Essex Property Trust Inc (ESS) 2017 Q1 法說會逐字稿

Good day, and welcome to the Essex Property Trust First Quarter 2017 Earnings Call. As a reminder, today's conference call is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin.

Thank you for joining us today, and welcome to our first quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments, and John Eudy is here for Q&A. This morning, I will comment on first quarter results, market conditions, regulatory matters and investment activities.

Our results for the first quarter were better than expected, as our recovery from a challenging fourth quarter occurred more quickly than we expected, contributing to core FFO growth that was $0.09 per share above the midpoint of the guidance range. While our sequential revenue growth was modest at 40 basis points, market rents grew 3.1% from year-end to the end of the first quarter 2017. While this sounds great, it needs to be evaluated against the challenges we had in Q4 '16, where market rents dropped 2% from the end of Q3 to the end of the fourth quarter 2016.

Looking at market rent growth from September 2016 to March 2017, Northern California was the strongest part of our portfolio, followed by Seattle. The results for the quarter do not significantly change our expectations for the remainder of the year and are consistent with our thesis that rental growth rates will approximate long-term averages in the West Coast metro areas. Angela will discuss the projections in a moment.

Our operations team did a good job of identifying opportunities to make incremental improvements in a variety of areas, saving money and generating additional income, which added a few cents of the core FFO beat, even with wage pressures, weather-related challenges and significant utility costs increases in California. I greatly appreciate the skill and effort of our operations team and thank them for their effort.

An important part of our expectations are that tight labor markets in California will push incomes higher, providing some relief to affordability issues. For the Essex markets, 2017 personal incomes are expected to grow an average of 5%, led by San Francisco at 6.2% and compared to the U.S. average of 3.9%. Further, over the past year, the ratio of rent to income declined in both San Francisco and San Jose, 2 areas most affected by the affordability issue.

Median home prices are generally growing faster than rents, averaging 7.2% for California versus 5.2% for the nation over the past year, and 4 of the 7 Essex markets outperformed California median increase in home prices.

My next topic, an update on regulatory matters. State and local governments in California have proposed legislation that potentially impacts apartment owners, which I will briefly summarize. First, the State of California recently dropped a bill that would have repealed the Costa-Hawkins Rental Housing Act, which generally limits the scope of rent control ordinances enacted by cities. Even though rent growth in Northern California has decelerated, tenant rights groups that are well organized and well-funded, continue to advocate for rent control and related issues in cities and at the state level, demonstrated recently by a new rent control ordinance in the Northern California city of Pacifica. As noted in previous calls, rent control has a variety of unintended consequences, which include prolonging and intensifying the shortage of housing by reducing turnover, and thus, availability of apartments for those seeking rental housing. Bottom line, we expect rent control advocacy to continue in California, while industry organizations highlight the unintended consequences of rent control in an effort to defeat or soften any proposed legislation.

A second bill in California would require apartment owners to use licensed inspectors to certify the structural integrity of balconies and decks more than 6 feet above ground level every 5 years. While the requirements for these inspections, as outlined in the bill, may still change, it would add operating cost pressures for apartment owners.

At the federal level, we are watching 2 topics closely. The first is the impact of tax reform on REITs. Unfortunately, the path ahead is unknowable, and therefore, any comments would be speculative, given lack of details, and therefore, we will wait for greater clarity. Second, we're tracking the ongoing discussion about reforming the H1B Visa program. This is an important issue for Essex because the top 10 tech companies have close to 22,000 open positions in California and Washington, and these open positions have steadily increased in the past year. In addition, the national unemployment rate for college graduates hovers around 2.5%, which suggests a critical shortage of skilled labor, both generally and within the technology industries.

Earlier this year, there was widespread concern that the new administration was going to dramatically change or eliminate the H1B program. More recently, the focus of the discussion has been to address specific issues and alleged abuses in regards to the program. A recent executive order directs various agencies to recommend changes to the program. One discussed change would be to replace the existing lottery system with a process that prioritizes higher-income jobs, like those typically provided by tech companies. As to H1B extension applications, we have heard anecdotal stories about delays or shortened renewal periods, although we could not find data to support this. Bottom line, some of the proposals being discussed should help the high-tech sector and reduce the reliance on intermediaries that arrange H1B visas. And so we are optimistic about the changes being discussed.

The next topic is investments. As noted in the press release, we've been active in the transaction markets, as we continue with a self-funded model that does not rely on stock issuance or increased indebtedness. These transactions support our view that multifamily cap rates have not changed significantly. We completed a second preferred equity conversion transaction, in which we acquired a common ownership position in Sage Apartments. We will continue to look for opportunities to convert preferred equity investments into common ownership positions, while also pursuing the buyout of co-investment entities with promoted interest.

In our preferred equity program, which also includes a few subordinated loans, our outstanding investments declined about $10 million in the quarter related to the conversion of the investment in Sage Apartments and stood at nearly $240 million at March 31. Generally, we're seeing more demand for this capital, as banks continue with conservative lending standards for construction loans and with construction costs increasing faster than property net operating income. These forces create the need for more equity, which are -- which we are willing to provide if our standards are met. At this point, I believe that we will achieve our $100 million target for preferred equity and subordinated debt in 2017. It's important to note that many apartment development deals don't have sufficiently high yields to support an expensive preferred equity component, and therefore, apartment development projects are often being delayed.

