Essex Property Trust Inc (ESS) 2018 Q4 法說會逐字稿

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

Statements made in this conference call regarding the 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. You may begin.

Thank you, and welcome to the ESS fourth quarter earnings call. John Burkart and Angela Kleiman will follow me with comments, and John Eudy is here for Q&A. Today, I will review our 2018 results, summarize our expectations for 2019 and provide an update on the West Coast investment market.

Before beginning, I'd like to recognize John Eudy, whose retirement was announced last month, for his many contributions to the company's success over the past 30-plus years.

Turning to the first topic. 2018 was another solid year for Essex with 5.5% core FFO per share growth and 2.9% same property NOI growth, both slightly better than anticipated at the start of the year. To put 2018 results into a broader perspective, ESS has generated a 16% compounded annual total return to shareholders since its IPO 24 years ago, ranking us #1 in total shareholder return for the REIT industry since the IPO. Over that period, we achieved an 8.5% compounded annual growth rate in FFO per share and a dividend that has grown for 24 consecutive years. Next month, our board will consider increasing our dividend for the 25th year, placing us among a select group of company known as dividend aristocrats.

Achieving these results was as much about discipline as it was about being opportunistic, especially as it relates to capital allocation. We have found that avoiding major mistakes and understanding the local real estate markets has led to a winning formula. To use a baseball analogy, our goal is to get many base hits while minimizing unforced errors.

Although 2018's 5.5% FFO growth is below our historical average, it is consistent with later phases of an economic cycle and the challenges in finding investments that add to per-share core FFO and NAV.

While we are proud of our nearly 25-year track record as a public company, our team remains focused on continuous improvement of our platform for the next 25 years as it relates to residents, colleagues and shareholders.

Setting the stage for 2019, we continue to see strong levels of housing demand relative to the national average across our West Coast footprint. We ended 2018 with trailing 3-month job growth in the Essex metros of 2.1%, which exceeded our initial expectations. The primary drivers of the outperformance were the tech markets of San Jose and Seattle, where we saw a strong increase in high-quality jobs during the quarter compared to 1 year ago. We believe this trend will continue as tech firms continue to expand in our markets.

Over the past year, job openings in California and Washington at the top 10 public tech firms, all of which are located in Essex markets, grew 49% to over 23,000 open positions, the highest level we have seen since we started tracking this data several years ago. While considerable recent attention has focused on the announced expansion of large tech companies in other areas of the country, we'd like to note that these very same companies were pursuing nearly twice as much growth in their West Coast markets during the same time period, as demonstrated on Page S-16.1 of the supplemental.

Turning to 2019. We continue to expect the tight labor markets and low unemployment will continue to push wages upward. In 2018, personal income growth was estimated at 6% in our markets compared to 3.9% for the U.S. We believe this outperformance will continue into 2019.

As a result of wages growing faster than rents, we continue to see rent-to-income ratios decline in nearly all of our markets as compared to a year ago, leading to improved rental affordability. Our supply estimates for 2019 have not changed from what we published in our third quarter supplemental. Overall, we expect a similar level of supply deliveries in 2019 as compared to 2018, although there are significant differences by market such as large increases in apartment deliveries in downtown L.A. and CBD Oakland, offset by reduced apartment deliveries in Orange County and San Diego.

Last quarter, we discussed the change in methodology for estimating apartment supply by factoring construction delays into our forecast. This resulted in pushing the delivery of 3,000 multi-family units from 2018 to 2019, resulting in a supply delivery estimate of roughly 35,000 units for 2018.

Looking back to our original supply estimates at the beginning of 2018, we overestimated multi-family supply by 8% primarily due to construction delays, while third-party providers overestimated 2018 supply by as much as 65%.

The improved accuracy of our multi-family supply estimates reflects several process improvements implemented by our research team who track and frequently visit apartment communities under development. Although we are monitoring several macro-related risks to the economy, steady supply levels and healthy job growth support our expectation that rent growth will be mostly consistent with long-term averages for the Essex markets in 2019.

Turning to investment market conditions. A review of transactions in our West Coast markets since the last quarterly call suggests no change to cap rates. The heightened market volatility in December resulted in a few deals being dropped. However, conditions have since stabilized. Generally, cap rates do not move quickly, and the first indication of changing conditions is often lower transaction volumes. With plenty of capital still looking to buy apartments and tempered Fed expectations for interest rates, we expect little change to cap rates in the near future.

We continue to view the best risk-adjusted returns on our investment dollars will be found in the preferred equity market, and we expect to close a few more deals in 2019 given our current pipeline.

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

Thank you, Mike. For the full year, we achieved 2.8% year-over-year same-store revenue growth, exceeding our original guidance. I would like to thank all our associates for their hard work and focus on achieving these results.

Overall, our markets are stronger today than 1 year ago. In the fourth quarter, market rents were 3.5% higher at the end of 2018 compared to 2017.

