Essex Property Trust Inc (ESS) 2018 Q3 法說會逐字稿

Good day, and welcome to the Essex Property Trust Third Quarter 2018 Earnings Call. As a reminder, today's conference call is being recorded.

Statements made on this conference call regarded -- 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, Dana. I'd like to welcome everyone to our third quarter earnings conference call. John Burkart and Angela Kleiman will follow me with comments, and John Eudy is here for Q&A.

I will discuss 3 topics on the call today: our third quarter results and preliminary 2019 market outlook, investment market conditions and an update on the apartment industry's campaign to oppose California Prop 10.

First topic. Our third quarter results were mostly as expected, reflecting a solid economy and severe shortages of housing on the West Coast. We continue to experience strong demand for multifamily housing across the West Coast metros with periodic disruptions to pricing when multiple apartment lease-ups occur within a submarket, often leading to large leasing concessions and often impacting pricing at nearby stabilized communities.

Job growth has continued to outperform our initial 2018 expectations across the Essex portfolio. Job growth is slightly lagging in Southern California and strong in the tech markets, as demonstrated by greater than 3% job growth in both Seattle and San Jose. With tight labor market conditions, income growth continues to outpace rent growth, which is improving rental affordability. Per capita personal income growth in the Essex metros is expected to average 5.7% in 2018, up almost 1% from a year ago and compared to 4% for the nation.

As John Burkart will discuss in a moment, we have experienced normal seasonal patterns in 2018, which is significantly different from 2017. Same-store revenue growth for 2018 troughed in the third quarter, mostly due to revenue strategy and year-over-year seasonal variations. Overall, market conditions are much better now as compared to a year ago, and our portfolio remains well positioned.

Consistent with the strong job growth reported in the tech markets, job openings for the top 10 public tech companies, all of which are headquartered in California and Washington, increased 26% year-over-year to nearly 22,000 open positions as of September. With the dearth of fieldworkers, employers continue to face shortages of qualified personnel, pushing wages upward to attract employees from other areas.

Turning to our market outlook for 2019. Today, we have a much better visibility into the year ahead compared to last year, and thus, we have included our preliminary outlook for 2019 on Page S-16 of the supplemental. We also provide the primary supply and demand drivers that shape our rent growth expectation. S-16 is intended to be a scenario based on the strength of the U.S. economy. We begin with U.S. GDP and job growth estimates from third-party sources, and based on these key assumptions, we estimate job growth and housing demand in the Essex metros. As to housing supply, we drive each market to gain insight on apartment delivery timing to create quarterly estimates. Using historical relationships between housing supply, demand and rent growth, we establish our 2019 market rent growth expectations.

For 2019, the U.S. economy is expected to continue growing at a healthy pace with U.S. GDP and job growth of 2.5% and 1.3%, respectively. Unemployment rates for the Essex markets declined 50 basis points in the past year to 3.5%. Over the past several years, falling unemployment has contributed to job growth, although this positive impact will likely diminish going forward. We expect the West Coast economies to outperform the nation as to job growth, which we estimate at 1.8% for the Essex metros in 2019. This is about 30 basis points below the September actual job growth of 2.1%, again, reflecting the impact of tight labor market conditions. For 2019, we expect 3.1% market rent growth in the Essex markets, with California slightly outperforming Washington and the best results in San Jose and San Diego. Oakland is expected to lag due to increasing apartment deliveries.

Reflecting the importance of economic growth in our 2019 assumptions, we produced a new graphic on Page S-16.1 of the supplemental to demonstrate the outperformance of the Essex metros in terms of cumulative nominal GDP growth. The bottom line, the Essex metros have outperformed the U.S. average and other major metros in the past 5 years and are well positioned for continued leadership going forward.

Turning to supply in 2019. Our preliminary forecast assumes that multifamily supply will be relatively flat in 2019 versus 2018 in the Essex markets with significant variances in some markets. Most notably, we expect a substantial increase in apartment supply in Los Angeles and Oakland and significant reductions in Orange County, San Diego and San Francisco.

Construction labor shortages continue to be a major factor affecting apartment delivery timing, and this issue continues unabated. Thus, in 2019, we made a notable change to our supply methodology on Page S-16 of the supplemental by factoring delays into the estimated delivery timing of newly constructed apartments. Thus, our multifamily supply shown on S-16 of the supplemental has pushed roughly 8% of apartment units or around 3,000 units from 2018 into 2019 and from 2019 into 2020. For the next couple of years, we'd see little change in the number of apartments being built and the overall construction labor force, and therefore, there's no reason to believe that the delays will abate. With housing demand continuing to exceed supply, we believe that housing shortages on the West Coast will continue.

Now turning to my second topic, investment market conditions. 2019 is likely to be another year where escalating construction costs, driven by labor shortages and entitlement costs, increase at a faster pace compared to rental revenue and net operating income. Therefore, developer yields are being compressed, creating a significant headwind to apartment construction starts. This is a challenging scenario for our direct development activities, and therefore, we have not materially added to our development pipeline. Instead, we have focused primarily on providing preferred equity to third-party apartment developers in the Essex markets. At the start of 2018, we had a strong preferred equity pipeline and hope to significantly exceed our $100 million target. As it stands now, we will struggle to hit our target in 2018. Angela will comment on guidance in a moment.

As it relates to acquisitions, we continue to see plenty of capital looking to buy apartments, leaving cap rates relatively flat. Recent increases in interest rates have erased most of the positive leverage tailwind that we have enjoyed since 2007 as long-term apartment financing rates are now comparable to cap rates. Today, property and locations continue to trade around a 4% to 4.25% cap rate and sometimes sub-4% for exceptional property, with B-quality property and locations generally trading 25 to 50 basis points higher. We'll continue to monitor the transaction market closely.

