up 5.5%, and we expect May to be up 5.3%.

Trends all seem positive, but it is still early and I look forward to adding additional color on this market in the July earnings call.

As we discussed on prior calls, Los Angeles is a market with significant increase in supply. And while it's a large geographic area, almost 60% of this new supply will be concentrated in the downtown metro area where we have 18% of our NOI.

Employment growth is diverse and remains strong. Jobs related to online content creation continue to ramp up with Netflix, Apple and Amazon making investments into the area from Hollywood to Culver City. This along with continued strength and expansion of Silicon Beach are aiding in the absorption of the new supply, but we know that the volume of new supply may become a pressure point against our pricing power in 2018.

Embedded on our L.A. guidance was a strategy of increasing the occupancy early to position us for raised rates beginning in March. For the quarter, we had 96.1% occupancy, which was 40 basis points higher than Q1 of '17 and renewals were up 5.6%.

Overall, our results were marginally better than expected, but we are still early in the season and the ability to maintain pricing power will be challenged.

Our occupancy in L.A. today is 95.9%, which is 30 basis points better than the same week last year. Our base rents are up 4.6% year-over-year and we expect a 5.9% increase on renewals in April and are trending to 6.1% for May.

Moving to Orange County. First quarter results were in line with expectations. Occupancy for the quarter was 96.2%, which was 10 basis points higher than Q1 of '17, and renewals were at 6.3%. Today, we are experiencing price -- pressure on pricing and occupancy at a level greater than we expected for April, and it's being created from the lease-ups in the Irvine area. Our occupancy is 95.5%, which is 80 basis points lower than the same week last year. Our base rents are up 1.7% and our renewals are up just over 5% for both April and May. Demand remains strong and this trend does have a potential to recover through the leasing season.

And last, but not least, San Diego. Our results for the quarter were slightly less than expected, almost entirely due to the occupancy of 95.8%, which was 30 basis points lower than last year. Renewals in the quarter were up 5.7%. Military spending remains strong in the area, but we are also facing several lease-ups in the downtown area. Qualcomm, San Diego's seventh largest employer, also just announced that they will be cutting just over 1,200 jobs in the market. And while this news is a negative for the market, a quick search of our residents would suggest the impact to our portfolio would be minimal.

Today, our San Diego occupancy is 96.2%, which is 30 basis points higher than the same week last year. Our base rents are up 3.9% and renewals for April are at 6% and May is trending towards 6.2%.

So to summarize all of this, sitting here today, we continue to see strong demand, and we are well positioned for the leasing season. We have New York and San Francisco trending modestly ahead, the add-on Orange County a bit behind and the rest of the markets on track and performing as expected.

In closing, I want to give a quick shout-out for the entire Equity team. Their excitement and readiness for this leasing season is felt throughout the entire organization. Their ability to deliver remarkable experiences to our residents is evident through our strong renewal results and the tens of thousands of survey results received. Renewing our residents in the phase of elevated supply remains the team's #1 goal. A sincere thank you to each of you for the work that you do each and every day.

Thank you. David?

All right. Thanks, Michael. Angela, we'll open the call to Q&A now, please.

(Operator Instructions) We'll go ahead with our first question from Juan Sanabria of Bank of America.

Just on the same-store revenues. What's the expected trajectory from here throughout the rest of '18? Do you still see a decline in the second and third quarter mainly due to supply? And when do you think same-store revenue growth on a year-over-year basis will stabilize?

Juan, it's Mark Parrell. So the answer to that really depends on the how the leasing season goes. And as Michael Manelis and David Santee just said, we're well positioned going into the leasing season. So we would hope that our quarter-over-quarter number for the second quarter would be just modestly lower than the number we just reported and then the rest of the year to be approximately equivalent, again, if we have a good leasing season. If the leasing season is less strong, then the numbers will decline towards the back half of the year quarter-over-quarter.

Okay. And then that decline is -- the quarter-over-quarter decline that you are you saying is on the year-over-year numbers, '18 versus '17?

Yes.