Consistent with my comments last quarter related to the strengthening of the market and our related operating strategy, we expect to continue emphasizing market rent over higher occupancy in 2019. Our 2019 guidance contemplates a reduction of occupancy of about 20 basis points to 96.6% for the full year.

Regarding expenses, we continue to see pressure in 2019 in utilities, taxes and wages, with offsets in other categories, largely controllables, leading to operating expense guidance of 3% year-over-year for 2019 at the midpoint.

The operating team continues to do a great job of identifying opportunities to increase efficiencies in the operating platform. In 2018, they had held controllable expenses to 1.6% year-over-year growth, and in 2019, they're expected to do about the same.

Office leasing activity provides insight into future rental demand. We are encouraged by the robust office leasing environment and continued office construction announcement in the second half of 2018, which we've illustrated for the major public tech companies on Page S-16.1 of the supplemental. I will provide more regional detail on this leasing activity in my market commentary.

In terms of supply, the focus of new apartment deliveries continues to be in the downtown locations. Overall, in 2019, we expect that supply deliveries as a percentage of stock will be 2.8% in the downtown markets versus 60 basis points in the suburban areas surrounding the CBDs of the largest coastal cities. Essex's portfolio is not concentrated in the downtown locations and therefore should be less impacted by new supply.

Now I will provide an update on our market. For the full year of 2018, Seattle had its strongest year since 2000, with 3.4% year-over-year job growth. Although Amazon announced the second and third headquarter locations, Amazon's open positions for Washington have increased over 150% from Q4 2017. In Q4 2018, there were almost 9,000 openings at Amazon in Washington.

Other major employers in the Pacific Northwest hit major milestones and there are continued plans to expand their Pacific Northwest offices, including Microsoft breaking ground on their 2.5 million square foot expansion in Redmond; Costco receiving city approval for their 1.2 million square foot expansion in Issaquah; and Facebook's new lease of over 1 million square feet in South Lake Union. Additionally, Amazon and Facebook continue to expand outside of Downtown Seattle, pre-leasing 750,000 square feet in office in Bellevue, Washington.

Moving to Northern California. Job growth in the San Francisco Bay Area averaged 2.3% year-over-year in Q4, led by San Jose with 3.2% growth, the vast majority of which occurred in high-paying industries such as professional and business services and information. Tech companies, Google, Facebook and DoorDash, expanded their downtown San Francisco presence by over 2 million square feet.

In the South Bay, Google was active in purchasing over $1 billion worth of land and property while expanding their Sunnyvale and Mountain View footprint by over 400,000 square feet. Our year-over-year same-store revenue growth in the same period was led by our San Mateo and San Jose submarkets with 4.2% and 3.2% growth, respectively; followed by Fremont at 2.9%; Oakland at 2.1%; and San Francisco with 1.7% growth for the same period.

Supply in the San Francisco and San Jose MDs is slightly lower in 2019 compared to 2018. However, we see supply in the Oakland MD increasing to 3,500 units, of which 3,000 units will be delivered in downtown Oakland. Although the total supply in the Bay Area is still relatively low at 70 basis points, it will be impactful in downtown Oakland.

Continuing south. Southern California job growth for our markets averaged 1.2% in Q4, which was negatively impacted by Orange County. Los Angeles remained consistent, with the region posting 1.4% growth for the period. Netflix continues to solidify their presence in the market, pre-leasing an additional 355,000 square feet in Hollywood. Google and Facebook both completed deals to expand a combined 860,000 square feet in West L.A. Year-over-year revenue growth in the fourth quarter of 2018 was led by our Woodland Hills and West L.A. submarkets, with 4.7% and 4.3% growth, respectively, trailed by Long Beach with 2.8% growth and Tri-Cities with 2.4% growth, while L.A. CBD remains flat.

Regarding supply, I've had similar comment for downtown L.A. as in Oakland. Although the supply overall in L.A. County is relatively low at 60 basis points, the concentration in downtown L.A. is significant. We expect deliveries in downtown L.A. to increase from about 2,000 units in 2018 to about 4,000 units in 2019.

In Orange County, jobs in the fourth quarter grew 30 basis points year-over-year and actually turned negative when looking at December 2018 over the prior year's period. A similar situation occurred in the numbers last year and it was revised with the annual benchmarking in March, which we will review closely this year.

Finally, in San Diego, year-over-year job growth was 1.9% for the fourth quarter of 2018. Most of the job growth is attributed to jobs added in high-paying industries.

In addition to tech giant Apple's plan for a campus in Austin, the company also announced goals to add over 1,000 employees in San Diego as well as Culver City and Seattle.

Military activity will have a moderate impact in the market on the margins with 1 carrier having departed at the beginning of the year and the potential of 2 inbound carriers arriving later in the year. Each carrier strike group has an estimated 7,500 crew members.