And now on to my third topic, an update on California Prop 10. As we've highlighted on prior calls, we're part of a broad coalition to oppose California Prop 10, which seeks to repeal the Costa-Hawkins Rental Housing Act on November 6. We are joined by other apartment companies, trade organizations, unions, veterans and a variety of pro-business groups. I think it's appropriate to recognize the extraordinary effort of those involved in the No on 10 campaign, especially its Executive Committee and Co-Chairs, John Eudy and Barry Altshuler. They have successfully united the industry around a worthy cause.

We believe that passing Prop 10 will intensify housing shortages, making a bad problem worse. It will likely lead to the expansion of price controls for all types of housing, which will result in less housing being built. Price controls produce longer tenancies, which, in turn, reduce the number of available rental units for those seeking housing, and those with limited means will be at an increasing disadvantage competing for housing amid greater scarcity. Finally, apartment, condo and single-family owners will have a strong economic incentive to convert rentals, subject to price controls, to owner-occupied housing, thereby shrinking the rental stock.

It's important to note that Prop 10 contains no funding for affordable housing and no requirements that additional housing be built. The State of California directs a process called Regional Housing Needs Assessment to plan for sufficient housing supply. However, many cities don't want to create housing because of the related cost of services, including schools, police, et cetera.

Gavin Newsom, a leading gubernatorial candidate, captured this issue on his website with the following comment: "Cities have a perverse incentive not to build housing because retail generates more lucrative sales tax revenue. The bigger the box, the better, because cities can use the sales tax for core public services." As a better approach, the state has recently passed many laws that support the Regional Housing Needs Assessment, which we believe are critical to increase housing production, the only viable solution to the crisis today. We also believe that more funding is needed targeting the affordable housing, and thus, we support California Prop 1.

That concludes my comments, and I'll now turn the call over to John Burkart.

Thank you, Mike. Q3 was a good quarter. It played out as we expected following historical seasonal pattern, with the rental market peaking in July and our operating team shifting our strategy from a focus of maximizing occupancy to locking in the seasonally high rental rates. The result was that we allowed the occupancy in our portfolio to move down 30 basis points, while we achieved rents on new rentals about 3.5% above the prior year's quarter.

For 2018, from a same-store revenue growth perspective, Q3 is a low point for the year due to the lower occupancy and the onetime payment in the third quarter of 2017 related to the delinquency collection from a corporate housing operator, which created an irregular comp. Adjusted for both occupancy and the onetime item, same-store revenue growth would have been 2.6% for the third quarter of 2018 or 40 basis points higher than our reported results.

Overall, our concessions in Q3 2018 were down approximately 20% from the prior year for the same-store portfolio. Our renewals in the third quarter grew approximately 4.2%, and they are being sent out at approximately 4.5% for the fourth quarter.

In September, our loss to lease was 1.7% versus 20 basis points in September of 2017 due to the stronger rental market we experienced this year, which positions us well for 2019. We expect the same-store portfolio revenue growth in the fourth quarter will be approximately 2.9%.

Although we are not providing guidance at this time, we look to 2019 -- as we look to 2019, we see the markets slightly stronger than in 2018, and our portfolio was well positioned with 1.7% loss to lease in September. From a revenue perspective, we will have headwinds related to higher occupancy costs in 2018, and we continue to face wage pressure in our markets, which is consistent with the past several years.

Now moving on to an update on our markets. The Seattle market continues to be supported by strong job growth, posting year-over-year job gains of 3.7% for the third quarter of 2018, the highest job growth in the Seattle MD in any quarter for over 17 years.

Looking at Amazon. Job openings for the company in the market have more than doubled as of the third quarter of 2018 to a little over 7,000 open positions since the end of last year. Tech continues to be a major driver for the market during the period. Amazon, Google and T-Mobile leased over 0.5 million square feet of office space in Bellevue, while Facebook has approximately 150 open jobs listed in Redmond for their virtual reality headset division and is rumored to be in the process of signing several expansion leases in the Eastside. With the light rail expansion into the Eastside scheduled to begin service in 2023, we will expect to see an increase in office leasing activity in the submarket.

Same-store concessions increased in the Seattle region from 80,000 in the third quarter of 2017 to 197,000 this quarter. The concessions were spread across many assets in each submarket and were largely used as closing tools.

Revenue growth in our Eastside and Seattle CBD submarkets was relatively flat at 1.6% and 40 basis points, respectively, while the north and south submarkets grew at 2% and 3.5%, respectively, for the third quarter of 2018. Our loss to lease at the end of the quarter was 1.2% for the entire market.

Moving down to Northern California. Job growth in the San Francisco Bay Area in Q3 averaged 2.4% year-over-year with over 76,000 jobs added. San Jose job growth was robust for the period with 3.2% year-over-year job growth, while Oakland and San Francisco were both up 1.8% for the period.

Notable office leases this quarter include Amazon and PwC's combined 300,000 -- 350,000 square foot expansion in downtown San Francisco. On the Peninsula, Facebook leased 800,000 square feet of under-construction project in Burlingame. And in the South Bay, Roku added an additional 250,000 square feet to their Bay Area footprint, while Splunk signed a 300,000 square foot lease at Santana Row with plans to hire 2,000 additional employees in the Bay Area.

Total office leasing activity is over 11 million square feet for 2018. This is greater than the combined total leasing activity in this market for the past 2 years.

VC funding for San Francisco and Silicon Valley combined from the trailing 4 quarters through Q3 is at a new peak of $41.6 billion.

Same-store concessions decreased over 50% in the third quarter of 2018 from the prior year's period. Concessions were spread across many assets in each submarket and were largely used as closing tools.