As noted last quarter, we continue to see headwinds to new development deals and believe that the trend for apartment supply is downward in 2018.

Cap rates remained stable during the quarter, with 8 quality property and locations trading around a 4% to 4.25% cap rate used in the Essex methodology, and from time to time, more aggressive buyers will pay sub-4 cap rates. B-quality property and locations typically have cap rates 25 to 50 basis points higher than A-quality property. With the REITs mostly on the sideline, there are fewer motivated apartment investors in the market as compared to a year ago.

That concludes my comments. Thank you for joining the call today. Now I'll turn the call over to John Burkart.

Thank you, Mike. I also want to thank the E-Team for another great quarter. Their hard work and persistent focus on our corporate objectives has helped us produce year-over-year, same-store revenue growth of 5% and NOI growth of 5.6%. Although our quarterly revenue growth was 5% over the prior year's quarter, our scheduled rent growth was 4.3% in January over the prior year's month and decreased to 3.9% in March over the prior year's month, as we expected. The difference was due to 50 basis points of increased occupancy over the prior year's quarter as well as increases in other income and utility reimbursements. Some of the income was related to onetime items such as increased cancellation fees and collection of delinquent utility reimbursement, and the rest was related to sustainable increases in various categories, as we continue to focus on the nickels and dimes of the business.

We expect the year-over-year earnings comparisons to continue to decline through the third quarter due to tougher comps as well as the supply entering the marketplace moderating the seasonal increase in rents. Although we plan to continue to emphasize occupancy based on the current market conditions, the impact from occupancy on year-over-year revenue growth will be 0 in the third quarter, since it was the third quarter of 2016 that we had modified our strategy and achieved higher occupancy.

The gain-to-lease of 50 basis points at the end of the fourth quarter, meaning that market rents were below the average rent in the portfolio at that time, led to the relatively low sequential growth of 40 basis points for the portfolio in the first quarter. The good news is that, although the market was weaker than expected in the fourth quarter of 2016, it came back stronger than expected in the first quarter of 2017. Currently, we have a loss-to-lease of 1.8%, a 230 basis point increase from the 50 basis point gain-to-lease in December of 2016. We are cautiously optimistic about the markets and our performance in 2017.

Turning to expenses. We continue to see wage pressure, driven by both the increases in minimum wage in both California and Washington and the tight labor markets on the West Coast. The minimum wage will increase at an average rate of between 7% and 9% for the next few years. Our administrative and maintenance staff costs were up about 5% year-over-year.

Additionally, utilities were up 7% over the prior year's quarter, as we had anticipated. The increase in utilities is driven by increases in gas, water and trash collection. Many of our utility companies have pushed through significant increases. For example, PG&E, our Northern California gas and electric provider, increased gas rates over 15% to create funds aimed at improving infrastructure as well as the need to meet certain global warming regulations by buying renewable energy at higher rates than other options. We have several work flows related to reducing administrative maintenance and utility expenses, and we expect to continue to make incremental progress in controlling expenses.

Finally, our unit renovations slowed down significantly in the first quarter from 917 in the prior year's quarter down to 594 in the first quarter of 2017 because of both rental market conditions and labor shortages.

Now I will provide an update on our markets. The Seattle MD's expansion continues, as job growth remains healthy at 3.1% for the first quarter of 2017 over the prior year's quarter. This marks the eighth quarter in a row of 3% job growth or higher and has helped keep the unemployment rate at a low -- at an estimated 3.2%.

Boeing plans to reduce its Puget Sound area and manufacturing workforce by more than 1,800 people in 2017. However, that is not expected to have a material impact, considering the strength of the economy. There were roughly 9,600 Amazon job openings in Washington as of the first quarter of 2017, a 28% increase compared to the same period last year.

The high quality of life and sustained economic growth has managed to bolster net migration by adding roughly 50,000 people in 2016. While elevated supply continues to be a constant threat throughout the MD, 48% is focused in the CBD. Fortunately, approximately 83% of the Essex portfolio is located outside the Seattle CBD market and the East, North and South markets.

Office absorption was 2%, with 5.7 million square feet under construction, 47% of which is preleased. Our same-store Seattle revenues grew 7.9% year-over-year, with the CBD at 7.5% and the remaining East, North and South submarkets achieving between 7.7% and 9.7% revenue growth.

In Northern California, the Bay Area averaged 2.3% year-over-year job growth in the first quarter, outpacing the U.S. by 70 basis points, with roughly 77,000 jobs added over the prior year's quarter. San Francisco led the way, posting year-over-year job growth of 2.6%, while San Jose and Oakland were up 2.1% and 2.5%, respectively. The Bay Area's VC funding in the first quarter totaled $4.1 billion, up nearly $1 billion from the fourth quarter of 2016 and about equal to first quarter of 2016.

Office absorption in the Bay Area was relatively flat in the first quarter. However, the market has absorbed over 3 million square feet or 1.4% of total office space over the last 12 months. In San Francisco, Google leased another 166,000 square feet, expanding their footprint in the city to nearly 900,000 square feet. Across the bay in Fremont, ramp-up for the new Model 3 continues, with Tesla expected to increase employment at its plant by 50%.

Finally, in Silicon Valley, Amazon continues its expansion, announcing leases for more than 560,000 square feet at 2 newly constructed locations.