Okay, got you. And then just on the upside and downside risk for the '18 same-store revenue numbers. Where is that risk? Is it concessions in New York? Or what's -- or the Long Island City and in Brooklyn supply? If you could speak to that. Or what represents the downside risk from here to the numbers what would have to happen?

This is Michael. So I guess I would tell you that just based on the commentary, I mean, we have markets with elevated supply coming at us, and we're entering in the peak leasing season in the position where we want to be. But our risk, clearly, I mean, we denoted that, I think, on the last call is New York. We also have L.A., which has elevated supply. And while it's doing well in the absorption and we're positioned well, those are markets as we go through the peak leasing season that are going to have a lot of weight on our full year performance.

Okay. And is -- how is New York, Manhattan being insulated -- if it is, from supply in Long Island City and Brooklyn?

Yes. So, again, we kind of look at this in a couple of different ways. So we know the elevated supply is concentrated with 11,000 of the 19,000 units being in Brooklyn and Long Island City. And as we think about kind of that performance, we're looking at former residents, the forwarding addresses they give us. And I think that to date, we have not seen the impact from Long Island City supply. We did a trailing 12-month view back in February and at that time, we had less than 1% of our move outs, providing us the forwarding address in Long Island City, and we just updated that from a year-to-date basis. That trend has continued with less than 1% of our move outs having that address. So to date, I would say the absorption in both Brooklyn and Long Island City is better than what we expected, and it is not impacting the performance in Manhattan. And even in our Brooklyn portfolio, sitting here today for the quarter, we are better positioned than what we would have thought, given the amount of elevated supply that we are facing.

Your next question comes from Nick Yulico of UBS.

David Neithercut, I guess question on supply in 2019. I think you and a lot of others in the industry have pointed to supply trailing off in '19 at some point in terms of deliveries. Other data providers are showing that as well. However, we got some census bureau data at the national level that showed supply permits and starts for multifamily still being a bit high last week. So I guess how are you thinking about that latest data that came out? Does it pose some risk on the supply picture still being elevated through 2019?

Well, I think that data you're referring to, Nick, is national data and the data we give you is that which we see very specifically not just in our own markets, but in the footprints that we believe are going to compete with our assets. So nothing has changed from our perspective with respect to supply reducing generally, significantly in some markets like New York, but generally across our footprint notwithstanding what may be happening across the entire country.

Okay. And then just a question on capital use as I think you had recently or in a process of having your annual board meeting where you talk about where you think NAV is for the stock and how that would dictate your capital strategies. And so, I guess, latest thoughts on how you're thinking about as some of the development pipeline has really slowed and spending has slowed as well. Your use of the excess free cash flow there, whether it goes to greater dividend growth, stock buyback, other uses. How should we think about your order of priorities right now?

Well, let me first state that does not -- that's not an annual conversation, it's a quarterly conversation with respect to deployment of capital. And we did, in fact, have that in our most recent meeting in March and Mark went through just the cash flow. And as you note, the fact that our cash flow allocated to development is coming down considerably, which does create some more optionality with respect to where to invest that. And we have taken them through those choices and feel those conversations are ongoing. Nothing has changed at the present time. I think that, as I've shared with the investment community on this call many times over the last year or so, we're certainly aware of where we trade relative to what the Street thinks and what we think our NAV is. We have bought stock back in the past. We won't hesitate to do so in the future, but just our belief of where kind of that discount needs to be relative to many others is just a wider discount. So we would continue to have 13 million shares available under our announced plan. And at the appropriate time, we won't hesitate to take advantage of that.

And I guess just following up lastly on that is, I mean, do you think at some point of -- if the stocks had a discount NAV, I mean, do you think about selling even more to capitalize on what seems like a still a strong pricing in the private market versus where the stock is trading? And then also do you think about looking at perhaps some of the newer developments you delivered where you don't have as much of a tax gain to deal with and so perhaps that could be more attractive to sell some of the developments you delivered in New York City over the last several years, for example?