Our year-over-year same-store revenue growth for the third quarter of 2018 was led by the San Mateo submarket at 3.4%, followed by our Oakland and San Jose submarkets with each -- which each grew at 2.4% and our Fremont submarket at 1.8%, while San Francisco continued to remain flat for the period. Rents in our Bay Area markets were up approximately 3.3%, and loss to lease was 1.1% in September.

Continuing to Southern California. Job growth in Los Angeles in the third quarter of 2018 averaged 1.3% year-over-year. Netflix continues to solidify their presence in the market, preleasing an additional 330,000 square feet in Hollywood. Likewise, coworking companies, Spaces and WeWork, expanded their combined footprint by almost 200,000 square feet during the period.

Year-over-year revenue growth for the third quarter of 2018 was led by our Long Beach and Woodland Hills submarkets with 5.4% and 4% growth, respectively, trailed by the West L.A. submarket with 2.8% growth and the Tri-City submarket with 2.4% growth. September loss to lease in L.A. County was 2.4%.

In Orange County, jobs in the third quarter grew 60 basis points for the year-over-year. This situation is similar to 2017 when the BLS showed 30 basis points in job growth for the third quarter, which was increased to 2.2% when the revisions were completed. We will continue to monitor job growth in this market. Orange County loss to lease was 1.7% in September.

Finally, in San Diego, year-over-year job growth remained at 1.7% for the third quarter of 2018. Amazon expanded their San Diego Tech Hub by 85,000 square feet, with plans to add 300 tech workers. It's worthy to note that high-paying industries have accounted for more than 50% of the job growth in the San Diego market.

Year-over-year revenue growth in the third quarter of 2018 was 3.4% for our Northern San Diego submarkets, while Chula Vista grew at 4.1%. Loss to lease in the market was 2.2% in September.

Overall, same-store concessions are down in the Southern California region about 30% from the prior year's period. 65% of the concessions in the third quarter related to Downtown L.A. and assets impacted by the supply in South Orange County.

Currently, our portfolio is at 96.5% occupancy, and our availability 30 days out is 5.1%.

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

Thank you, John. I will start with a brief review of our third quarter results then discuss the full year guidance and conclude with an update on capital markets and the balance sheet.

In the third quarter, core FFO grew 5.7%, exceeding the midpoint of guidance by $0.03 per share. Details of the reconciliation to our original guidance are included on Page 4 of the earnings release.

Our favorable third quarter results enabled us to raise our core FFO per-share guidance by $0.03 at the midpoint to $12.56 for the full year. This represents a 5.4% year-over-year growth, which is 90 basis points higher than our original guidance of 4.5%.

Turning to our third quarter investments and funding plan. We closed $104 million acquisitions in the Wesco V joint venture and originated an $18.6 million preferred equity investment, which brings our total structured finance commitments to approximately $385 million. We plan to fund the new investments from 2 dispositions that are on track to close at the end of the fourth quarter.

As for guidance and investment activities for the full year. On acquisitions, we expect to achieve the low end of our range. On our $100 million preferred equity target, we currently have $45 million closed through October and believe that the majority of the remaining balance could close by early 2019, with funding up to 6 months thereafter. This is consistent with Mike's earlier comments on the headwinds regarding apartment construction starts. On dispositions, we have several properties in various stages of the sale process in anticipation of funding needs for 2019. Depending on the timing of the sale, some properties may transact by year-end. Therefore, we are increasing the high end of our dispositions range from $300 million to $400 million.

Use of proceeds may include potential buyout of joint venture partner interest, development funding, stock buyback and debt repayment, depending on the market conditions. As we have done in the past, we will seek to redeploy the proceeds into the most attractive investment in order to maximize the total return.

Consistent with our original guidance this year, we will not start any new developments. As it relates to our existing $940 million development pipeline, our share of unfunded obligation is $384 million, most of which will be funded in 2019, which means over 85% of our development pipeline will be completed and in lease-up by next year. Keep in mind that lease-ups are FFO dilutive until we approach stabilization. Consequently, our preliminary forecasts anticipate a potential FFO per share impact of up to $0.10 for the next year.

Lastly, on capital markets and the balance sheet.

Our capital needs for 2018 remain de minimis. We look to 2019 as we plan to repay approximately $590 million of secured debt, which was assumed from the BRE transaction and has an effective rate of 3.4%, but the cash rate is 5.6%. Therefore, this refinancing will be an economic benefit to the company but will create an FFO headwind of between $0.05 to $0.10 per share, depending on timing and market conditions as the current rate on a 10-year unsecured bond offering will be in the mid-4% range. However, we have a good amount of flexibility with access to multiple refinancing alternatives. And our balance sheet remains strong at 25% leverage with 5.5x debt to EBITDA and virtually full availability on our $1.2 billion revolver line of credit.

That concludes my comments, and I will turn the call back to the operator for Q&A.

(Operator Instructions) Our first question comes from the line of Juan Sanabria from Bank of America.

Just wanted to follow up on the supply data where you mentioned you changed up your methodology. Could you just give us a little bit more details around that? What would the numbers have been had you not assumed delivery delays, which have been pretty consistent, like you said, from '18 into '19 and '19 into '20, just to get a sense of comparing that to third-party providers?