During the quarter, the under-construction pipeline grew more than 1.2 million square feet, totaling 16 million square feet of active construction projects, of which 43% is preleased. In March, Google received approval for their new 600,000 square-foot Charleston East campus in Mountain View, which should break ground later this year.

Moving down to Southern California. In Los Angeles, the first quarter job growth was 1.7% year-over-year, in line with the U.S. at 1.6%. Even with the slower job growth, the MSA achieved 3.6% revenue growth year-over-year in the quarter, with the Tri-Cities at the top growing 5.4%, the L.A. CBD performing consistent with the MSA, growing revenues at 3.6%, and the West L.A. submarket at the bottom with 3% revenue growth over the prior year's quarter.

The growth of online television in recent years has spurred a wave of large real estate deals in recent quarters from tech companies such as Netflix and Amazon. In fact, the entertainment energy -- the entertainment industry now occupies roughly 25.5 million square feet in Los Angeles County, up nearly 3 million square feet from 5 years ago. Netflix, which will produce around $6 billion worth of original content this year, recently committed to increasing its production infrastructure in California rather than chasing filming tax credits in other states.

Orange County's job growth came in below our expectation at 1.2% year-over-year for the first quarter compared to our estimate of 2.3% for the year. We will be monitoring this market closely, especially considering the level of supply anticipated in 2017. Our North and South Orange submarkets achieved 6% and 4.8% revenue growth year-over-year, respectively.

Last but not least, in San Diego, job growth was strong at 2% for the first quarter over the comparable quarter. The North City submarket, where we have over 70% of our San Diego portfolio, achieved revenue growth of 5.8% over the prior year's quarter. San Diego is about to roll out the largest city-based Internet of Things platform in the world. The city is partnering with GE to upgrade 1,400 traffic lights to LED and integrate the traffic light system into a connected digital network. Deployment of 3,200 smart sensors will enable the network to optimize parking and traffic, enhance public safety and track air quality.

Currently, our portfolio is at 96.6% occupied, and our availability 30 days out is at 4.5%. With a loss-to-lease of 1.8%, we are positioned well for the leasing season.

Thank you, and I will now turn the call over to our CFO, Angela Kleiman.

Thank you, John. I'll start with a review of our first quarter results then discuss guidance revision and conclude with an update on capital markets activities and the balance sheet.

For the quarter, our core FFO exceeded the midpoint of our guidance by $0.09 per share. The components of [that] performance are outlined in our press release on Page 4.

Also, in the first quarter, we declared a quarterly common dividend of $1.75 per share, which is a 9.4% year-over-year increase and represents 23 years of consecutive dividend growth.

Moving on to the full year guidance. We are raising same-property revenue growth guidance by 25 basis points to 3.5% at the midpoint. The increase is attributed to favorable first quarter results and an increase in projected other income for the rest of the year. While we are raising our growth outlook for the year, we still expect our revenue growth to decelerate from 5% reported in first quarter to around 2% by the third quarter. As previously noted, we expect a more difficult second half of the year, largely due to a tough year-over-year occupancy comp and a lower level of embedded gains in the portfolio via loss-to-lease.

In conjunction with the same-property growth increase, we are raising core FFO guidance by $0.08 per share to $11.76 at the midpoint. This guidance increase primarily reflects the revised revenue growth outlook, partially offset by the timing of expenses. Overall, we are now projecting core FFO to grow at 6.5% for the full year, which is 70 basis points increase compared to our initial guidance.

As for the second quarter, we are forecasting core FFO to be $2.87 at the midpoint, which is $0.07 lower than the first quarter results. There are 3 key factors contributing to this outcome. First, we benefit from a onetime commercial lease termination fee in the first quarter. This is a $0.02 impact. Second, we expect higher interest expense in the second quarter due to capital markets activities. This is a $0.03 impact.

As you may recall, in March, we repaid a $300 million bond with a cash rate of 5.5% and an effective rate of 1.8%. In April, we issued a $350 million bond at a rate of 3.625%. This bond offering was consistent with our original guidance provided last quarter and did not impact our full year core FFO projection.

Third is the timing of expenses. Our guidance assumes expense growth will be around 4.5% in the second quarter. Nonetheless, for the full year, we still expect our operating expense to be consistent with our original guidance range of 3% at the midpoint.

With the April bond offering, we have substantially completed our debt refinancing for the year. Our remaining maturities in 2017 totals only about $100 million, which has been mostly funded by the April bond offering.

At the end of the quarter, our net debt-to-EBITDA was 5.7x, which is a reduction from 5.9x at year-end and consistent with our expectations that this ratio would trend down from growth in EBITDA. With full availability on our $1 billion line of credit and a light maturity schedule, our balance sheet remains strong.

That concludes my remarks, and I will now turn the call over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Nick Joseph from Citigroup.

I just want to start on the preferred equity deal. So what's the opportunity to grow that book today? And how large could that book eventually be?

Nick, it's Michael Schall here. I think it could be a lot larger than we want it to be. And so we're seeing a lot of demand for that product, and again, for the reasons that I cited in our script. So I think that our limitation is sort of a self-imposed limitation. We're trying to pick the best deals out of the group and the ones that both underwrite the best and are more -- most consistent in terms of higher-quality locations and properties. And so the main reason for that is because the term of these deals is somewhere in the 3- to 4-year range. And they have a high coupon somewhere between 10% and 12% typically on them. And so when that reverses, if we can't replace them, then we have an FFO decline issue. And so we're trying to be very thoughtful about how we execute that business. We think it's a great opportunity in the marketplace today, and we want to take advantage of it. We just want to do it within boundaries. So I think, a long time ago, we talked about somewhere around a 5% cap relative to the total market capitalization of the company. And we're well under that, and we expect to remain well under that.