Year-over-year revenue growth in the fourth quarter of 2018 was 4.2% for our North City submarket, 3.9% for Oceanside and 2.4% in Chula Vista.

Currently, our portfolio is at 97% occupancy and our availability 30 days out is at 4%.

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

Thank you, John. Today, I will focus on our 2019 guidance, followed by an update on capital markets and the balance sheet. The key assumptions supporting our 2019 forecast starts on Page 4 of the press release and S-14 of the supplemental. We are guiding to a midpoint of 3% for both same property revenue and expense growth. The revenue growth assumption is primarily driven by our expectation of a steady market rent growth near the long-term average and for our West Coast market to continue to outperform the U.S. average.

On core FFO guidance, we are expecting a growth rate of 3.7% at the midpoint. We mentioned on the third quarter call that there are 2 key headwinds impacting this growth rate. First is debt refinancing, as the effective rate on the debt coming due is below current rates in the marketplace. Second is the lease-up of our development pipeline. When a building first open, even though it is vacant, we recognize the operating and associated interest expense. This effect creates a temporary drag on cash flow. Since over 85% of our development pipeline will start lease-up this year, we anticipate a more meaningful FFO per share drag of between $0.05 to $0.10 in 2019. Once the buildings are stabilized, which typically takes 12 to 18 months per phase, we expect the drag to become a tailwind.

Turning to capital markets activities. For the year, Essex was a net seller of assets, as we arbitrage between private market yields and our cost of capital. During the fourth quarter, we sold 8th & Hope in Downtown Los Angeles for $220 million, which represents a cap rate close to mid-3%. We purchased this property over 3 years ago for $200 million, which we funded with common stock when we were trading at a large premium to net asset value.

Recently, using the proceeds from the sale of this property, we have repaid debt and repurchased stock because we have been trading at a discount to net asset value. Since the beginning of 2018, we have repurchased $108 million of stock at an average price of $243.44. Currently, our 2019 guidance does not assume any additional stock repurchase other than what had been completed through January. As always, we remain disciplined capital allocators and are ready to adjust our plans, depending on market conditions, to maximize shareholder returns.

Lastly, on the balance sheet. We plan to repay about $880 million of debt in 2019. This includes prepaying a $290 million secured loans that matures in 2020 without incurring any prepayment fees. We generally favor refinancing our maturities with long-term unsecured debt, subject to relative pricing, of course.

As for the $290 million loan prepayments, we had discussed on our previous call that the average pay rates on this debt is 5.7%, while the effective rates used to calculate GAAP interest expense is 3.8%. So even though the FFO impact will be negative, we will generate annual cash savings of approximately $3 million.

In summary, our balance sheet remains strong with only 25% leverage, 5.4x debt-to-EBITDA and over $1.5 billion of liquidity. We are well-positioned to take advantage of any opportunities that may arise in 2019.

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

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

Wondering if you can talk about the cadence of same-store revenue growth throughout 2019, given difficult occupancy comps, it seems at least for the first quarter -- probably for the first half of the year.

Yes. Sure. This is John. The first quarter is going to be a little bit tougher, and part of it because there's some noise that we had from other income, the benefit of other income last year. So the year-over-year comps are a little tougher. For example, in January, our rental revenue on preliminary numbers is 3%, but the actual revenue -- overall revenue is 2.6%. So it'll come out looking less than desirable, but the reality is the market's actually stronger this year than it was last year. So overall, we're in a better position but the first quarter numbers would be lighter and then it'll pick up throughout the year.

And then, just on development. It looks like 2 of the projects were delayed by 1 quarter, and I recognize that execution was only a few weeks. So are these projects actually seeing delays? Or is it upward normal quarterly shift?

This is John Eudy. The labor issue delayed a couple of our deals. They're actually only pushed out about 1.5 months but it pushed into the next quarter. So that was the reason behind it.

Our next question comes from Trent Trujillo with Scotiabank.

Appreciate the commentary on supply in different markets, but it looks like there's a lot of supply that's scheduled to deliver in the Bay Area. So how are you thinking about your ability to retain residents, perhaps maintain occupancy and drive rent growth? Because I believe one of your peers cited recently that the new assets could have rents that are at 15% to 20% discounts to existing products. So do you think that'll be a drawing point? Or do you see enough demand that it may not be much of an ultimate impact?

Hi, Trent. This is Mike. Thanks for your question. We continue to see the Bay Area as the area that has the strongest job growth and the strongest economy. And if you look at overall levels of supply, we think 2019 will be somewhere around 1% of stock on the apartment side and 0.7% of stock on total supply in the Bay Area. So obviously, when you're growing jobs at 2%, those numbers do not appear to be concerning. And the other point I would make is there's sort of a trend toward fewer for-sale units being built and a few more apartments being built. And the for-sale component is impacted by higher mortgage rates and higher prices. I think California had median home price increase of somewhere around 5% over the past year. So the for-sale side is getting more expensive, and I think that, that benefits the rental. But when we look basically at supply and demand, we think demand significantly outstrips supply as it relates to all housing and apartments as well.