Juan, it's Mike. Thanks for joining the call. I appreciate it. It's going to be difficult for me to reconcile these exactly because the supply estimates from the vendors have changed a lot. And I think there's some procedural issues. What we are trying to do is take a longer look at supply. So we have gone back to 2017 and projected forward to 2020. And what we found in that analysis is that the total number of units produced in the Essex metros have ranged from 34,000 to 36,000 per year in all of our -- again, in all of our metros. And essentially, what we conclude from that is that construction labor is the main constraint. And even though construction labor can vary by submarket to submarket, in other words, can be transit, some construction workers can go from L.A. to some other metro, what we think is happening is, basically, there is a cap on the amount of construction that can get done. And so we're seeing pretty consistent total apartment units being delivered in each of those years. And that caused us to essentially take our best estimate at trying to guess or estimate how much was going to leak from 1 year to the next. And as I said in the prepared remarks, we think it's around 3,000 units from 2018 into 2019 and 2019 into 2020. And again, within the context of -- that leads to about 36,000 units, plus or minus, in each of the last 4 years or the 4 years preceding 2020.

Okay, great. And then I was just hoping you could talk a little bit about the expense side. I don't know if this question is -- who's best to answer. But Angela gave some data points on kind of how to think about some FFO impacts from occupancy -- sorry, from developments in some of the debt stuff you're trying to do. But any color you can give on the expense side, particularly around some of the bigger-ticket items like real estate taxes as we think about '19?

Sure. On the real estate taxes, I think, with California, that piece is pretty straightforward. Seattle continues to be more of a wildcard. So for example, we had expected 2018 Seattle taxes to come in around, say, between 10% to 13%. It came in at 16%. And so next year, we're going through that process, right now still working through it. But it's probably going to be consistent in that it will be high, and it'll be more than 10% but probably below, say, 16%, if you will. So that's our current thinking. We expect utility costs to continue, Juan, at around that 4%, 5% range. And I think those were some of the largest noncontrollable items.

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

Mike, you talked about cap rates haven't moved, but you mentioned that positive leverage has started to be eliminated. Historically, you've mentioned that as being kind of one of the supportive metrics of sustaining low cap rates. So just curious, when you look back historically, what does your research tell you about the lag between perhaps when cap rates could begin to move higher as a result of the -- eliminating the positive leverage?

Sure, Austin. I think in our experience, cap rates are pretty sticky. They don't change quickly overnight. Buyers and sellers need time to adjust to a new environment. I think that there is an enormous amount of money out there looking for investments and looking for yield specifically. And I think that, that is a -- one of the forces that is keeping cap rates at relatively low levels. So I wouldn't expect any significant change in cap rates in the near term. I think what happens is you will see buyers and sellers not agreeing, and that will essentially cause a freeze in the transaction markets for some period of time before cap rates would change. So again, we haven't seen that now because there's so much money in the market chasing deals, and it'll -- we'll see what happens going forward. I guess it's going to take several quarters for this to play out.

Great. I appreciate the thoughts there. And then can you just give us a sense how 2019 supply deliveries stack up? Is it more heavily weighted in the first half of the year or back half of the year?

Sure. Overall, we think 2019 is, again, as I said in the prepared remarks, roughly the same as 2018. There are some regional variances. Supply, for example, up pretty significantly, let's say, in L.A. and Oakland and then down in some other places that are essentially offsetting those numbers. In terms of quarter-to-quarter, I think it's been so challenging to get the timing right, that going into that level of detail is probably too far into the weeds. What we have right now for 2019 is the third and fourth quarters are a little bit higher -- actually, you know what, no, they're pretty consistent throughout. The third and fourth quarters are heavier in Northern California but lighter in Seattle and Southern California. So we have pretty even supply quarter-to-quarter throughout 2019.

Our next question comes from the line of Nick Joseph from Citigroup.

How do you think about capital allocation and nonorganic growth given the current stock price? You've been active in the past either issuing equity through the ATM to fund growth or repurchasing shares when you're trading at large discount. But right now, you're somewhat in between those 2 scenarios. So how do you think about adding value in today's environment?

This is Mike, and that's a very good question. And we think it's pretty darn difficult to do that, to add value in this market. So obviously, we have tried to focus on preferred equity investments, and I think that will continue to be something that we focus on going forward. We also, at this point in time in prior cycles, have leaned more toward joint venture or co-investment-type transactions. However, with interest rates up, they're becoming more challenging to make work as well. And then finally, on the development side, Mr. Eudy is here, and he can comment on this or follow up on my comments, you would have seen a lot of low to mid-4% cap rates measure today untrended, so measured on rents in place today throughout our portfolio. We just don't think that's a high enough cap rate to get us excited about development. John, do you have anything to add to that?

Only that we're keeping our powder dry for when the time comes, and that will change. Yes, it will be in interesting.

And so I will conclude by saying I've learned in this business that don't try to make something work that just fundamentally doesn't work. And so essentially, focusing on the balance sheet, making sure it's in pristine shape and being ready for opportunities when they arise. We don't know when or where they're going to be, but when that happens, we want to be ready. So I think that's our focus now.

And then you mentioned the headwind, too, and the compression in market development yields. Do you think that will have an impact on rent concessions during lease-ups for the product that is underway now?

I think that we're expecting pretty consistent concessionary activity going forward. John, do you want to handle that one, concessions going forward given development?

Yes. No, absolutely. In Q4, we see a little bit more supply coming at us for the year, and so there'll be the normal Q4 softer market. I'm sure we're going to have some more concessions. But overall, our expectations are concessions are in check across each of the markets. Again, as Mike had mentioned, L.A., downtown L.A. is going to have more product. And so there'll be isolated cases with more concessions. But overall, as a company, our concessions are down in the same-store portfolio, and we see things generally in pretty good order, 4 to 6 weeks limited situation versus 8 weeks. And oftentimes, concessions are going back, even back down to 3 weeks.

Our next question comes from the line of John Kim from BMO Capital Markets.