Nick, it's Mark. I appreciate you starting by noting that assets we've owned implicitly on for a while, have a great deal of tax gain. In fact, the $300 million or so we sold in the first quarter has about $210 million of gain. So just to give you a sense of when you own assets, you buy right. You hold them for a while, you do a quite a bit of gain in them as well as our frequent use of 1031 exchanges. In terms of selling newer assets , whether it's New York or San Francisco, I mean, those assets we think are the ones that will drive long-term growth for the company and its shareholders. We feel to some extent that you're selling your seed corn, which suggests to you that if we sell these better assets in bulk, that, that would affect our multiple at some point as well. So again, it's not something, as David said, the board or the management team is unwilling to do, but it just isn't costless either to sell even the newer assets that have less gain in them.

Yes, I guess the only thing to add to that, Nick, is that the development that we've done coming out of the Great Recession has been extraordinarily profitable. And notwithstanding the fact that it's brand-new, we've made a lot of money on those and there's a lot of built-in gain in those assets as well.

Your next question comes from John Pawlowski from Green Street Advisors.

Mark, I think last call, you mentioned that the 421a burnoff in New York City was going to increase 18 same-store expenses by 170 bps. Could you just give us an update on what inning we're in, in that burnoff of across your portfolio? And will that impact grow, moderate or stay pretty consistent over the next couple of years?

John, thanks for the question. Just to clarify, the 1.7 percentage points of impact is to real estate tax number, not to overall same-store expense growth. So just to give you a sense of that. That outcome will persist for a while. We have about 1.7 to 1.8 percentage points for the next 3, 4-plus years in terms of these abatements burning off. Again, as I noted in the prior call, every increase in that abatement does certainly hurt us on same-store expense growth, but the assets become more valuable, the cap rate declines. So it's like you're paying off an expensive loan of sorts. So you're creating value in these assets, it's not just as visible through the P&L.

Understood. And then moving on to the Boston development right across the street in TD Garden. Is that slated to still start this summer? And then could you, if it is, could you just remind us late 2021 delivery, I think you mentioned a low 6% stabilized yield. What kind of rent and construction cost growth rates are you underwriting between now and then?

The -- you're correct on all that, John. And we're in the process of starting that. It will likely -- I would expect that to be on the development schedule on our second quarter call, so we're now in the process of preparing the site, the demolition, the garage. So we are full scheme ahead on the second quarter. So that is a $410 million or so project. It is a -- we do expect it to be delivered in late 2021. And as you note, it is currently a low 6 or so -- low 6% yield. The construction costs are also sort of bought in, so we're not facing any meaningful or a lot of risk with respect to the construction costs. And -- so I don't have that at my fingertips what we might be projecting for revenue growth there. We feel very good about the market, as Michael said, in his opening remarks, but we're quite comfortable with that low 6 number.

Okay. And then I know you've been working on the deal for the better part of a decade. So that could fall in construction costs a fully loaded number that contemplates all the legwork that's going on into the deal?

That contemplates all the capitalized costs that we've incurred during that time frame. Yes, if that's your question.

And your next question comes from Nick Joseph from Citi.

David, I guess you are active in the first quarter in terms of acquisitions and dispositions. Just wondering if you've seen any change either in cap rates or buyer interest across multifamily?

No, Nick. We continue to see a great deal of demand for the product. We are willing to sell as well as for the product that we'd be willing to buy. There may not be as many bidders, but there's certainly sufficient number of bidders to continue to validate the pricing and the valuations that we have been looking at for quite some time.

So guidance assumes 50 bps spread between the acquisition and disposition yield and those actually inverted, I think, 20 BPS the other way in the first quarter. Was that something unique to the assets that you sold relative to what you're expected to sell the remainder of the year?

Yes, we sold a deal in the Upper East side of Manhattan at a sub-3 cap rate, which had a big impact on the weighted average cap rate for all the dispositions for the quarter.

And just finally on the San Francisco development that delivered. You increased the cost by about $20 million for amenity and apartment improvements. Just wanted to get your thoughts on why you did that and what the additional benefit of kind of increasing the scale of that was?