Okay. Great. And then, maybe one for John Eudy. This might be one of the last times we can ask about this with your transition. But you took a lead role in the Prop. 10 campaign, so maybe can you provide your latest thoughts on affordability measures and maybe let us know about the efforts you've seen and been involved in and what you think could be a potential resolution to the housing shortage and affordability issues in California?

Well, that is a very long-winded question. I'll do my best to answer it. First off, as you know, Prop. 10 was defeated handsomely 60-40 by 20 points, and I think the leadership with the legislature and our new governor understand that repealing Costa-Hawkins was not good for California and California housing. So that's good. As far as all the measures that are out there to create more housing, it gets back to the economic drivers and how are we going to make it work. I can't speak to how some of the affordable housing solutions that have been bantered around at the legislature are actually going to get done, but there is discussion. But as you all know, the economics have to work for anything to be built, and it's been tough the last couple of years to even keep up with the supply demands that we've had. So I don't see it blowing up, if you will, meaning an unabated amount of construction beginning to occur. It's going to be a long struggle, and California is in a deep hole for housing shortage, if you will, and it's going to take a long time to get out of it. There is a lot of focus on post-Prop. 10. What can we do, if anything? And I think that's being discussed. If there are any amendments to, or call it, a reform to Costa-Hawkins, they would be very minor is my expectation.

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

So going back to your revenue guidance of 2.5% to 3.5%, how comfortable are you with that range? And what do you think it will take to get to the upper versus the lower end range in terms of rent and occupancy?

Sure. This is John speaking. We're very comfortable with our range and, obviously, with our midpoint at this point in time. The markets right now are stronger than they were a year ago. We mentioned at the last call, we had a better loss-to-lease position, which puts us in a good spot. We shifted our strategy where we're favoring market rent as opposed to occupancy. So all those things lead to a stronger market. At the same time, though, there are some headwinds because of the occupancy headwinds I mentioned, about 20 basis points of occupancy headwinds that will work against us. What would make things better or worse is, really, jobs. I would say, if the jobs -- we're watching the Orange County jobs, I mentioned that. And if that turns out unfavorable, that will hurt that market, not a huge market but it will hurt that. We're seeing some stronger job growth certainly in Seattle and the Bay Area. So that would be the upside, and the downside would be Orange County jobs. Does that answer your question?

Yes. Actually also on supply, you mentioned that, right now, you have a sort of slippage into '19. But it seems as if slippage is a consistent theme. So have you accounted for slippage from '19 to '20 into your projections?

Yes. This is John. We made a shift last year because you're right, it is a fairly consistent theme where we go out and we drive all of the assets and look and make an assessment as to where they're at, come up with our best judgment as to the timing. But even then, there's errors just because of the labor shortage and the slippage. So what we adjusted is we continued that process of driving every asset, but then we made a more of a macro adjustment based on our experience that we've had over the last several years to modify that. So we're more confident this year than in the past as it relates to our supply expectations. But yes, I acknowledge it. The last couple of years have been tough because of the delays.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Question, when you look at your forecast for supply versus third-party forecast for 2019, are there still material differences? And do you think they've got a handle on the timing of completions at this point?

Hi, Austin. It's Mike Schall. As John just alluded to, we spend a lot of time on the supply estimates, and that's largely because there are such high degree of variation out there in terms of estimates. As I noted in my comments, that some of the vendors had 65% more supply in 2018 than was actually delivered. And typically, that just moves into the next year and then the next year appears to be overstated. So without making a systematic adjustment like the one we made to move 3,000 units from this year to next year and then do the same thing from '19 to '20, you end up with these huge numbers that are out there that are well beyond reality, in our opinion. So we think that similar to '17 and '18, there will be around 35,000 units per year that are delivered in our West Coast markets. Unless something changes in the construction labor market, which, candidly, we don't see. It was a point we made last time, on last quarter's call, that I don't know how you could expect a significant increase in the amount of supply when the labor market hasn't fundamentally changed. And in fact, I would say that there are demographic issues within the construction labor market because there are more people retiring than going into the trade. And you also have, maybe as an anecdote, people, construction workers diverted to some of these fire-destroyed areas that are taking people out of the labor markets in some of the metro areas and moving them into the areas that had these fires. So without a fundamental change in construction labor, I don't see how you could possibly produce a tremendous number of more homes. Makes sense?

Yes. That's an interesting anecdote. Do you think once we pass peak construction -- or peak supply deliveries in a specific quarter and that pipeline begins to slow, that there's, I don't know if you call it a greater risk or greater likelihood that projects are completed on time?