On Proposition 10, some of the polls seemed to be working in your favor as far as they're not passing. I'm just wondering how confident you feel about this vote going in your favor versus a few months ago. And is there a particular poll that you pay attention to more than the others?

I'll try to -- this is John Eudy. We are cautiously optimistic that we're in a pretty good spot and where we thought we were going to be at this point in time. But you never know, polls have been wrong in the past. The messaging I think you're referring to is the PPIC public poll that came out a week ago. It had -- it has it at 60% no, 25% yes and the balance undecided. We see that in our internal polling as well, but the last 8 days can change. But right now, we believe that we're in a pretty good spot to win or to push back on that repeal.

I'm going to add one thing to that, and that is Mr. Eudy does not give up and he is very focused on really pushing hard right through election day to make sure that the campaign is very focused on the ultimate result. And again, I've -- we have watched John do this for the last couple of months, and he's been incredibly focused and incredibly effective.

Best of luck. On your repairs and maintenance, the costs were down 1% year-over-year, and I'm wondering how much of this is due to low turnover versus capitalizing more or maybe some other factors.

Yes, this is John. It's not really capitalizing more. It's -- the turnover is a factor for sure. There's also some timing issues there as well. I think it will pick up in Q4 but all according to the original plan for the year. So we are finding opportunities to create efficiencies and lower our costs to offset some of the wage pressures that we face and are coming in, again, with another good year as it relates to our controllables.

Our next question comes from the line of John Guinee from Stifel.

Angela, I was just noticing in your guidance, and this may be old news, but just clarify it for me, insurance reimbursements, legal settlements, et cetera, you recognized a negative $2 million year-to-date, but you got a budget -- or you have $6.2 million for the year negative. Is there a onetime charge you're expecting to get in the fourth quarter?

Yes, that's all related to our Prop 10 campaigning efforts. And so that is a onetime charge, and it will occur in the fourth quarter.

Okay. So $4.2 million hit to FFO in the fourth quarter? And that's in your guidance or not?

It is in our guidance. It's on -- yes.

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

Quick question on occupancy. I was hoping you could clarify how -- I think it was mentioned before just where occupancy was at the end of the third quarter, kind of where it is today. And should we necessarily expect that things get back on par year-over-year during the fourth quarter as you kind of move into a less favorable season with maybe some more supply coming in at some unfavorable times? Just curious how to model that.

Sure. Our occupancy at this point is 96.5%. And last year, we were a little bit higher. We were about 30 basis points higher at this point in time exactly. I think this year, we will again be -- or we'll continue to be a little bit under last year. If you're going back for the year, we started well above in occupancy. And then as the market shifted, we shifted our strategy to favor achieving market rent over occupancy. And so we do have that headwind that we faced in Q3. As I mentioned, Q4 will continue -- we'll actually continue it into the first half of '19. So my expectation is our occupancy is a little tough to tell. We're obviously finding it out in the marketplace, and as I mentioned, we have more supply that's going to hit Q4 during the low demand period. But I expect we'll probably stay close to where we are right now, maybe up 10 basis points or something like that.

Okay. That helps. And then quickly on Seattle, kind of the characteristics of supply for next year. Looks like you're expecting less multifamily supply growth in Seattle next year versus this year. Is that construction delay impact noticeable there? And I guess as you go into next year, is the supply just this kind of downtown concentrated as it was this year? Is it a little more spread out?

Drew, it's Mike. We think it will decline a little bit, maybe around 10%. Seattle will still have plenty of supply in 2019 relative to 2018. But yes, to your second question, which is it will be more spread out. And the more spread out it is, the less we see that phenomena of multiple lease-ups competing against one another and offering very large concessions. So the fact that it's spreading out should help us in 2019 relative to 2018.

Okay. Then one more for Angela. You mentioned the $0.05 to about $0.10 dilution potentially from paying down debt maturities next year. Does that include just 2019 secured maturities? Or is there some component of 2020 maturities that might be prepaid as well that contributes to that number you provided?

That's a very good question. And so, yes, it does include a component. So the $590 million of the debt assumed from the BRE acquisition, $300 million is due this year -- I mean, I'm sorry, in 2019, and $290 million is due in 2020. Because we can't repay it without any penalty, that's the right economic thing to do, and that's why. So in total, yes, we actually can and are planning to pay about $900 million of debt, which $290 million is optional.

Our next question comes from the line of Trent Trujillo from Scotiabank.

I appreciate the commentary in your prepared remarks about this, but what are your latest thoughts on voter support for Prop 10 and how it is or has been impacting the transaction market? You mentioned cap rates are broadly unchanged. There's still healthy liquidity and capital chasing multifamily product. But what kind of depth in buyer pools have you seen? Because we've heard that there's been less institutional interest in California multifamily recently.

Yes, this is Mike. It's -- that's another good question, and I'm not sure I have a perfect answer for it. I think that the greatest sensitivities are the transactions are hitting the market in some of the cities with the most extreme forms of rent control. I know that there was a transaction, for example, in Berkeley that had very extreme form of rent control. And I think that the market is reacting to those by pushing the bids for them past November 6. And so you'll know the answer before people commit to it. So I think there's been somewhat of a chilling effect in the marketplace as people wait for Prop 10's ultimate outcome. But I don't get the sense that it's had an overall impact. In other words, some parts of the market, areas that have less severe forms of rent control, I think it has a smaller impact on the market.

Okay, appreciate that. And you alluded to having a handful of assets on the market as a source of funds. Can you perhaps speak to the type of product you're looking through a cycle and if these are, perhaps, in those submarkets that are being subject to the most extreme versions of rent control potentially?