Well, we just felt that putting the hard surface flooring and upgrading the kitchen cabinets, doing the countertops rather. I think stepping up the overall quality of some of the amenities all made sense. We continue to have some costs relative to the late addition of air conditioning into that property. So they were all things that we felt made a great deal of sense for that property, just given what pricing is there today.

Your next question comes from Rich Hightower of Evercore ISI.

First, really quickly just congrats to David Santee on a long successful career at EQR. I just wanted to bring that up. It's been a real pleasure working with you. So onto the Q&A here. Really quickly within the embedded guidance for the year. Where do new and renewal rents factor into the guidance range? What are you assuming for those metrics?

So for the full year, for the portfolio, the new lease changed. Guidance was at negative 60 basis points. Renewals were up 4.2%.

Okay. Perfect. And then just back to the question on discount to NAV and share repurchases. So coming out of the fourth quarter earnings call and then coming out of the city conference, the stock was much lower than where it is today. I think the commentary was a little more forceful in terms of the discount to NAV. There was a board meeting coming up. If you don't mind, give us a little sense of maybe, if any, thinking at the board level changed from one time period to the other in the fact that no shares were repurchased in the interim period. Just help us understand the thinking there.

I don't think there was any change in thinking, Rich. Look, the board, I think, very appropriately looks at capital. Equity capital is very precious resource. And while it understands the arithmetic, just believes, again, that we've done it in the past, and I think what we did in some of the stock we bought back at all 10-plus years ago we're buying at 30% and 40% discounts to a replacement cost. That one only gets limited opportunities as we talk about limited bites -- sort of bites at this Apple, and we just felt like it was not appropriate at this time. I don't want for a minute to have anyone believe that we're unwilling to. I'm not sure anybody has bought more stock back than we have over the history of the company. As you know, we returned a great deal of capital back to our shareholders in the big disposition strategy that we undertook in 2016. So these are -- it's just -- there's not an unwillingness on our part. It's just a belief that discount needs to be greater than what it is today.

Your next question comes from Rich Hill of Morgan Stanley.

I'm sorry if you've disclosed this previously, but could you refresh on what your rent income ratios are across your portfolio?

Yes, we can. That number has been fairly consistent, David?

Yes, I mean, over the years, we've always used kind of the same multipliers, so the percentages don't necessarily change. We -- over the past 2 years, the most notable change that we've seen was in Seattle where rents have grown, but the absolute level of rents have been lower. But you've seen this influx of high-paying tech jobs. So over the past 2 or 3 years, Seattle has kind of come down and mirrors New York City, which is our lowest at 17% of rent to income. Everything else is kind of in the 20s and we're at 22% rent to income today. And that is low 20% -- that's been pretty consistent for quite some time in that low 20s, given the portfolio we have today.

Got it. And so when I hear those numbers, I don't see any issue with continuing to pressure -- to push rents. You would agree with that?

Well, not from an income standpoint. From a supply standpoint, but not from an income standpoint, no.

Got it. And then one more question on the job front. You guys have a really great chart, I guess, on Page 27 of one of your recent decks illustrating that your median resident age is 33 and primarily focused on millennials. I'm curious, how much is population migrations factoring into some of the job growth that you're seeing? You mentioned Boston. Is it really job growth that's driving this? Or jobs becoming -- jobs coming because you're seeing population migrations to certain markets? I tend to think that given your millennial population, you're in a really interesting position to maybe address that question.

Well, I guess I am not sure what difference it makes. A lot of the businesses are going to the talent and the talent is going to these high density sort of urban environments and so therefore, the companies are having to go there. So I mean, we're just seeing very, very, very strong absorption of this new supply. It negatively impacts pricing power. We believe that the tide will turn come 2019, but we are seeing an extraordinary absorption of this new product. Certainly from millennials, they're having a profound impact, but as we have mentioned a lot, nearly 20% of our residents are 50 years of age and older. so we really do believe that we appeal to anyone who is interested in living that sort of high density urban lifestyle.