Yes. I think I'd go back to what John Eudy has said. It's all about the economics. So for the past couple of years, we've had rents growing at somewhere around 3%, 2% to 3%, and construction costs have been growing at the high single-digit to low double-digit rate. And so the net effect of those 2 numbers is the compressed development yields, and this is why I think it's unlikely that you're going to have a significant increase in the number of units developed from the perspective of just economics in terms of development economics. And really, this underlies our switch from direct development, where we're buying land and for future start and concern, therefore, about that construction cost increase between when we commit to land and when we start. And rather than that, focus on our preferred equity portfolio where we're financing someone else's development deal and we are coming in at the point that we know the cost because they have construction loans, they are signing contract with a general contractor, et cetera. So we think that's a lower risk, more appropriate way to approach development at this point in time.

And then, last one for me is, you talked about downtown L.A., significant concentration of supply, doubling in '19 versus '18. Can you just speak to the concession trends you're seeing as well as what your guys' exposure is in the market now following the sale of 8th & Hope?

John, do you want to do that?

Sure, I'll grab that. Yes. So what we're seeing now as far as concessions in that market is pretty consistent with what we typically see in the fourth quarter because, again, reminding everybody that it's a lower point in the season. So concessions are up a couple of weeks. They're now roughly 6, 6 to 8 weeks in the downtown L.A. markets, specifically as it relates to lease-ups, not same-store, but lease-ups. And that's fairly normal. One might expect with the new supply coming on this year that it might get more aggressive. We'll watch that carefully. As it relates to our exposure, the downtown market for L.A., our exposure is pretty small. It's right now a couple of percent of the whole portfolio. It's really not very big at this point after that sale. Did that answer your question?

Yes. Absolutely. That was very helpful.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

So 2 questions. First, on the operating expense, you guys talked about your ability to really make headway on the controllables to offset the payroll, utility and taxes. But it certainly seems, Mike, to your comments on labor shortage, it certainly seems like payroll wages is going to be a continuing pressure point. So can you just talk, ongoing, you said that you could manage it this year. Do you think that's sustainable? Or do you think that expenses are going to rise in the future if you guys are unable to further control the controllables?

Hey, Alex. This is John. I'll take a stab at it. I know you said Mike, but I got the controllables in my bucket here. So as it relates to wages, you're right, there's significant pressure out there. Let's not forget that one of our issues is affordability. And so as wages go up, it does help the overall picture much, much more. So if this was a long-term trend, that would actually be very beneficial for affordability and therefore rents. But getting back to your specific question, sure, if in the end of the day it goes up forever, we'll run out of -- potentially run out of opportunities, but we continue to find ways to leverage the asset collections that we have with sharing of personnel to reduce total labor while we're still paying our people significantly more. So everybody's winning in that equation. We're also finding opportunities to leverage technology to automate various processes, and in doing so, improving the customer experience, making things much faster as well as our employee experience and, again, reducing labor or vendor cost. So what we see for the foreseeable future is a lot of opportunity but a tremendous amount of work with change management to try to implement the different things that we're looking at. Did that answer your question there?

Yes, it does. And I was referencing Mike's comment on wage with construction labor. But -- and actually, now, I'm going to turn to Angela. On the guidance page, it looks like capitalized interest is expected to be higher, if I'm reading the guidance page correctly. And it -- so if you could just talk, are you guys anticipating increasing the development pipeline? I mean, it didn't sound that way, but if you could just walk through why capitalized interest looks to be higher in '19 than '18?

Oh, sure. And I'm happy to, Alex. That's really just a function of our current development pipeline. We still have about $250 million -- a little over $250 million of spend this year. And because of that, capitalized interest is going to naturally increase. So it's nothing more than just how those numbers work out.

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

I think, Mike, in your prepared remarks, you mentioned preferred equity as your most attractive risk-adjusted return for your dollar spend. Yet your guidance for this year anticipates only $50 million to $100 million, which is less than what you've invested last year. And on top of that, you expect to be a net seller this year. Just wondering if we should read into that, that most investment opportunity we'll get in pricing.

Yes, John, it's a good observation. Thanks for that. I think it has to do with the other point I made a minute ago, which is construction cost increasing faster than rent, and a lot of these deals are being pushed back. In fact, most of our pipeline in 2019 represents the deals that we thought we're going to close in 2018, and it just has essentially been pushed back. So they require typically more equity than some of the sponsors originally thought they would and otherwise need to be reworked. So basically, it's taking us a longer period of time to get the preferred equity deals to the closing table. And so we remain optimistic in 2019. We actually have a very good pipeline right now. And so perhaps there's a little bit of upside to the guidance assumption. But again, given the inherent uncertainty, we are -- we want to make sure we had a level that we could, for sure, close.

Okay. And then, John mentioned Orange County and the slight loss of jobs that occurred in December. It doesn't sound like you're concerned about it too much at this point, but you're still maintaining your 20,000 jobs forecast for the year. I'm just wondering, if you had to reduce that job forecast, how sensitive would that be to your market trend forecast?

