Equity Residential Properties Trust (EQR) — Q3 2018 Transcript

Thank you, Jonathan. Good morning, and thank you for joining us to discuss Equity Residential's third quarter 2018 operating results. Our featured speakers today are David Neithercut, our CEO; Michael Manelis, our Chief Operating Officer; Mark Parrell, our President; and Bob Garechana, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now, I'll turn the call over to David Neithercut.

Thank you, Marty, and good morning, everyone. Thanks for joining us for today's call. As we reported in last night’s earnings release with the primary leasing season in the rear view mirror, we’re pleased to now expect to deliver same store revenue growth for the full year of 2.3%, which is at the very top of the guidance range we provided on our most recent earnings call in late July. Achieving this level of growth is the result of a couple of primary drivers, the continued strong demand across the board for rental housing and the relentless attention to customer service delivery each and every day by our outstanding property management teams. These two factors combined to maintain very high levels of occupancy, record-setting resident retention, and very strong renewal rates, all despite elevated levels of new supply across our markets. We could not be more proud of our teams across the country for the outstanding jobs they do, making living with equity a remarkable experience for each and every one of our residents. I'll now ask our Chief Operating Officer, Michael Manelis, to go into greater detail on what we are seeing across our markets today.

Okay. Thank you, David. So let me begin with a huge shout out to our onsite teams. The third quarter represents our busiest activity period, with just over one third of the entire year's renewal and new leases taking place. The team's performance and relentless focus on delivering remarkable experiences to our residents delivered outstanding results for the quarter. With just over 24,000 transactions completed during the third quarter, we achieved a 5.1% increase on renewals, and a 1.2% increase on new leases signed. This, along with maintaining our occupancy at 96.2%, has delivered third quarter revenue growth of 2.3%, which as David said, now gives us the confidence that our full-year 2018 revenue growth will be 2.3%, which is the top of our previous reported range. I would also like to highlight that the 16.4% turnover for the quarter is the lowest third quarter turnover reported in the history of our company. We renewed just over 500 more residents in the third quarter of '18 versus the third quarter of '17 with roughly the same number of explorations in each period. During the third quarter, we also achieved our highest recorded resident satisfaction scores. Service-related surveys completed in the third quarter came in with an average rating of 4.8 out of 5, and year-to-date, we have increased our all-time high online reputation scores with both Google and Yahoo. Both of these are by far the most important customer review platforms to our prospects. Bottom line is that our service and leasing teams have been focused on delivering remarkable experiences, and their efforts are paying off. Before I move to specific market commentary, I would like to start by saying that the overall trends we discussed last quarter have continued. Our average resident tenure, currently at 2.2 years, continues to grow, as a result of our exceptional renewal process and the macro trends of millennials experiencing life changes such as marriage, children, and buying homes. The demand, fueled by good job growth and record low levels of unemployment in our market, has aided in the absorption of the elevated supply. So let's start with Boston. Full-year revenue growth expectations of 2.4% is slightly above the expectations we shared with you on our second quarter call, primarily due to strong replacement growth, which has continued into October and stronger renewal increases. This performance occurred at the same time that the majority of the 2018 new supply was delivered in the urban core, and went head to head with most of our NOI. Our revised assumptions for 2018 include occupancy at 95.8%, a negative 0.8% on new lease change, and achieved renewal increases of 4.9%. Deliveries will be like the urban core over the next year, which should continue to bring modest pricing power to the market. Moving to New York, our current expectation for full year revenue growth has improved to 70 basis points. This is 50 basis points higher than the expectations we shared with you on our last call. This outperformance is a large contributor to us achieving the high end of our overall company's same store revenue guidance. Our full year assumptions for New York include occupancy at 96.5%, a negative 2.2% new lease change, and achieved renewal increases of 3%. Concessions used in our portfolio remain extremely targeted and are well below both last year and all expectations throughout the year. During the third quarter, we had moving concessions being issued to less than 10% of our total applications in New York. This resulted in only $260,000 in concessions in the quarter as compared to $830,000 in the third quarter of 2017. 