And then I appreciate the uncertainty around immigration and H1B visas. But just curious if you've seen any change in traffic of non-U. S. residents at any of your properties or across the portfolio.

Yes, Nick, this is John. The answer is no. I can't say that we perfectly track that, but we really haven't had any anecdotal or other information indicating any changes in traffic. I mean -- and frankly, traffic overall is about the same as it was last year, and specific traffic as it relates to any particular person.

Our next question comes from the line of Austin Wurschmidt from KeyBanc.

Just want to touch on guidance really quickly. You still talked about there being heavy supply in the first half of the year. And we've seen job growth moderate a bit across some of your markets. So I guess, just what gave you the confidence to raise the same-store this early in the season or before entering the peak leasing season? Or with the higher earn-in, I guess, do you have some conservatism baked in now through the rest of the year?

Austin, it's Mike Schall. Let me start with this, and then maybe Angela will want to follow up. I think, as we entered this year, we had -- we needed a -- we realized that there was a greater range of outcomes that were potential this year, really driven by the lack of loss-to-lease. At December 31, we had a negative loss-to-lease, meaning that market rents were below scheduled rent in our portfolios. Scheduled rent is 90-something percent of our revenue. And so because of that, we had some uncertainty there. We also had uncertainty with respect to how the lease-ups, the timing of the lease-ups and how aggressive the owners of the lease-up properties within the marketplace were going to be with respect to concession. So those 2 factors gave us less certainty about this year in terms of projection, just in general. And then, rolling that out, we noted it on the last quarter call that because of a negative loss-to-lease, we would be building loss-to-lease this year. And obviously, if you're building loss-to-lease, your reported results -- [they're not going through] as reported results, they're going into the loss-to-lease for the portfolio, which has increased pretty substantially, as noted on the call. So those were the dynamics behind what was happening with respect to projections. In terms of how the numbers roll out, Angela, do you want to address that?

Sure thing. And so the way the numbers roll out is that the rent growth midpoint, 25 basis point rate, essentially reflects the first quarter achieved results. And we added to that other income that we are expecting, which John Burkart alluded to earlier about focusing on the nickels and dimes of our business. So it's primarily driven by those 2 components and that flow-through FFO. And then the additional couple of pennies on the FFO side relates to our preferred equity business and other small items. So that's why we're comfortable with our guidance raise.

And then just the one follow-up I'd add, what would you need to see or what would get you more comfortable with increasing the unit renovations?

Yes, this is John. I'll take that. As I mentioned, there's really kind of 2 things that were slowing us down a little bit there. One related to the market, and the other related to labor shortages. We're seeing some challenges getting the contractors there, and that's been an issue. So that would have to get resolved, and that's not as easy as it sounds. And then, of course, the markets are getting stronger. The markets -- speak about the markets for a moment. They're really functioning now consistent with our seasonal expectations. At the same time, the first quarter is just the beginning. You have to really get into the second quarter until you really see how they're moving. But what we're seeing within the marketplace is as -- is what we expected. It's generally good. And we are planning to increase renovations as much as we can, but again, we still have some levels of limitations due to some labor shortages.

Any increases above what you would have anticipated, I guess, on the fourth quarter call?

No, no. We're in line with our overall plan. We were a little bit behind in the first quarter from what we had anticipated, and we'll be in line overall for the year or just slightly below that.

Our next question comes from the line of Gaurav Mehta from Cantor Fitzgerald.

In your press release, you mentioned that Northern California saw lower apartment supply deliveries. And I think, on the last call, you mentioned that bulk of supply in Northern California is expected in the first half of 2017. So I was wondering, when you say lower apartment deliveries, is that compared to your expectations going into the year or compared with last year?

This is Mike, and maybe John will want to follow up with this. Yes, in general, we said that supply is declining in Northern California, and we think that, that's going to continue into and through 2018. In fact, from '17 to '18, we're forecasting about a 36% reduction in supply, '18 over '17. And within '17, it drops off quarter-to-quarter. The first half remained pretty strong, and then the supply should drop off in the second half of the year, although, I think there's been some leakage in terms of pushing back some of our expected first and second quarter deliveries in Northern California, maybe into the third quarter and beyond. So those are the dynamics there. So again, as I mentioned earlier, the ability to figure out exactly what's going to deliver and how those owners are going to price concessions, we've seen some increasing concessions in Q2. It's one of the variables and one of the difficulties in trying to estimate what's going to happen. So -- but the statement that you made, we agree with, basically, that Northern California supply is being reduced. We expect, in '18, it'll be relatively flat in Southern California and decline about 13% in Seattle in [2017].

And this is John. I would just add, we get out into the field and we look at where things are at. And we do full scale about twice a year and then we spot-check. And when we went out and spot-checked earlier this -- in the first quarter, we found that several of the assets that we thought were going to get delivered were not. And I'm guessing they're facing the same issues we're facing on the rental side. There's shortage of labor for finishing skills -- finishing skilled employees. And so I think, really, the whole industry is feeling that pressure.