Yes, John. This is Mike, and John will follow me. Job growth there is 1.2%, and job growth in Southern California is about 1.3%. So I don't think that we have been aggressive on jobs. I think we're being thoughtful and realistic. So all of these assumptions can vary to some degree, and -- but I think, if you look back historically, we've been pretty close on virtually everything, and if anything, maybe a little bit conservative.

Yes. And I would just add, remember last year with Orange County, the jobs were pretty flat and then the revisions came through and they revised back a whole bunch of jobs. We're watching that situation. I'm not sure if that'll happen again or not but we're watching that closely. We're not seeing signs that the market is having great struggles. I just want to bring it up on the call so people are aware and seeing what we see that there was a negative print in jobs in December.

Our next question comes from Drew Babin with Robert W. Baird.

Question. Going into next year, obviously, there were quite a few markets where you had a pickup in kind of the second derivative of leasing in 2018. In your guidance, are you assuming that any markets have another second derivative improvement in pricing power for 2019 guidance purposes?

I wouldn't say it that way. I would look at it and say, we expect the markets to continue to stay strong. We had a -- really a shift in the market, and it goes all the way back to '17 when things were slow and in the first half of '18, and then they shifted, clearly shifted. We see a continued strength in the market but not necessarily something really taking off, but we do see continued strength in the market. And we look at factors like the Northern California job growth, the Seattle job growth and the consistency in the SoCal region, again, with the exception of Orange County, and expect that things will continue pretty good over the next year, again, where supply is generally in check overall in the larger markets.

Okay. That's helpful. And I guess, kind of converting that over to loss to lease language. It would seem, based on your market rent forecast for '19 as well as some of the comments on loss to lease towards the end of '18, that revenue growth would maybe be a bit higher than implied by the midpoint of guidance. I know you talked about the 20 basis points of occupancy decline. I guess, can you quantify the piece of that kind of caused by overall, I think, deceleration in property fee income growth? Or kind of what's the drag being created by that?

Let me kind of walk through big picture, the way I look at it. Typically, again, and thank you for referencing loss to lease. To Essex, it's one of the key metrics along with market rent, and of course, occupancy adjustment is how we look at it. And so when looking at loss to lease, we typically like to look at it in September. It's after peak leasing and before things slow down in the normal seasonal slowdown. So at that point, we had about 1.6% for the portfolio loss to lease. And again, on average, with 12-month leases, you're going to figure you're going to get all of that over the next year. Then if you look at our rent in S-16, it's 3.1%. And if you look at that and say, "I'm going to take a midyear convention on how that hits the market," that gets you about another 155 basis points. And then, if you take the 20 basis points of occupancy and subtract that out, that gets you into about the 2.95% range for revenue and we're pretty darn close to that at 3%. So that's big picture how we kind of look at it and see it -- the year, so I think we're pretty spot on with our 3% midpoint guidance.

Okay. The explanation's very helpful. And lastly, just in Seattle, it would seem based on some of the data out there and some commentary that supply is beginning to kind of directionally shift from downtown out more towards the Eastside and also some news about tech firms possibly getting behind the creation of additional kind of lower and middle income housing out on the Eastside. I guess, are you seeing anything in the market at this point in time? Any kind of disruption? And what kind of visibility could you provide about some of those Eastside submarkets around Seattle?

Well, yes. I think you're right, Drew. There is more development on the Eastside than there was. It was -- development was very focused on Downtown Seattle first and then Downtown Bellevue, and then now it's moving more to the suburban areas of Seattle. But we see an overall trend of reduced supply in the Seattle area more broadly. So in '18, we had 9,750 units in Seattle being delivered, 9,000 in '19, and then about a little over 6,000 in 2020. So we think actually that the supply side is actually going the right direction. And then, the other side is -- obviously, the demand side, which continues to be very robust. So -- and maybe the other piece, which is affordability, which we're a bit concerned about more in the California markets, Seattle is much more affordable. So we still view Seattle as being an appropriate area to invest. And as you can tell from our 2019 expectation, it's just a small bit below our expectation for market rent growth compared to Southern Cal and Northern Cal.

Our next question comes from Wes Golladay with RBC Capital Markets.

Looking at that 8th & Hope transaction, it was described as an arbitrage. And I'm just wondering, it looked like you bought all the stock in the last week of the quarter. Was it conceivable that you guys could actually sell the asset and buy the stock in a 1-week period? Or were you contemplating that maybe throughout the entire quarter?

Yes. Hey, Wes. It's Mike. Yes. I guess, we hope to buy the stock if we could. If we didn't buy the stock, we thought that debt rates had increased to a point that there was still positive arbitrage, just kind of smaller refinance, for example. So it was going to be positive arbitrage no matter what happened, in our view. But obviously, the opportunity to buy the stock back was the better outcome and we're pretty excited about it.