2019 deliveries will be significantly lower than '18 with more than a 50% decline expected. The deliveries will continue to be concentrated in Long Island City and Brooklyn where to date we have not seen a significant impact on our operations. In fact, our base rents in New York today remain strong and, sitting here in the last week of October, they have not yet started their normal seasonal decline. As we think about DC, there is not much news to report. Positive economic conditions continued to aid the absorption of new supply, but the overall market continues to demonstrate very little pricing power. We have no change to our full-year expectations of 1.2% revenue growth. Our assumptions include full year occupancy at 96.2%, our new lease change of negative 2.1, and an achieved renewal increase of 4.2%. 2019 will mark another year of elevated supply with just over 12,000 units expected. Moving over to the West Coast, Seattle is expected to deliver 3% revenue growth for the full year, which is in line with the guidance we issued in July. Our full year assumptions for Seattle include occupancy at 95.7%, a negative 1.8 new lease change, and achieved renewal increases of 5.7%. Seattle supply is expected to slightly increase next year to just over 8,000 units. As a CBD where we have approximately 40% of our NOI, we should experience some relief in 2019 as the concentration of the supply shifts to the Bellevue Redmond submarket, where we have 24% of our NOI. On the previous calls, I mentioned the outperformance of the San Francisco market as being a contributor to the upward revision of our revenue guidance. Not much has changed. We expect full year revenue growth to be 2.9%, which is consistent with our July call. Our full year assumptions for San Francisco include 96% occupancy, a positive 0.3% new lease change, and 4.9% achieved renewal increase. Looking at the overall market, the tech companies continue to grow, and the Bay Area is on track to surpass the 10 year high of 35 IPOs that was set back in 2014. There continue to be daily announcements highlighting the expansion of companies in this market. Office vacancies continue to move lower, and all of this should support positive fundamentals in our space. The deliveries for 2019 in San Francisco are expected to increase by about 2,500 units to 9,500 with over 40% concentrated in Oakland and East Bay submarkets. At this point, it is still unclear exactly what the impact from the Oakland delivery will be, sort of like the Long Island City situation on Manhattan, although this will have considerably fewer units coming online. Moving down to Los Angeles, we expect full-year revenue growth to be 3.6%, which is up 20 basis points from our July guidance. Our full-year assumptions are 96.2% occupancy, 6.1% achieved renewal increase, and 1.4% new lease change. Construction in the market continues to face labor shortage issues, which has pushed 2,000 units from 2018 into 2019. We now have 2018 showing just over 9,600 units and 14,200 units being completed in 2019. It is likely that we will see some of these expected 2019 deliveries pushed into 2020. That being said, the combined 24,000 units over the two year period has not changed, and this total is spread out over a huge geographical region. Remember, we tend to feel the impact from new supplies when it is delivered in a concentrated fashion in direct competition to our assets. For example, in 2019, our San Fernando Valley portfolio will have exposure to new supply for the first time in a while, but that new supply will have very little direct impact on our West L.A. portfolio, which is many miles away. Regardless, the overall market in L.A. continues to demonstrate strong demand, which should continue to aid the overall absorption. Moving to Orange County, our full-year revenue expectation has modestly increased 10 basis points to 3.6%. This ties with L.A. for our second highest revenue growth market for the year. Our full-year assumptions have occupancy at 96%, achieved renewal increases of 5.5%, and 0.3% new lease change. The 2019 outlook for deliveries is about 500 fewer units at just over 3,500 units expected. And last but not least, San Diego. Our full-year revenue expectations remain unchanged at 8%. This will be our highest revenue growth market for the year. Our full-year assumptions have occupancy at 96.2%, achieved renewal increases of 5.9%, and 1.6% new lease space. The 2019 outlook for deliveries is about 700 fewer units at just over 3,000 units expected. So now, let me close with some color on 2019. While we are not issuing guidance at this point, nor will I be sharing any specific numbers at the market level, I do want to share some general thoughts on our guidance process and our preliminary review of the 2019 market performance. To begin, we have two different approaches for creating our guidance: one, that is bottom-up completed by the onsite and property management leaders, and the other that is a top-down approach completed by our revenue management and senior leadership teams. We are in the very early stages of both methods, and both methods consider supply, employment, and our current posture in terms of renewals, new lease rates, and occupancy. Today, we anticipate that both occupancies and achieved renewal increases will be very similar or slightly better next year. We also expect to see some improvements in our new lease change as modest pricing power continues to grow in many of our markets. To summarize our very preliminary expectations today, we would say that the California market, excluding any impact from propositions, may deliver similar results in 2019. Seattle will likely be less. And moving to the East Coast, New York should be better, Boston is on track to be slightly better and D.C. will most likely be about the same. With that, I will turn the call over to our President, Mark Parrell.