No, not necessarily. Again, this is Mike. We follow the same basic methodology with respect to both sides of our portfolio. We try to rank our submarkets by longer-term job growth -- I'm sorry, longer-term rent growth, and that's a function of job growth and supply growth. And then we try to identify the areas that will -- are the weakest level of that and try to cull the portfolio as a result of that. The Domain disposition earlier this year is a good example of that. Also, it seems like we're getting more unsolicited offers. And when we get unsolicited offers, we will take them on a case-by-case basis. And sometimes we will act on them if we get the right value. So I'd say those are the 2 driving forces of our dispo program.

Our next question comes from the line of Rich Hightower from Evercore ISI.

So most of my questions have been answered already. But quickly with respect to fourth quarter expenses. I think the guidance implies maybe high 3s, upwards of 4% of same-store growth in the fourth quarter. Is that driven by the uptick in repairs and maintenance that I think John referenced? Or is there something else going on there that we should be aware of?

No. I think it's what you are anticipating. And so on the expense side, we are expecting to land for the full year at 2.6%. And it's not atypical for us to run high in expenses in the fourth quarter. And so there's definitely timing elements with that in conjunction with what John Burkart said earlier as it related to repairs and maintenance.

Okay. That's helpful. And then just backing up to the occupancy headwind third quarter, fourth quarter and then into next year. Can you help us understand -- I guess the word for it would be the cadence of the headwind. As we kind of progress through 2019, is it -- the impact is more impactful in the first half of the year and then kind of getting to a normal seasonal occupancy in the third quarter and fourth quarter next year. Just so we kind of understand the quarterly sequential element there as we model it.

Yes, you hit it exactly. The greatest impact is in Q1 and Q2 where we were running at significantly higher occupancy. Our Q1, we were looking at the numbers, January, 97.1%, 97.2%, 97.2%, very high occupancy, Q1. And I don't expect to match that. As we move forward into -- through Q3, it's less, and then we get into -- I'm sorry, Q2, it's less. As we get into Q3, we're probably right on point. And our Q4 will probably be right on point. So the headwind is really largely related to Q1 and Q2 occupancy, and that's -- at this point. We're still in our budget planning process, so I'm just giving you big picture. To the extent we see greater opportunities or reasons to be more aggressive, we certainly will be. But at this point, those are the most obvious headwinds. Does that help?

That is perfect.

Our next question comes from the line of Rob Stevenson from Janney Montgomery Scott.

How significant is your current redevelopment opportunity across the portfolio? And how comfortable are you that you could achieve targeted returns for new projects at this point in the cycle given market supply conditions?

Sure. So big picture, we are renovating somewhere in the neighborhood of 2,500 units a year, and that implies a life cycle of over 20 years considering the size of our portfolio. So we are pretty comfortable that, that process can continue. We -- it moves around a little bit depending upon, of course, the rental market strength. And we constantly are looking to making sure we're achieving our expectations. But there's no reason to believe that our unit turn program would slow down in the coming years. As it relates to larger projects, we have several going that are listed, that are doing well. And again, there's probably, what, 4 properties that are specifically outlined, and that pipeline should continue as well. It's the asset's age. We look for opportunities to do more robust upgrades to the asset systems, et cetera, and create value. So I don't see our renovation program changing materially over the next couple of years.

Okay. And then what's the current expected stabilized yield on the 6 properties in your development pipeline?

In the mid-5% range.

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

So 2 questions here. First, Angela, if we think about the comments you guys spoke about on the outlook for next year, there's $0.10 of lease-up drag potentially from the deliveries. There's another $0.05 to $0.10 of drag from refinancing. But you guys are always pretty good on growing earnings. But in total, it sounds like there's upwards of $0.20 of drag for next year. Is that the correct way to think about it? Or am I not looking at that -- or did I not hear correctly?

I think you are thinking of it correctly. That's -- you're thinking of it the same way I'm thinking of it. And so although to the team's comment that operating fundamentals are coming in as we expect, we have other factors impacting FFO, and financing and dilution as it relates to timing of development and lease-up are 2 important factors.

Okay. And then, Mike, on the supplemental page where you provide 2019 outlook, I don't know if that's markets in general or you're specifically providing Essex revenue or rent projections. But suffice to say, if you're looking at 3 -- call it, 3% rent growth for next year on that page, and this year, rents are up 2.3%, revenues up 2.8%, it sounds like the environment for next year isn't going to be too dissimilar revenue-wise to this year given that occupancy sounds like, on the whole, will be flat. Is that a fair way to think about it, that revenue next year is really that 3% level? Or could we see occupancy improve that you might exceed that 3% level?

Alex, this is Mike. And we're not going to morph into a guidance conversation here. But let me just clarify what we mean in our market forecast. So S-16, our economic rent growth represents in these submarkets, not for Essex but for the broader submarket, what we think market rents will do in each of these areas. So our portfolio can vary from that by some amount and depending upon where it is, depending upon its competitive position within the marketplace, et cetera. And so our actual revenue result can be different. And again, this is for the entire year. So how it breaks down the rent growth curve, it's not a flat line, straight up during the year. It tends to be strong in the earlier part of the year, and weaker in the end of the year. And so there can be variations in these numbers. And so I think I'm going to leave it at that. We'll be giving guidance at some point in time or in late January, early February, and we'll talk about it in much more detail at that time.

And I will just add, Alex. I think you said that occupancy would be flat. That's not what I'm saying. I'm saying occupancy will be a headwind. So the greatest headwind will be Q1, Q2, with Q3 and 4 basically flat. But for the year, it will be a headwind overall. Does that make sense?

Yes.

Our next question comes from the line of Rich Hill from Morgan Stanley.