Yes. Well, congrats on buying the bottom. Big picture, though, when you sell an asset at 3.5% cap rate, which I believe you cited, do you think, eventually, if there's more transactions like that, developers will start to lower their hurdle and then maybe this whole low interest rate environment could just be maybe negative long term for overall rent growth?

Well, it's pretty challenging on this side to respond to hypothetical type of questions. But because our view is it's all a matter of looking at the landscape a variety of different points of view. So in that case, I guess, what you're talking about is higher valuations of apartments are going to increase. The next question I would ask you is, "Hey, does that mean that the stock price is going to increase, too, and our cost of capital is going to decline?" Because again, we are constantly looking at what's better, the real estate portfolio or the value implied in the stock and trying to understand that's where we make good capital allocation decisions. So to ask a question that just focuses on one variable without the other variable is challenging to answer. Does that make sense?

No. That's a fair point, and I definitely agree with the way you look at it from the relative value of your stock.

Our next question comes from Hardik Goel with Zelman & Associates.

I was just wondering, on the supply, on your adjustment there, obviously, you guys have the best view into the market. You guys drive around. You view these assets. I'm just wondering what's causing the delay beyond just the labor issues. So if you look at assets that are maybe high-rise versus something that is more mid-rise, is the high-rise more likely to be delayed than the mid-rise? Are there certain kinds of projects that are more likely to be delayed? What kind of color can you add on the delays specifically?

This is John Eudy. I'll try to answer that. The more complicated the structure, obviously, the higher likelihood that there could be more delays because everything stacks up on itself. The general labor issues that the industry has faced over the last year specifically has been the driver, and the out-migration of the older construction folks that are no longer there like they were 10 years ago is part of the answer. So it's a little bit of everything, Hardik. But yes, the more complex the construction, the higher likelihood there would be delays in this environment for the next 12 months.

And is that just on a construction basis or also complexity on the capital structure side that you noticed?

Well, I was just referring to construction. But on the capital, obviously, the numbers have to work to want to do a deal, which you've already committed once you started. So it's in the pipeline. So I was only referring to the pipeline when I responded.

Best of luck as you retire.

Well, I'll never retire but I'm not going to be working 24/7.

We're not going to let John go that easy.

Our next question comes from John Guinee with Stifel.

First, John, we are going to miss you. It's been a great 30 years. Boy.

34, just to be exact, not that I'm counting.

34. You started there when you were 16. Wow. Any 1031 Exchange requirements on 8th & Hope? And then, other 2 questions, any promote income identified in 2019? And then, refresh our memory, and if you already did this and I missed it, I apologize, how you handled the Costa-Hawkins costs that you incurred in 2018?

Sure thing, John. On the 8th & Hope, there is a small piece of 1031 Exchange but it's not such a meaningful impact on the gain because we had sold -- back then, it was -- the last piece of share are great, so it's just a small piece. So it really doesn't impact the ultimate gain numbers in a material way, and we certainly have the ability to absorb that without impacting our dividends. And as far as the Costa-Hawkins and the G&A impact, we pulled that out of core and we actually disclosed it separately. And I think it's on Page 5 or 6 in the press release. But in any event, the total cost, which is also public information, for Costa-Hawkins is about $5.8 million for the full year. And we don't expect, of course, such a significant onetime item to reoccur in 2019, and so we don't have a forecasted number.

And Angela, any promote income expected in 2019?

At this point, not yet. We're still reevaluating the platform because that involves conversations with the joint venture and market conditions, and there's a lot more conversations that goes into just factoring getting a promote. So we certainly have a good embedded pipeline on the promote.

Our next question comes from Tayo Okusanya with Jefferies.

Let me also add my congratulations, John, on your semi-retirement. And Adam, also, congrats on the promotion. A couple of things from our end. I think we've talked about the cap rate on 8th & Hope. Could you just give us a sense of kind of some of the other cap rates for those acquisitions you did during the quarter as well as dispositions?

Sure. This is Mike. As I mentioned in the prepared remarks, I don't think cap rates have changed a whole heck of a lot. For A quality property and locations, it's around a 4% cap rate. Sometimes, you have very well-located, very high-quality, let's say A+, A++ type property that will go sub-4% cap rates. And then, for B quality -- or let's say, from A- to B-, we would add probably from 30 to 60 basis points to the A cap rate. So again, very consistent with what we've said in the past.

Okay. That's helpful. And the second question, given the viewpoint on cap rates, is that one of the main reasons why you're still forecasting the net sale of assets in 2019 similar to 2018?

Again, it's what I said earlier. It really is a relationship between the stock price and net asset value of the company and the different components that go into each of those. Notably, for example, our debt on balance sheet is lower cost than if we go and incur debt tomorrow, which gives our balance sheet a reason to buy it versus just transacting them in the marketplace. So we were looking for the appropriate arbitrage and add value on -- from the transactional side. We also need to fund our development pipeline.