Okay. And as a follow-up, I think, in your remarks, you mentioned opportunity to convert from preferred equity investments to owning those assets. I was wondering, when you are evaluating preferred equity investments, are you underwriting them the same way as you would for your wholly-owned acquisition platform?

In general, yes. I mean, this would be a supplemental source of potential acquisitions and investments. It would not be something that we're trying to give a preference to one of the owners of one of these preferred equity deals. So no, it's strictly an acquisition strategy.

Our next question comes from the line of Juan Sanabria from Bank of America.

Just hoping to follow up on Gaurav's supply question. Could you be a little bit more specific in terms of the individual markets within Northern California that are contributing to that 30-plus percent year-over-year decline in '17 -- '18 versus '17 that you're expecting?

Sure. This is Mike once again, Juan. About 50% in San Francisco, which goes down the Peninsula in San Mateo County, about 25% in Oakland and 26% in San Jose. So we have roughly -- so this year in San Jose, these are obviously multifamily supply. 3,200 units goes to 2,400 units approximately in San Jose. So again, we see widespread decline in Northern California, less so in Southern California and a little bit in Seattle next year, 2018.

And are you concerned at all? Because I mean, you obviously are talking about some slippage due to labor that, that massive decline year-over-year won't materialize and kind of may cause 2017 to play out more differently than you'd expected (inaudible) for your guidance?

Well, generically, Juan, I'd say we're always concerned. So this is a business where you're constantly humbled because what you think is going to happen doesn't always happen. But this is the discipline of trying to understand the markets and understand what is -- what's happening, what the dynamics are and what the forces are so that we can get the capital allocation of the portfolio right. So I suspect that we won't be 100% right about these, about the projection for 2018, but I also will suggest that we'll be more right than wrong. And this is the information that gives us a little bit better knowledge and strategic advantage in terms of making good investment decisions and capital allocation decisions.

Just one quick follow-up on the lease term fee on the commercial [front]. Can you just give us a little bit more color on the quantum dollar-wise and where that was booked?

Sure. Well, I'll go back to what it was, and I'll let Angela walk through where it was booked and that. But this relates to an asset we bought. It had a space that was -- had a paying tenant, yet the space was actually vacant. And so we worked to negotiate closure to that situation so we can renovate that center, and we're rather excited about that. As far as for where it was booked in the financials, I'll let Angela...

Oh, sure. Yes. And so in terms of the dollar amount, it was about $1.2 million, and it's booked in other income non-same store.

Our next question comes from the line of Neil Malkin from RBC Capital Markets.

First, I noticed on the development page, it looks like land ticked up about $30 million. And am I reading that correctly? And if so, can you tell me what that's related to?

Mr. Eudy is here. I hope he has that one.

Sure. It's the Hollywood deal that I think you may be aware of that we've put into predevelopment, if you will. All these [add-ons] were achieved in the end of the fourth quarter, and we will be starting -- we did the demo, moved the tenant out, vacated in December. And we'll be starting construction we expect late Q2, early Q3.

Okay, great. And then just circling back to the preferred. Do you guys -- can you give us a sense of when -- I know you have a good amount of those, but when are those going to be maturing? For example, are 5 more going to be maturing this year and compared to maybe last year or in '18? And then are you seeing or do you anticipate most of those converting into common? Because your partner has probably way less liquidity than you do, so they're probably unable to pay you back on that.

This is Mike. We have no contractual right to convert anything, so just to make that clear. However, we have a seat at the table with respect to the outcome on some of the preferred equity deals; and therefore, it's just good. It gives us another -- again, another bite at the apple, let's say. And so from that perspective, I think it works well. In terms of the maturity schedule, I think, as we've ramped up the business, we don't have that many maturities. We did -- we had one other conversion earlier this year. And then I think we also had -- we have another -- we've actually had several maturities that have come through. So what you're seeing in building from -- I think it was about $100 million last year to -- $100 million, $150 million last year to $250 million, you've seen a net booking of transactions relative to repayments. I think the repayments will start hitting a little bit more substantially a year or 2 from now, but I don't think it's going to affect the next year in any material way.

Our next question comes from the line of Drew Babin from Robert W. Baird.

A quick question for Angela on the debt maturities. I have a little over $300 million of secured debt maturing in '18 with a weighted average rate of 5.3%. I was hoping you could comment on what the effective rate on that is and whether there's an arbitrage opportunity to potentially prepay that at some point this year.

Yes. I [was going to] say the effective rate is what's shown here, and it's the 5.3% on our...

Okay. So there is a cost of arbitrage?

Yes, yes, there should be right at this point. And as far as the general planning is that we do prefer to refinance our secure debt with unsecured debt and 10-year maturity and continue with laddering our maturity.

So at what point do the [seasoned] costs become economical? (inaudible)

With secured debt, the prepayment penalty is pretty severe. And so unless it's built into the agreement itself, in some, you get [the fee] or prepay, pay 6 months in advance. But they're all quite different. But we wouldn't incur those kind of costs because it just doesn't make enough economic sense at this point.

Okay. So it sounds like there's no impact from anything dealing with those maturities in this year's guidance?

We're not planning for that.