Got it. And so maybe flipping on that, are you seeing any signs of population migrations out of New York City? We've heard anecdotally some of that, but we personally haven't seen a lot of evidence of it yet. I mean, are you see any signs of population migrations out of high-cost areas?

Well, I guess people try. If you look at the larger SMSA, that may be the case. But that doesn't mean that you're not adding population in the urban core. You may be losing population in some of these markets within the entire footprint of the SMSA, but we continue to see what we think is increases in households and density in the urban core. I think Washington, D.C. is a perfect example. I mean, much of the new construction has been in the district. The district is now providing a lifestyle that had not been available for a long time, and you are seeing extraordinary growth within the urban core of the district.

Your next question comes from John Kim of BMO Capital Markets.

In New York, the 32BJ union workers' strike was recently averted after an agreement on salary increases. And I'm wondering, a -- how much of this union impacted your New York portfolio? And also, if you could just give us an update on where you think labor cost will go over the next couple of years.

This is David Santee. Yes, we've rescreened -- we've renegotiated contracts that is part of our, if you want to call it, elevated payroll growth for this year. We have a very good team that works very closely with 32BJ. A lot of these 421a buildings require unionized labor. As part -- what was the second part of your question?

Do you see this issue in other markets outside of New York?

Just overall labor pressure?

Yes.

Yes, I mean well -- I mean overall our labor cost in our industry, we've talked about this for the past couple of years. I mean, when you're building 10,000 units, 20,000 units in New York, you're creating tremendous numbers of jobs in our industry. I would tell you that with the impact of retail, our ability to attract and retain our office folks has been fairly reasonable. But on the service side with levels of construction, some of the immigration issues, some of the high costs in some of these urban cores, it becomes more challenging to attract and retain the service side of the equation. So when you look at our overall salary growth this year, I mean, office administrative function is very much in line, but we're seeing the elevation on the service side.

And, John, just to give you some more detail. It's Mark for New York. It's real estate taxes we're really driving. So New York reported a 5.3% quarter-over-quarter number. They did an exceptional job managing payroll in New York and it was flat for the quarter. It was really about real estate taxes being up 13% and dragging that number up.

And the turning to development pipeline, it now stands at $1 billion, which is less than half of what it was a couple of years ago and that's very consistent with what you guys have been saying. But how low are you comfortable with the pipeline going to, given that the core competency, the development costs remain elevated.

Well, it's a $1 billion pipeline, but what is truly under construction is meaningfully less than that. I mean, we're comfortable having that development pipeline be whatever it needs to be. That allows us to commit capital in an appropriate, sort of risk-adjusted manner. Development remains the core competency. We've got a terrific group of development folks in each of our kind of core markets that continue to look at product for us. It's difficult to actually justify any sort of transactions today. They do other work for us. They've been involved in some capital projects deals. They've been underwriting potential acquisitions. So it's a group of people resources that we'll retain, and we'll look forward to building that business back up but only if and when it makes sense to do so. We're not going to change product just because we've got folks who would like to be building it. We put those folks to work doing some other things in addition to them underwriting product. And the time will come when we'll look forward to building that business back up.

Your next question comes from Alexander Goldfarb of Sandler O'Neill.

Yes. David, just best in your next and I assume that your handicap will improve. So just 2 questions. First, David Neithercut, you mentioned the sub-3 on the Upper East side, which sounds like that asset had a lot of growth in it. So if you can comment, one, how you think about selling assets that may have a lot of embedded growth and how that affects FFO growth of the company. But also given, I would assume the desire to have a mix of assets in your markets of As and Bs, how selling an asset like this fits into that strategy? I'm trying to straddle a number of price points to maximize the portfolio's performance.