Thank you, Michael. As we expected, we had a busy third quarter on the investment side. We mentioned last quarter that we planned to reenter the Denver market after exiting that market in early 2016. We did so this quarter by acquiring two assets at a total cost of $275 million. As you may recall, we left that market because we had a portfolio that was primarily garden, surface-parked older suburban products, and with a portfolio exit, it was not a market call. We have kept our eye on Denver and continue to believe that in the right locations and at the right prices, this market can produce excellent long-term returns. We see in Denver many of the same attributes we see in our coastal markets, which we think will lead to higher long-term returns, such as single-family home prices that are higher both absolutely and relatively compared to incomes, the creation of many high-paying jobs over an extended timeframe, our history of strong rent growth, and a market with a high quality of life where our target millennial demographic wants to live, work, and play, as evidenced by strong population growth in the 25 to 34 year-old age cohort. And all that comes along with a fiscally sound local and safe government. So some specifics for the assets in Denver. One asset was acquired for $140 million, which is about $395,000 a unit. The property was completed in 2017 and is a high-rise in the uptown neighborhood near downtown with a 96 walk score. We expect a 4.7% cap rate in year one and believe we purchased it at a modest discount to replacement cost. The other Denver property is a mid-rise located in the same uptown neighborhood. The property was acquired for $135 million or about $364,000 a unit, was built in 2017, and has an 83 walk score. We expect a 4.6% cap rate in year one and believe we also purchased it at a modest discount to replacement cost. We also acquired a high-rise asset in Boston for $216 million or about $572,000 per unit. It's located in the south end neighborhood that was built in 2015 and has a 97 walk score, and complements our current Boston portfolio well. We expect a 4% cap rate in year one. And while we acknowledge that is a relatively low cap rate, we feel that is a good trade as it was funded using proceeds from the sale of an asset on the Upper West Side of New York, at a disposition yield of 3.9%. This property sold for $416 million or about $820,000 per unit. We earned a 9.8% unlevered IRR over our five-year holding period. This property is in the burn-off period for the 421-a tax abatement program. A quick note on our strategy in New York. We have a significant concentration on the Upper West Side of Manhattan and felt it prudent to reduce our concentration in that submarket and our exposure to outsize real estate tax increases in the future. We continue to believe that the New York market is an excellent long-term IRR performer, as evidenced by the return on the asset we just sold. You can expect us to buy and build in New York as opportunities present themselves. As always, we will continue to review our portfolio both in New York and elsewhere with an eye to maximizing our long-term total return, including our cash flow growth. Before I conclude my remarks, as you all know, our friend and leader, David Neithercut, is retiring on January 1 after a remarkable 25-year career at Equity Residential. On behalf of our investors, our Board, and the entire Equity nation of employees, current and past, thank you, David, for your leadership and even more for being a person of great wisdom and integrity. Whether it was taking advantage of capital allocation opportunities like Archdome, navigating us safely through the shoals of the credit crisis, or in your work every day to improve our operations and build our team, you always made the right decision in the right way. I also thank you for all the time and effort you've spent mentoring me over the years, and I look forward to having you continue to contribute to Equity Residential as a board member. You've had a great ride at Equity, and we wish you well in the next chapter of your life. And now, I'll turn the call over to Bob Garechana, EQR's new Chief Financial Officer.