Okay. And then a question on the operations front. You mentioned that rents, I believe it was San Francisco, but correct me if I'm wrong, rebounded 3.1% during the first quarter after being down in the fourth quarter. I was hoping you could break that down. Was that San Francisco-specific? And what do those kind of swings in rent growth look like in some of the other sub-markets around the Bay Area? Is this kind of a stabilization that's happening from the inside out, with San Francisco kind of snapping back but other markets maybe not rebounding? Or how would you classify that?

Yes, this is John. If you want me to -- let me give kind of a broader answer here. So what we're seeing is generally good action in the Bay Area, consistent -- actually, in the whole portfolio consistent with historical seasonality. We're seeing a little bit more strength in areas like San Jose, San Francisco that were hit harder, San Mateo that were hit harder. And in a couple of areas like, for example, in the East Bay, where people had moved from the higher-priced zones of San Francisco and San Jose, they moved into those areas. And probably due to affordability, we're seeing the reversal of that, which would make sense. And so the East Bay is struggling a little bit related to people moving back to San Francisco, San Jose is what the belief is. As it relates to Seattle, we're seeing, again, shrink there. And in L.A., a little bit less. L.A. has been a little bit flatter, but still fine. L.A. being all of SoCal, to be blunt. L.A. itself is a little flatter; San Diego, stronger; Orange County's fine. And that gets kind of overview. Does that answer your question?

That helps. Yes, I appreciate it.

Hey, Drew, just one comment. The 3.1% was the portfolio average. So Northern California, looking at economic rent growth for the quarter -- for December 31 to March 31 was 3.8%.

Okay. I appreciate the clarification. Just one more on the Bay Area. You talked about some supply potentially getting delayed from the first half of the year this year into the second half. Any way to quantify kind of what percentage of the overall deliveries you expect in '17 that's already delivered versus what's to come this year?

Yes. This is Mike. We do have it by quarter. And again, these change from quarter-to-quarter because we go out and drive the properties, as John said, and try to gauge when they're going to deliver. So in Northern California, we have Q1 deliveries for '17 at 35%, dropping to 29% in Q2; 20%, Q3; 16%, Q4. And the biggest deliveries were in San Jose so far this year, according to the schedule.

Our next question comes from the line of Jeffrey Pehl from Goldman Sachs.

Just sticking with the Bay Area. On concessions you mentioned earlier in the call, you saw an uptick in Q2. Just wondering if you can give a little more color on that and which submarkets you're seeing the uptick in.

Sure. This is Mike. Concessions, I'd say, in general, are up maybe 2 weeks from Q1 to Q2 so far. San Francisco, actually, the typical concession is still 4 to 8 weeks. That applies to San Francisco, Downtown San Jose. There are some areas that are closer to 2 months free, Dublin, Pleasanton, for example, and Sunnyvale, which has just a bunch of active lease-ups underway right now. So -- and the Peninsula, actually, is a little bit less than that. So the Peninsula, San Francisco Peninsula has gotten better. It's about 1 month free. But again, this is a fluid process, and they can decline or increase over time, almost -- and are constantly changing. And we do the same thing on our lease-ups as well. You will find, we're pricing the smaller units different from the bigger units based on supply and demand for each unit type. And so the concession numbers are a fluid process, and they will continue to change throughout the year.

And then just on the portfolio, generally. I was wondering if you could give an update on move-outs to purchase a home.

Sure. Yes, move-outs to purchase a home are roughly consistent with long-term average. They're about 10% right now, but materially the same as it's been for a long time. No surprises there.

And actually, I'll make one other comment, and that is partially because the supply of for-sale housing is so muted in the West Coast. So we're not building a lot of for-sale homes; and therefore, the ability to transition from an apartment to a home is more challenging out here.

Our next question comes from the line of Dennis McGill from Zelman & Associates.

First, just on L.A., you touched on the market a little bit throughout, but looking at the revision you made just to the market-wide stats, hoping you could maybe elaborate a little bit on whether that was a heavier supply or demand component kind of driving that down a little bit.

This is Mike. Maybe John will want to throw in a comment here. I think part of it is the concessionary nature of different parts of Southern California. Obviously, Southern California is a big place, but we're seeing -- we saw a pretty big ramp-up in supply in Orange County, for example, this year and the continuation of supply in Downtown L.A. So 6 to 8 weeks typically in Downtown L.A. And so I think this is more of the same. It's dealing with supply relative to the amount of job growth. Obviously, the Southern California area doesn't produce the same amount of jobs that Northern California and Seattle have, and I think that, that is probably the key difference between the 2 at this point in time. Just stronger job growth, more demand in the tech markets relative to Southern California.

Okay, that's helpful. And then sorry to add on to the regulatory theme from earlier, too. But one thing you didn't mention was AB 199, and I'm not sure if it necessarily impacts you, but it's something that we've monitored from the homebuilders side. But it sounds like it's more just related to redevelopment now. I'm not sure if that has any impact on your redevelopment business out there, so I figured I'd ask.

Yes. Actually, I had AB 199 in my script yesterday afternoon. And so we decided to drop it. John Eudy is here. He does a lot of this political stuff for us. And our belief is that AB 199 is not likely to survive. This would impose a prevailing wage requirement for any new construction that has "agreement" with the city and would probably end up further restricting the amount of supply that gets built, both for sale and rental. So that is that proposal or that law. So we didn't mention it because we thought that was likely not to survive.

In the chance it does, is there any impact on the redevelopment side or, as you understand, it's strictly new construction?