Well, I guess you presume there's a lot of growth in that because of the cap rate. Obviously, we feel that there was less growth in that asset than perhaps the buyer did. I think that there is a great deal of demand across the space today for "value-add product", and I think this fits squarely in that. While we are certainly capable of undertaking that work ourselves, often times we think someone will pay us a nice premium to take that risk and work on themselves, and this is one of those situations. And just -- I mean, I think an example of the kind of trading that we've communicated to Street that we're -- they should expect us to be doing, but selling assets that we believe will be slower growth and reallocating that capital hopefully in assets it will be higher growth. And it would be interesting to note that we are under contract to buy another asset, a much newer asset in the New York metropolitan area, not in Manhattan specifically, but in the New York metropolitan area. So it's not a retreat from New York, but just a reallocation of capital in New York. And -- but we own properties across sort of a spectrum in terms of quality. We're not -- I'd like to consider ourselves sort of agnostic in that regard. While certainly we've got a lot of very good-quality property, we also do have Bs and perhaps even some Cs that we're in the process of bringing to Bs. So we're happy we invest across the spectrum.

Okay. And then the second question is you guys have 25% of your exposure in California. The rent control proposition seems to be gaining steam. So if you could just comment, one, on how you guys are viewing it, efforts and your thoughts on if this does succeed, how this impacts the growth profile of your California assets?

Well, California does represent a meaningful share of our invested capital and of our revenue and net operating income. And we are working very closely with the group that includes other public REITs and other large private owners of multifamily to address this referendum to appeal the Costa-Hawkins Law. And for those who are unfamiliar with that, Costa-Hawkins is a law in the State of California that limits rent control only on properties delivered before February 1995, and it restricts -- it actually requires vacancy decontrol on those properties that are subject to rent control. So it's important to sort of note that rent control exists in California today and municipalities can adopt rent control today. It is just subject to Costa-Hawkins. So while we certainly don't think the repeal of Costa-Hawkins is a good thing, we also don't think that it's a disaster, because you can have rent control today and many, many, many municipalities have decided or opted not to. And in those that have actually been on the ballot measures over the past several years, many of those have actually been defeated. So it's certainly something that we are watching very closely. We are aligned with our peers and others that they have got significant investments in multifamily in California, and we will sort of see where it goes.

But do you have a view on what it would do to your rental profile? Your growth?

Well, again, Costa-Hawkins is not introducing rent control. So the fact that Costa-Hawkins is repealed does not mean every municipality in which we operate will automatically adopt rent control. So first of all, Costa-Hawkins has to be repealed and then municipalities have to decide whether or not they want to adopt some form of rent control, an option that they currently have, but, as I mentioned, many of them don't. So it's very difficult to sort of tell you what the impact would be. I could tell you if you wanted to ask if a particular municipality adopted rent control, what that impact might be. But to sort of suggest what it would be on the entire state would be impossible.

Your next question will come from the line of Tayo Okusanya of Jefferies.

Yes. Two quick ones from me. First one, I just wanted to confirm, for the quarter, interest and other income was about $5.8 million that seems to be like some one-time item in there. Could you just let us know what was and whether that's being backed out of normalized FFO per share?

Yes, thanks, Tayo. It -- there is a schedule we prepared for that on Page 22. And those are lawsuits that were settled in our favor relating to some development activities. But we do take those out, those recoveries in our favor, out of normalized FFO. And that is on Page 22, that $5.3 million, almost all of that is really that nature.

All right. I see that now. That's helpful. So that's #1. And then #2, heading into spring leasing season, I know it's just April at this point, but any insight at this point that you can give into new lease rent growth? I mean, it sounds like it was negative again in 1Q. And just some sense of if it's possible for it to turn positive in 2Q. Or given the supply constraints, you are still kind of cautious in making such a statement.

Yes, so this is Michael. I do want to start out and I wanted to share I do not believe that looking at the results for just the first quarter is the best way to think about this new lease change metric. I will tell you that every market other than Seattle and Orange County was on track or slightly ahead with our Q4 -- our Q1 forecast even though those were negative numbers. And really, there has been no change to our full year new lease guidance assumptions that we shared in the investment presentation back in March. I can also tell you that Seattle and Orange County, which we talked about, were also offset by greater than expected performance on the renewals side. And since the volume of transactions during this quarter is low, a lot of this stuff can change on us as we start moving through the leasing season. And I think what you just alluded to if you just go back to some of the commentaries for each one of these markets, we are on like our eighth consecutive week of incremental rent increases week over week over week, and that absolutely manifests itself into improvement in this new lease change. But sitting here today like we look at what every single week, because last week, we were positive. It doesn't mean that, that trend holds. It doesn't mean that it can't get even more positive, but those are the kind of indicators that we have right now and the fact that rents have been moving up kind of do help fuel performance on the new lease change metric.