Thanks, Mark, and good morning. With Michael having covered our upward revision to same-store revenue guidance, I want to take a couple of minutes to talk about same-store expense guidance, full-year normalized FFO guidance, and capital markets activity. As is our custom with our third quarter reporting, we've raised our same-store guidance from ranges to single points. For same-store expenses, we expect to produce full year 2018 growth of 3.7%, which is effectively at the midpoint of the guidance range we provided during the last call. Before I move to specific categories, I'd like to highlight that for the first nine months of 2018, same-store expenses increased 3.4%. As a result, our guidance implies a higher expense growth rate during the fourth quarter of 2018. This is due to a low comparable period for the same quarter last year. Now, let me provide some color on the drivers of full-year same-store expense growth. On property taxes, we've produced growth of 4.1% through the first nine months of 2018. We now expect our full-year property tax expense growth to be approximately 4% or at the low end of our prior expectations. We've continued to have success with our fuel and refund efforts this year relative to our prior estimates. As a reminder, our prior property tax expectations already contemplated the sale of the New York assets subject to 421-a in the third quarter as Mark discussed. As such, a 30 basis point reduction to property taxes was already included in our second quarter range of 4% to 4.5%. Now moving to payroll, our second largest expense category. For the full-year, we continue to expect payroll growth around 3.5%. The job market remains highly competitive with near full employment. We, like many employers, continue to experience wage pressure in order to retain our best-in-class onsite employees and continue to provide superior residential service. In our earnings release, we gave full-year same-store revenue guidance of 2.3%, driven by strong renewals, low turnover, and high occupancy, as Michael discussed. With same-store expenses in line with prior expectations, we now expect to produce same-store NOI growth of 1.7%, which is at the higher end of our previous range. This contributes approximately one additional $0.01 per share to full-year normalized FFO. We've also updated our guidance for normalized interest expense and corporate overhead, which we define as property management and G&A. We now anticipate a $0.01 improvement in normalized interest expense, driven by lower than expected floating rate and later timing in our expected debt rates, the normalized corporate overhead we expect to come in at the top end of our previous range resulting in a $0.01 reduction to normalized FFO due to compensation expenses at the higher end of our earlier estimates. The net result of all of it is a $0.01 increase to our normalized FFO guidance midpoint, moving it from $3.25 per share to $3.26 per share. All in all, revenue expectations have improved, expenses remain in line, and the midpoint of our normalized FFO guidance has modestly increased. Quickly on the capital markets front. You saw in the release that we prepaid a $500 million secured debt pool due 2019 with our line of credit. Our guidance contemplated pre-paying relatively expensive debt, and we’re able to do so without penalty. We expect to turn out all our portion of this debt in the upcoming months. With the majority of the anticipated offering hedge at a very favorable treasury rate, we would expect to issue at a rate well below the level of the debt that we prepaid. With that, Jonathan, I'll turn it over to the Q&A session. Thank you.

I was just hoping you guys could give us a little bit of color on New York City, and how you're seeing new lease rates trending into next year. It seems like that’s a big variable. If you could just talk to the range of what's expected for New York City in particular given the meaningful drop-off in supplies. Is it a market that is going to accelerate quickly, or is that more of a 2020 story?

Yes. So this is Michael. I think, I said that I’m going to stay away from kind of the specifics of ranges at a market level. I will just tell you though that in New York, while we do see this marked reduction in the supply, the 50 basis points, we like where the base rent growth is on a year-over-year basis today, holding strong into October. You’re going to come up against the wave of renewals for all of the deliveries that occurred this year. So it’s not that you are completely out of the woods, but you have forward momentum in New York. It definitely will be better next year or should be better next year than where it is today just because of that forward momentum and what we have embedded into the rent growth.

I appreciate the commentary on 2019 and some of the revenue drivers there. Any early look you can give on expense growth? Is there revenues improving? Is expense growth can aid into that at all next year?

Yes, hi, Nick. It's Bob. I'm going to echo what Michael mentioned and refrain from commenting on specific numbers. When considering the major expense categories, real estate taxes have shown a healthier trend, and I don't anticipate any significant changes in the aggregate growth. On the payroll front, we are still experiencing full employment in the economy. Therefore, we expect to see similar levels of employment and wage pressures as we focus on retaining and engaging our employees.

And then on New York City, you've had 6% expense growth this year or some of that is due to, I guess, 421 tax abatements burning off. Can you just remind us where your portfolio in New York City is today in terms of the tax resets that have happened? What still to come? And I guess whether this issue is getting sort of better or worse in terms of expense growth for the New York City portfolio?

It's Bob again. We currently have 14 properties in New York that are subject to the 421-a program. And what that means on our kind of real estate tax run rate basis related to the abatements specifically is on a full-year basis, call it $2.5 million to $3.5 million for the next, call it 5 years. Those projects are all in different levels of abatement, and some of them don’t even start until further out for the next, call it 5 years of $2.5 million to $3.5 million on an annual basis.

Okay. And then, I just have one last question. You sold the West End asset. It was a low cap rate. It sounds like, I mean, we heard that went to evaluate buyers. So I guess that's supported a lower cap rate. I think you have two other assets you are marketing for sale in New York right now. I mean, are those similar low cap rate deals? And is there also any tax abatement burn-off there to consider? Thanks.