Just a quick one for me, recognizing that you want to stay away from giving guidance. But if you could think about the -- if you could consider the impacts of higher anticipated supply or slower-than-anticipated job growth as maybe the biggest risks to your market forecast or economic rent growth, which one is that, both maybe to the upside and the downside?

Yes, it's Mike, and that's a very good question. I think we have the supply pretty well locked out. Now we'll be -- we could be wrong from quarter-to-quarter like everyone, and I know everyone has been frustrated with the supply forecast over the past couple of years. But I think that now we're looking at it over a broader period of time, and it seems to make reasonable sense to us. So I would say the greater risk is on the job side. And I would say, again, this is -- our forecast on S-16 is a scenario. It begins with what's going on in the U.S. And then we have a lot of history with respect to -- the U.S. does 2.5% GDP and 1.3% job growth. This is what will typically happen in the Essex markets. So we try to make the jump from what the U.S. does into what our markets do. But as you know, given all the geopolitical issues and a variety -- interest rates rising and other things, the U.S. assumptions can change pretty significantly over time and they can change at any time really. So it's intended to be a scenario that begins with the strength of U.S. economy, and it rolls down into what that means for the Essex metros. Does that make sense?

Yes, it does. That's helpful. And are there any markets where you think might have greater variability than another, either to the upside or the downside?

Well, I think that Seattle has always been challenging. I think that we have beat up Seattle historically over the last several years, much greater. It's outperformed what our expectations have been. But it is more challenging just because if you look at the amount of supply that it produces, 1.8% versus about 1% in Northern California and 0.7% in Southern California, there's a greater degree of variability there. And so we can be wrong. The higher the supply number, typically, the more wrong you can be. So I'd point to Seattle.

Our next question comes from the line of Hardik Goel from Zelman & Associates.

Your supply outlook, you guys noted that you're adjusting for delays this time. Could you give us some insight into your process, just bottoms-up, what it was before and how it's changed and how you're actually accounting for those delays in supply?

Sure, this is John. So on a process -- from a process perspective, we drive every single site, and we benchmark where it's at, what we think is going to happen. We do this on a regular basis, and we're obviously looking at all the other information that's out there. And so we feel we have a great database of the various sites and where they're at. What's been a challenge is really trying to understand where they're at, when they're going to actually finish, complete -- when they're going to come to completion. And part of that issue relates to the fact that if you look on the building from the outside, you can't tell exactly where things are, how far along the building is. And so we're relying, to some extent, on conversations we have with developers or other people to try to gather information to really focus in on that site. What we've done in the sense of our adjustments is we looked at how often we are right and where's the -- how long with the delay it actually has been on an asset by asset basis and came up with a track record. And it's that track record that we then apply to all these deals. And so we looked and said, if on average we're missing it by several months, which is really the case, we made those adjustments. And so that's what's going on. It's based on a track record as we drive all the sites and then looking back and saying, how accurate have we been on the timing, what's the normal delay been, and we applied it equally across the board. Does that make sense?

Yes, that makes a lot of sense.

Let me add one more thing to that. And I think that what has typically happened, and we've seen out there in some of the data providers is when something doesn't get delivered in Q1, it gets pushed to Q2 and Q2 to Q3, and you end up with this lump of supply that is going to ultimately get done in Q4. And then, of course, that doesn't happen. It gets pushed to the next year. So that's been sort of the process. It started what John just talked about in that you end up -- it ends up being very confusing because you have a very large number in Q4, which doesn't get delivered, which then makes next year start out with a very large number, and it confuses the entire picture. So we're trying to cut through all that and create something that is hopefully more sustainable and more accurate.

That's really helpful. We can certainly appreciate the challenges. Just one follow-up to that. What is your radius like? I hope, John, you're not having to drive around all of Southern California and Northern California. How do you decide this asset is within our comparability set?

Yes. So although I do a lot of driving, there's a whole team of people in the research department that do the specifics, and they have a -- actually a mobile database that they log into to check things out. So what they're doing is they're actually driving the entire MD. So they're looking at everything out in that area to understand exactly what's going on. Again, we don't look at it and say, here's an asset that we're going to go within 3 miles. And different people have different ways of doing it. We look at the whole supply/demand picture, and we make an assessment according to that. So we're looking at all assets that are 50 units and up, driving those assets in the MD, seeing where they're at and factoring that in. Obviously, from an operational perspective, we have individual operational asset reports that our research department creates that enables us to better understand what supply is going to impact what assets and, therefore, adjust pricing strategies. But from a big picture, from the economic perspective, we're looking at the whole MD, each of the MDs. The team does a lot of work in this area.

Our next question comes from the line of Rich Anderson from Mizuho Securities.

Mike, have you given any thought to a Plan B, say, Costa-Hawkins gets repealed or you're not even going there right now? In other words, what do you do? What do you...

We always have a Plan B, but keep in mind that we operate in 70 different cities in California. So we're more diversified than you might think. And as you know, probably the greatest risks are in the more urban-type locations, and we are a mix of urban and suburban. I think somewhere around 10% of our properties actually are in the urban core. So we think that there's just an inherent safety in the portfolio. And I've commented previously about concentrations. There's only 4 cities where we have more than 2,000 units. And so, again, we're pretty diverse, and so we're not hugely impacted under any scenario, although we do look at -- we do have a contingency plan that might target a few cities that we're most concerned about. So I wouldn't say we wouldn't do anything, but I would say that our feeling is we're pretty well positioned overall.

No home properties in your future, I'm gathering, to use that as an example.

Probably not. I mean, we do track other metros because we want to make sure that the West Coast is competitive with some of the Eastern metros for sure. And like -- looks like job growth in certain of the Eastern metros are pretty appealing of late. And -- but it's really trying to confirm whether our existing property profile is appropriate given the broader U.S. landscape. So it's sort of confirmatory. And based on that, looking at supply and demand dynamics, we feel good about the West Coast.