Your next question comes from Dennis McGill of Zelman & Associates.

First question, so just carrying forward on the new lease question there. I appreciate the clarification, but do you have what the new lease rate was just for our records in the first quarter and then how that spans across the markets?

Yes, sure. So I'll kind of rattle it off. I will tell you for the entire portfolio, same-store, we were negative 2.6%. And I'll just move kind of market by market real quick. So Boston was down 4.2%. New York was down 5%. Washington D.C. was down 4.8%. Seattle was down 4.5%. San Francisco was down 1.5%. Los Angeles was positive 20 basis points. Orange County was negative 40 basis points. San Diego was positive 50 basis points. And again, I just want to make sure everybody realizes that, that stand-alone quarter is not a really good indicator. And I think what's more relevant is whether or not the assumptions for the full year are changing based on what has occurred in the first quarter. And outside of that trajectory for Seattle and Orange County, I will tell you these are exactly where we expected them to be.

And just for comparison, so that minus 2.6% across the whole portfolio, that's comparable to what you just referenced as being slightly positive in the most recent week?

Yes. Yes, so I don't have that in front of me, but I think we were positive 20 basis points for the last week for the entire portfolio on that new lease change metric.

Great. And then second question. Can you maybe just share what you're hearing and seeing with respect to capital availability for the development side?

Well, I think everybody just only has sort of anecdotal sort of things about that, Dennis. I can tell you that we have received -- so our investment team has received inquiries about our interest in providing some equity capital for developments from sponsors that never would have called us 12 or 18 months ago. We've just -- we've seen -- we've heard about things being mothballed, things being put on the back burner, et cetera. Now that doesn't mean that well-capitalized people can't find the capital, can't find the institutional partners. We've heard of some big institutions sort of stepping aside. Mark can tell you about maybe of that debt side and how that...

Sure. So what we've seen is generally steady ability of developers who are able to obtain equity to finance themselves in the debt market at this point. We see some banks, for example, Fifth Third just announced that they are reducing their multifamily lending. The other banks we survey generally say they are going to be in about the same place as they have been in the recent past. There may be a touch more focus on suburban deals that are tending to pencil better so that they're doing a little bit more development in the suburban areas that are being financed, but it doesn't seem to me that the banks are the restrictor, it's the equity, because the banks are only loaning at 50% to 60%, so it's easy for them to make that loan and feel confident. It's the equity that's at material risk.

Mark, how about the (inaudible).

Dennis, just real quickly. You just have a situation here where development costs continue to rise, rental rates continue to be pressured, yields, build-to-yields getting compressed and it just -- we just think it's getting to a point where a lot of equity is heading to the sidelines.

All right. I was going to follow up if you look at the nonbank sources. Is there anything that would vary from what you just talked about sort of the stable availability?

Yes, there's more. There's certainly more involvement from them, but their capital is so expensive that they're more of a substitute for the equity than they are for the debt. And again, they are a pretty pricey alternative. So again with all the cost pressures, we just see this general cranking down of yields and IRRs. And with revenue growth being modest across the country, we do just generally feel like those numbers are just not going to add up and we would expect them to decline over time.

Your next question comes from Wes Golladay of RBC Capital Markets.

Just a follow up to that last question. Do you expect to see a meaningful uptick in current developers getting in trouble? The whole backdrop of rising costs, higher financing costs, delays. What have you seen on the ground?