Hey Nick, it's Mark. Congratulations on your new role. I want to comment on our specific marketing activities. We're consistently putting assets on the market and recycling them through the system. However, I don't anticipate that New York will be disproportionately influenced by our sales activities; we've performed well in the market. As you can see, we achieved a solid internal rate of return on the asset we just sold. Overall, when we look at New York and the tax abatement assets, if someone wants to purchase relatively built assets in New York, they likely came with this abatement. Essentially, everything that was built had this abatement. Therefore, our significant portfolio of 421-a assets indicates that we have a strong presence in Manhattan. We've done quite well with these assets. Michael has pointed out improvements in supply, and we feel optimistic about New York's performance. Any assets we decide to sell will be based on achieving a good price, and if we don't sell anything in that market, that's perfectly fine too.

You continue to drive turnover well. I know it's been a large focus. But what level of turnover do you consider frictional at which it can’t go lower and then new lease growth becomes more important?

Yes. I mean, it's an interesting question. So I think, I don't know if we're there yet. But I would say that we're getting close. I think with record turnover being recorded now for the last couple of quarters, I would expect that trend to continue. I think that the team has done a fantastic job as I said with our relentless focus on delivering outstanding service and focus on renewals. I don't know exactly where we’re going to land, but I'm guessing that we're getting close to kind of normalizing on a turnover percent.

Thanks. And then you did the deals in Denver this quarter. Are you considering expansion into nearby markets right now?

Hey, Nick, it's Mark. To guide you on that, we've been very open to evolving our strategic process, so I encourage you to refer to our investor materials. There's a chart on Page 17 that acts as a bit of a heat map showing our thoughts on the market attributes that contribute to long-term success. Denver was rated the highest market on there. As we consider our markets, it's certainly possible that we will succeed in our other markets, but we're thinking about it through the lens of classic characteristics that define good markets, such as relatively high single-family costs, desirable locations for our target demographic to live, work, and play, and markets with high wage growth. These factors are driving our decisions.

It's Michael filling in and speaking. David, just a question for you. And congratulations on your retirement, and congratulations for the rest of the team in terms of this transition that was executed all with internal promotions demonstrating the bench and the leadership that you’ve shown. I’m just curious about staying on the Board. We've seen companies do different things where our CEO retires, and then exits completely versus those that stay on the Board. Can you talk me through how you and the board came to the decision on how to stay on versus leaving?

Sure. We've had many discussions about that, Michael, and concluded that one size doesn’t fit all. While there are industry best practices, it would likely have been difficult for me to stay on the Board if someone external was brought in. However, I hired Mark 20 years ago, and he has reported directly to me for most of that time. So, I believe that in this situation, it’s acceptable for me to remain on the Board. I understand my boundaries, and I’ve had many conversations about the role I should take moving forward, as well as how I can support him in that role. I think we both approach this with an open mind and believe it will work out well.

Curious. Some of your office three tiers have been found in the table on inflection points in D.C. demand. And I know the multifamily supply is still high. Curious if you're seeing any inflection points from fiscal stimulus defense spending where big employers are starting to enter the market.

Yes, this is Michael. I'm trying to understand the foot traffic count. The overall market is showing an increase in demand, and I’m looking for specific percentages. For September, our foot traffic increased by 1.4% compared to September of '17, indicating stable to increasing trends. However, even though people are willing to visit and take tours with us, we still do not have the pricing power we need. I do see a stable improvement in demand that is easing the absorption of new supply, but we're not in a position to raise prices yet.

Hey, John, it's Mark. We’re constantly looking at all the markets, including D.C. and including the low performing assets. You can expect us to continue to do that in D.C. And we’re certainly aware and acutely aware of the high supply and the impact that’s had on our numbers in the last few years. I do want to point out that D.C. over time has been a terrific performing apartment market. And coming out of the great recession, it did very well for us. So it does have some counter-cyclical benefits, and it does have the factors perform well over long periods of time. So there are things about D.C. that we do find appealing certainly would be great if this supply abated a bit. But at this juncture, it is like we think the D.C. And in fact, we just completed an asset of 100K that's just started with lease up that so far is going very well in this sort of know my area so to speak of Washington. So we like the market in many regards that we do acknowledge the difficulties as late in terms of supply.

Good morning, everyone. I apologize if this has already been addressed, but I haven't had the chance to discuss it. Do you have any updates on Costa-Hawkins? We are hearing various reports, and I was curious if you have any information, especially since it’s less than a month away and only a couple of weeks from now.