This is John Eudy. I'll further add on to what Mike said. Basically, we believe it's going to affect only those developments that get public funds and/or come through the successor agencies, the redevelopment agencies, the way it's been modified. So in both cases, it would not affect us.

And that would be...

Would be now, right.

So that would be...

Effectively, no change.

No change, no change.

I believe the way it's going to be modified, if it gets passed, is it'll clarify what already is the case.

Perfect. And if I could just squeeze a quick one on property taxes, the 1% or so rate in the first quarter, how are you -- what's embedded in the guidance for the full year for property tax increases?

We are guiding around 4% for the year. And in Q1, we had some refunds which benefited Q1. However, we still have not gotten property tax on Seattle, and that tends to be the wildcard.

Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

So just 2 questions here. First, Mike, you mentioned that you guys have seen a lot of opportunity on the mezz and finance side. But just curious, as far as related to investing and development, my understanding is with the new tighter bank regulations, the developer has to come up with that 35% of equity being all equity. They can't use preferred or anything of that sort of debt yielding. So are you guys not doing development? Or are the banks not as strict as enforcing what the regulators have laid out?

Well, Mr. Eudy is here and he loves to talk about development. We're active, but we're not as active as we could be, primarily because we don't see a lot of development deals that generate the types of yields we need to achieve to take the risk of that business. So that has been a choice. And -- but having said that, we will always be active in development. And we have enough deals over the next couple of years that are the next phase of several transactions that are underway now, the Hollywood deal, et cetera, that we're not going to be completely out of the development world at all. Having said that, as we look at new deals, and again, keep in mind what's happened here. You have construction costs growing much faster than property NOIs. And obviously, that causes cap rates to compress, measured today. So if you have compressing cap rates, we haven't changed our objectives or goals with respect to development. We're still in the 5% to 5.5% unlevered yields or cap rates measured today, not with trended rents, measured today, because we're competing against an acquisition measured today. And we're just not seeing a lot of those deals that cross that threshold. So I'd say, Mr. Eudy's job is...

Mike, I was actually talking when you guys are doing the mezz book, like investing in other people's deals, not your own accounts, when you're doing like the preferred equity investments.

I'm getting to that, Alex. So with the mezz deals, we have risk relationships with some lenders and -- so yes, I don't think that, that's entirely right with respect to the mezz deals and the yield on the preferred, although the yield on preferred is generally -- it generally doesn't apply to the construction period anyway. So I think that's probably the key there. It's accrued.

Okay, that's helpful. I'm sorry about that. The second question is, on the guidance, you guys did 5.6% of NOI in the first quarter, but the range is 2.8% to 4.6%. So is it more year-over-year comp related then the back half just gets tougher? Or is it that as your (inaudible) is given, you want to see how the summer goes, and if the supply continues to pull back and the concessions hopefully start to maybe lessen over the year, that you're just not sure how the summer's going to go, and therefore, that's why the range is where it is versus how you guys did in the first quarter?

Yes, Alex. This is Mike. Again, it goes back to that theme that we were talking about before, which is the -- we have to build, we're building loss-to-lease. If rents go up $100 today, we don't actually see that hit the bottom line until we turn a unit or turn a lease. And so if there's a building loss-to-lease, which means the scheduled rent, which is really driving the income statement, is declining still. So just to give you some numbers there. January, scheduled rent was up 4.3%. By March, it was 3.9%, and preliminarily in April, it was 3.7%. So that trend of declining scheduled rents and building loss-to-lease is going to continue throughout the year until about Q3, where it turns around.

Yes. And Alex, that is why we view that. We're going from a 5% revenue growth down to 2% in the third quarter. What that means is in the second quarter, we think that revenue will come in kind of in that low to mid-3% range.

Alex, this is John. I'm going to add one more piece here, just so we get the context. As Mike said, we went from 4.3% to 3.7% year-over-year in April in scheduled rent. And we already said that the loss-to-lease was 1.8% at 180 basis points in March. In April, it went up to 260 basis points. So 2.6% in April. So the market is doing as we expected. It's moving up, but because of this delay, our scheduled rent continues to go down, again, as expected. So this is all, according to plan, things are good, but it's just the way the numbers roll out. And then I mentioned before the occupancy adjustment, that will be a net neutral in the third quarter.

Our next question comes from the line of Tayo Okusanya from Jefferies.

I guess, my question really is when you kind of think about what you're seeing fundamentally in 4Q versus 1Q, that's been a big change in the Northern California market, and things keep swinging around all the time. Could you just talk a little bit kind of fundamentally what you're kind of doing week in, week out, to kind of make sure you're fully capturing these kind of crazy inflection points such that, again, you guys are doing, you're meeting your budget and things of that. Like, have you really kind of changed anything procedurally to kind of just make sure that all this volatility, you don't kind of get caught on the wrong side of it?

Tayo, I've been in this business a long time, and honestly, there's not a whole lot you can do on a week-to-week basis. Certainly, with respect to you can monitor the lease-ups, and you can react based on what they're doing. And again, we do the same thing. We have our own lease-ups that are in the marketplace right now. And we have weekly pricing calls, and we try to monitor everyone's -- what everyone is doing in the marketplace so that we're not out of step with respect to everyone else. But that's about as much as we can do. This business is really driven by the long-term trends, both with respect to demand and supply. And so we try to make good decisions as to the longer-term trends and then just execute well when we're on the ground. The decision a year ago, for example, in the third quarter last year to build occupancy by 50 basis points was a strategic decision because we thought, "Okay, if we're not going to get rent growth, let's try to build occupancy and play a little bit of an occupancy game," and I think we did that pretty well. So with that said, John, do you have any additional comments to the question?