I guess we've not seen much, a really any of that, at least at this juncture. As we mentioned earlier, the products -- projects that have been delivered are being absorbed. They may not be achieving the rental rates that they might have expected, but they are being absorbed, and my guess is that they're far from being in distress. They might not be making their equity returns that they had hoped, they may not be able to refinance out every, sort of, nickel of construction loan that they had hoped, but we're a long way, I think, from distress in the space, just given the very, very strong demand that we're seeing for good quality multifamily today.

Okay. What if we fast-forward, call it, 2 years from now and if you're having a hard time penciling in developments, and I'd say you have a superior cost of capital. You just raised debt around 3.6% for 10-year money. Do you see the people are going to break ground today given any issues?

I mean, again, if they're breaking ground today and if being financed, as Mark said, at 50% or 60%, they're not going to be distressed. They may not achieve their equity returns, but they will not be in distress.

Yes. Just to give a little color around that. We're seeing spreads of 250 to 300 basis points above LIBOR. LIBOR is around 2%. So call it $450 million you imagine that rates are up 2%. You could have a situation where the debt rate the developer is paying is 6%, 6.5%. That said, they're underwriting the debt yields of 7% or 8%. So I think the lenders are at 50% leverage are probably okay. I think the equity will get pinched at some point and they'll feel it. But I think the lenders at this low leverage, frankly, are, as David said, probably in an adequate position of coverage.

Okay. And then looking at the deliveries for peak leasing season this year in many of the markets, do you see any risk to at least at some markets where it would be pushed in the back half of the year where it's not ideal?

Any of the new products being pushed in the back half of the year? Look, here's plenty of products being delivered in every quarter. That's it's -- whether or not something opens their doors 30 or 60 or 90 days later than expected is not going to be a windfall to the space. I mean, there's just a lot of product kind of coming and when something opens its door, I'm not sure it's going to have much of an impact.

And your next question comes from Steve Sakwa of Evercore ISI.

Obviously, you guys have refined the portfolio from a geographic perspective the last few years. And I'm just curious if you or the board have had any thoughts about reconsidering markets or are you pretty content on kind of the markets you are currently in?

I think the board asks us, Steve, on a regular basis to sort of test our thesis, and have asked us repeatedly if you would add some additional markets, what might they be and why are you not entering those today. If you look at the heat maps that we've shared in all of our brochures that there are certainly some markets that, on some characteristics, look, I think, very attractive. For one reason or another, they're either too small or single family home ownership is -- the price of single-family homes is too cheap or whatever, but we're not committed. We are not chiseled in stone where we are. If it make sense for us to add another market or 2, we don't hesitate to do it and we continue to do that work to determine whether or not it's in our shareholders' best interest or not.

David, could you just maybe share with us kind of the 1 or 2 markets that you might go back into? And would you go into that through acquisition or through development?

Well. Look, I guess one of the things that we have to be thoughtful about, Steve, is just given our size, for us to go "into a market" requires a very meaningful amount of capital to have it make sense for Michael and his team and for our investment team and for all the support that one needs to give. So my guess is if we went into a market, it would be with a, hopefully, some sort of portfolio acquisition that would then be supplemented by one-off acquisitions and certainly we would consider development. I'll say that Denver is a market that when we exited that market, as part of a large sale of assets to Barry Sternlicht and Starwood several years ago. We'd always consider that not to be a market exit, but rather to be a portfolio exit. It was a portfolio of 30-year-old, quite suburban surface park walkup kind of product that we knew we would own long-term. We did not see our way at the time to having the sort of portfolio that we want to have in that marketplace, so we took advantage of what we felt was very attractive pricing to sell those assets. And certainly a market that we would consider going back into if and when it made sense to do so.

Gentlemen, there are no further questions at this time. I'd like to hand it back over to Mr. McKenna for closing remarks.

And I will thank you very much, everyone. I'll let you know that David Santee will be in attendance at the Nareit meetings in New York and you will all get a chance to say goodbye and wish David well. And we look forward to seeing everybody at that meeting in June in New York. Thank you so much for your time today.

This concludes today's call. Thank you for your participation. You may now disconnect. Have a wonderful day.