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

Let's go back to Orange County a bit and contrast it to, I think it was a year ago in the Bay Area where you saw similar scary BLS job growth trajectories and that were restated. So I understand the concern with restatements. Is it that your on-the-ground trend, which I'm guessing could be better predictors of job growth than BLS, those on-the-ground trend a year ago corroborated BLS type numbers, at least as they stated? And this time, they're kind of telling you a different answer that on-the-ground trend in Orange Country are actually a lot stronger than the BLS numbers?

No. This is John. So last year, it really wasn't the Bay Area. It was Orange County that was revised up pretty substantially. And last year, we saw market rent growth in the context of everything that's going on in the sense of supply being delivered and everything else, which was pretty good. And so it was not consistent with BLS. And I would go back and say, this year, it's a similar situation. We're seeing Orange County, say, fourth quarter rents in Orange County were 2.9% year -- over prior year, yet the BLS has basically flat job growth for that quarter. We also expect lower supply deliveries going forward. So the BLS is one number that's out there and we watch it but we look at many numbers and we're trying to make sense of it. Right now, on the ground, we're not seeing significant deterioration, and so we'll watch the revisions but we'll continue, stay more focused on what's really going on in the rental market.

Okay. Could you share that 2.9% growth in 4Q, what's it look like in January? And what was that trend -- what's the trajectory of the trend into this year?

Sure. That is up from where it was earlier in the year, and in January, it's down a little bit from there, as is San Diego. Both of those markets are down a little bit but that's not unusual at this point in time. That's why I quoted the fourth quarter number as a whole because one month, there's a movement that can go on within our portfolio, and certainly, it's a low demand period. So not really a good reference point. That's why I use the whole quarter, but we only have January. So January is down a little bit from there.

Okay. John Eudy, on the Governor Newsom's recent steps or planned steps to address the regional housing need allocations in certain cities, from your experience, if he is successful and he does have bipartisan support, I guess, how quickly could we see starts starting to pick up in some of these cities that are forced to increase their allocation?

Well, as you know, John, in California, not taking that into consideration, 4 to 7 years is the cycle from identification of site to you actually have a stabilized asset. And some of the ambitious things that he has said sound good, but the execution in reality, by the time you go through the process and sequel -- even if there is some sequel reform, you're not really going to accelerate the timing that much and the economics drive the decision anyway. So I don't see a near-term, over the next 3 to 5 years, massive increase from what we're expecting to see.

John, it's Mike. I'll just have one more thing to add to that. And I don't know if you saw, it's right in your backyard, but I think it's notable that the City of Huntington Beach is suing the state over some of these new requirements, SB 35, so I think that's something that we're going to be keeping our eye on as it relates to these matters.

NIMBY attitudes in California are not going to change easily is what I think Mike said.

That's the point. Yes. Exactly.

We will take our last question from Karin Ford with MUFG Securities.

It doesn't sound like you're underwriting a recession in your 2019 outlook. But if we do end up going into one nationwide this year, how do you think the West Coast will fare? And what do you think the downside risk could be to your job growth and market rent growth forecast?

Hi, Karin. It's Mike. Not sure exactly how to respond to that because, obviously, it depends on what type of recession, how steep it is, what happens to employment, et cetera. So I have a hard time responding to it exactly. I would expect, at the end of a cycle, conditions continue to change, jobs will trail off, development pipelines will be -- will continue to be delivered because once you turn a stated work, they will be finished and you'll end up with a supply-demand mismatch. But quantifying how that looks and exactly what that means, I think it is virtually impossible to do at this point.

Okay. Fair enough. And then, my second question is just on the preferred equity pipeline and book. You said in the third quarter press release that you had originated, I think, an $18 million or $19 million investment in Burlingame, but the number of investments stayed at $17 million from September to December. Just was wondering, did something get paid off? Or did that deal just not happen?

Typical duration of these preferred equity deals are 3 to 4 years. So yes, we're constantly having redemptions or repayments.

Okay. And can you just give us a sense for what was repaid and what was the rate on it?

Yes. It was a small deal, $6 million, and the pay rate, I'm just -- from memory, was around 11%. But at this point, I mean, if you look at our total preferred equity commitment, it's still pretty darn close to what we had reported last time. It's close to $400 million. So there's some inflows, there's some outflows, but net-net, we're still around that $400 million and we are well under our maximum capacity of $900 million.

And is there anything, any new investment that you think is imminent in the first -- say, closing in the first quarter?

That's really hard to say because we do, as Mike said, have a good pipeline and that we're working through but the timing of the close is just difficult to predict.

Thank you, Karin.

At this time, I'd like to turn the call back to Michael Schall for closing comments.

Thank you, operator, and thanks, everyone, for your participation on the call today. We look forward to seeing many of you at the Citigroup Conference in March. Have a great day. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.