No, I would just add, I mean, clearly, in the big picture, it's a supply-demand game, as Mike said. But on a daily basis, our people are working extremely hard. They're trying to understand the market. Obviously, they don't set it. They just need to understand it and react thoughtfully to it. And so we have great communication amongst the team, making good decisions. The team is empowered to make decisions. We don't make them from corporate. They're empowered to make the good decisions, and the communication is awesome, and that's what's enabling us to thrive in this pretty challenging market. And it does, as you point out, change pretty significantly week-to-week, month-to-month. But they're doing an awesome job.

Got you. And then just, again, could you just talk a little bit about fundamentally what you're seeing in regards to how the Class A versus Class B assets are performing within your markets?

Sure.

Interestingly, as the market came back, we are seeing better activity, higher growth in some of the Class A assets for certain. And we'll, again, watch, cautiously watch, how the supply enters the market and the competition comes, because they'll be the first to feel more significant impacts. But as we came back in the first quarter, the As did a little bit better than the Bs overall, really across the markets.

Our last question comes from the line of Conor Wagner from Green Street Advisors.

John, I apologize if I missed this earlier. Did you give a new lease growth in renewals for 1Q and then where things are trending thus far into 2Q?

I didn't, and I'm glad to give you some of that input. So new lease growth for Q1 in SoCal was roughly 2.4%, and pretty consistent in the different markets across SoCal. As we get to NorCal, it was actually negative, new lease, and that just gets to part of how our numbers all kind of tie together. We were negative about 1.6%. And then as we get to Seattle, we were again positive about 2.5%. On the renewals side for Q1, SoCal was about 4.5%, the Bay Area was about 2%, and Seattle was a little bit closer to 5%. And going forward, very, very preliminary numbers, NorCal has now switched to positive. So we moved from negative to positive again. We're moving up, as Mike had mentioned and I have mentioned. And so NorCal is a little bit over 1% up year-over-year and Seattle is over 5%. It's taken off. SoCal is fairly flat. It's around 2.5% still on new leases, but the movement is going all in the right direction. Does that answer your question what you're looking for?

Yes. And then maybe give me further portfolio as a whole in 1Q and then as a whole for renewals thus far, please?

Sure, sure. As a whole, around 90 basis points in 1Q for new and about 3.5% for renewals. And looking out I guess the last piece for you, looking out the renewals we're sending out, overall are about 4.5%, moving up incrementally across each of the different zones.

Okay. And then you'll get -- you'll have some bleed-off of that, the 4.5%?

Yes. No, you know what, it's interesting. It depends because in some cases, sure, people want to negotiate, but oftentimes, what happens with renewals is you send them out. And we're typically quoting a 12-month lease when I give you that. We're obviously offering all different types of lease terms. It's not uncommon for people to choose a shorter lease term and pay a premium. And so it really is -- it will vary. Sometimes, we'll actually do better than that because more people chose a shorter term instead of a 12-month term, if that makes sense.

Okay. And then on the other income items, it looks like in the same-store portfolio, that grew around 10% or 11%, the nonrent items. And you highlighted some of those. Just want to make sure we understand what's going on there. And the extent that, that is going to persist throughout the year, you mentioned utility reimbursement and some break fees. Is there anything else there that we need to understand? And then, just so I get it correctly, on the utility reimbursement. Does that have a matching item on the expense line where your expenses should be higher, but then again it gets washed out?

Yes, big picture for sure. I think Angela has covered the adjustments in the updated guidance. Again, some of the utility was really related to onetime item collecting some past delinquents. As we mentioned last quarter, we pushed very hard, and we continue to push all the nickels and dimes. And so some of that, just carried over into the first quarter. So that's what some of that was. The lease breaks, those really are onetime items and have actually started to trend down, as we would expect. And so that's onetime. There are a few additional ongoing items, and that's what Angela has picked up in the guidance.

Right. And Conor, just to add, on the expense side, the 7% increase in utility expense, that is what we actually expected. So it's built into our guidance. That was not a surprise to us.

Okay. So -- but it was just -- but the level of reimbursement -- right, but I mean, as we think about it, right, like if there was a surprise on utility expenses, you're getting paid back for that by your residents. So this is more than catch-up, as John mentioned.

Yes. It was a catch-up. And again, going forward, yes, it's roughly 60% to 70% of utilities gets reimbursed. So if there was a negative increase on utilities that was unexpected, we're going to collect roughly 2/3 of that coming back.

Okay. And then as we're thinking about the same-store growth just going forward, should we expect that nonrent component to grow closer to the overall level of rent in the future?

I don't think it's that direct correlation. I mean, we did factor that into our guidance. That's part of the 25 basis points increase. But it's not -- it's not the same correlation.

That is all the time we have for questions. I'd like to hand the call back over to Mr. Schall for closing comments.

Okay, very good. Well, all of us thank you for your participation on the call, and we look forward to seeing many of you at NAREIT in June to continue the conversation. Have a good day and a good weekend.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.