Okay, yes. And then just related, what percentage of your portfolio is condo maps, just as a reminder? And is it concentrated in some of those urban areas where perhaps should Costa-Hawkins get repealed, that certain municipalities would be inclined to follow the rent control sort of mentality? Can you comment on how and where it is mapped?

Yes, I can. Roughly 8,600 units in California are condo map, and then condo mapping in Seattle is easier than it is in California. In California, if you don't have a condo map coming out of the gate, you're unlikely to get one unless -- may take you many years in order to get one. And so 8,600 of our California portfolio would be the condo map.

15%, 16%.

16% -- 15% to 16%. Yes, but they tend to be in more of the urban core.

Our next question comes from the line of Wes Golladay from RBC Capital Markets.

I'm just looking for an update in San Jose, more in particular, that large lease-up Santa Clara Square. Has that impacted the market? And how do you model that delivery and job for the next few years?

This is John Eudy. We opened that right after the first of the year, as you're probably aware. And it's a pretty deep market. A lot of the Sunnyvale product got burned off on the inventory this year, and we think it's well positioned to have a pretty good start come late Q1.

Okay. And then going back to that condo mapping question. Would you look to convert the condos as more of a defense for potential repeal of Prop 10?

We have maps on, like Mike said, roughly 8,600 units, most of which are the urban core units that have been developed in the last 15 years. And we're always looking at the metros between NAV value, condo conversion versus as an apartment. So that optionality is there, and we will make the right decisions at the right time.

Exactly.

Our next question comes from the line of Paul Pawlowski (sic) [John Pawlowski] from Green Street Advisors.

Mike, I understand your comments about the transaction market only seeing a slowdown in volume, no impact on pricing in high-risk cities of rent control. There's a very real chance this comes on Costa-Hawkins on a 2020 ballot as well. So I think conversations you and John are having, that suggests that the transaction market slowdown can be more multi-year in nature and not exactly everything continues unfettered after November 6.

Yes, it's Mike. It's a good question, and honestly, we don't know the answer. As you guys actually pointed out, there's a lot of money in private hands looking for yield. And it's there. It's not going away probably anytime soon. So how much we'll transact given the amount of money that's searching for quality apartment deals, obviously, remains to be seen. I guess I'm -- I wouldn't be as maybe dire, as you're suggesting, as it relates to the transaction market. I mean, conditions can go on a lot longer than we might think before pricing or -- you see that freeze. So it would be a guess and I'd be speculating, so I think I'll probably just leave it at that. I think that there's no reason to believe that things will change overnight. They generally take significant amount of time to change, and I would guess that it would be, at the very earliest, sometime a year from now or something like that.

Okay. On Seattle, and I know this is a market rent forecast, the acceleration you're calling for in terms of economic rent growth from 2% to 2.9%, are you seeing any leading indicators within your portfolio in Seattle that suggest market rent growth is stabilizing? Because the pace of deceleration we're seeing in Seattle across you and your peers' reports have been pretty persistent deceleration. So wondering what really causes the conviction of a 100 bp acceleration in market rent growth next year.

Sure. This is John. And what we're seeing, to start with on the supply side, is we see the fourth quarter as being pretty heavy with supply. So that will be a tough fourth quarter for us now. And then Q1 and Q2, also significant, a little bit less and then lightening up quite a bit in Q3, Q4 in Seattle. We also -- when we're looking at where we were for -- we talked about the acceleration we have in the rent growth this year in S-16, which is projecting into '19, we're sitting right now on job growth that's, as I mentioned earlier, it's about 3.7%, very high job growth this year for the third quarter. Compare that to last year, last year was a low point. Last year, we were down about 50 basis points -- sorry, '17, we were down about 50 basis points in job growth. And that impacted our '18 numbers. At this point, being up in job growth in '18 and doing very strong, that will actually benefit the '19 rental market. There's a little bit of delay between job growth and the rental market. So it's really that combination of a better employment picture with declining supply that will get us to our rent growth numbers. Does that make sense?

It does.

It'll be a little tough in the middle, though. The fourth quarter is going to be challenged. I'm sure it'll be noteworthy.

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

Our last question comes from the line of Karin Ford from MUFG Securities.

I know we focused a lot on the occupancy counts for next year, but I just want to make sure I understand the rent growth that's earned in from this -- from the past leasing season. You said new leases were up 3.5% and renewals were up 4.2%, I think, in the third quarter. Is that correct? And if so...

That's correct. Yes.

So we're looking at a high 3%, I guess, kind of level of earned-in rent growth from the peak leasing season heading into '19. Is that correct?

Well, Q3 was strong, and that's -- I was trying to articulate that. And part of that relates to the curves changing. 2018 was a normal seasonal pattern, and comparing that to 2017 gave us kind of a big pop in Q3. As we go to Q4, we'll face more pressure, and our loss to lease will largely dry up. And so when you look at '18, obviously -- or '19, we're not giving guidance, but we're not in those -- in the high numbers that you're talking about. We'll have the headwinds from the occupancy with a solid rental market, and yes, we'll give guidance later on.

And can you just remind us what percentage of your leases you signed in 3Q?

Yes. I think we had roughly 14% turnover, if my memory is right, 6,500 leases or something like that overall or something. It's the bigger percentage. It's meaningful, but it's not -- we still signed quite a few in Q1 and Q4.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Michael Schall for closing remarks.

Thank you, Dana. Thank you for your participation on the call today. We look forward to seeing many of you next week in San Francisco at the NAREIT Convention. Have a good day. Thanks for joining the call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.