David Neithercut here. We don’t have any updates at this time. You may have seen more newspaper editorials coming out against closing Prop 10, which likely reflects the same polling you’re seeing. There are no real updates to provide with just about two weeks left until Election Day. However, I can share that we have a strong team in place, led by our senior leader on the West Coast, as well as the senior leader at Essex. They have been doing an excellent job conveying the message about why this would be a mistake in addressing the serious housing problem in the state. Polling is initially indicating that there is an understanding that this is not the right approach to tackle such a significant issue. We are committed to seeing this through, and we believe we have a strong message that will resonate this year.

Got it. I want to circle back to New York City for a second. Complete depreciation aligned New York City is really an attractive asset class in the medium to long-term. But I'm curious if you think about New York City and the supply coming down. Is it just a worst case scenario coming off the table? Or do you really expect growth to inflect? And I guess the question that I'm asking you is how do you, as an owner of multifamily properties in New York City, balance near-term growth that’s not as attracting as some other markets, but recognizing that medium to long-term IRR potentially is still really attractive?

John, it's Mark. I want to repeat that the question because you broke up a little there. You were asking for some of our view short and medium-term on New York. Is that right? Yes, I'm going to go with that because I can't quite hear at all again. We're not in a position to give you exact numbers at this juncture. But just in 2015, this market was a 4% revenue market that wasn’t that long ago. So we think there with the supply abating, the continued cyclical unit of new media jobs and technology jobs into that market, is a reason this market and are now suggesting its 4% next year. But again, go back to a good run rate on revenues at some point in the near future. So we would like the market short-term, medium-term, long-term, all across the board.

The two stabilized development you have this quarter indicate a 4.3% stabilize deal. I'm wondering if that came in below your expectations. And if so, what drove this?

So I'm sorry, again, the question was relating to Helios?

Yes, Helios.

Yes, we see those assets stabilizing at a mid-5% yield. Again, they're still occupying, positions are burning off. All that still goes on, on those assets. So we're happy to bring those in kind of a mid-5% yield as our expectation.

Okay. And then on your partnership with WhyHotel in D.C., can you give some kind of indication of how much that could add to your development returns or your development yield on the project?

So it's Mark. I mean, we think that could be $800,000 or something like that to normalized FFO. It's really just to be clear, none of the numbers that we’re going to show you as occupancy step in the development page of anything they do with WhyHotel occupancy temporarily if units and net properties doesn't execute hotel execution. So in the long run, you will see from us the 100K number strictly from a residential, permanent residential perspective. But I think you should think about it not as affecting the development yield, but really just affecting FFO next year.

We don’t view our assets as solely appealing to millennials. In fact, 20% of our residents are 50 and older. We believe our product, located in urban areas with suburban amenities, attracts individuals of all ages. To that point, millennials are aging, with our average resident age at 34. The largest cohort currently is 26 among millennials. We continue to see demand, with over 40% of our units occupied by single individuals. We expect sustained interest across all age groups for our product as Gen Z emerges, and I don't see any reason why they would prefer an urban lifestyle any less than their slightly older counterparts. Overall, we feel optimistic about the demographic trends.

You talked earlier about rising construction costs of what that maybe for supply. I wanted to ask it a little more specific to you. You haven’t had to raise the budgeted costs on your active developments. Could you talk a little about when in the process you locked in costs? How much you lock in? And if you’ve changed your process around that all given we're in a rising cost environment?

I’m going to start, and David may amplify some of this. But, for example, the West End tower deal, the so-called Garden Garage deal, we’re 90% bought out on that deal. It was a matter of great interest to both the board and to the investment committee internally that we not go forward unless we’re very certain about our construction cost and had an appropriate contingency. So I think we're very focused on these things, not trying at the level of detail you're asking for on each one of these deals. But as we approach both the West End tower and 249 3rd Street, which are our two most recent starts, we've been very focused on making sure that as much as possible, things have been bought out. And if there are some risks that we got an appropriate contingency in them. So right now we feel comfortable about our budget.

That’s helpful, since West End is the biggest line and has the longest lead time. My second question is more of a bigger picture question. You know a lot has been talked about millennials finally getting to marriage age, but there are right there up until their late 30s, the oldest ones. I was wondering about the following divorce rate, and if that’s in any way impactful, and if you think these things together, could become a drag on household formation as that demographic wave kind of moves through the snake?

We don’t view our assets as only appealing to millennials. About 20% of our residents are 50 and older. We believe our offerings, with urban and suburban amenities, attract individuals of all ages. Certainly, millennials are aging, and our average resident age is 34, with the largest group being 26. We continue to see demand from this demographic. Over 40% of our units are single-occupant, indicating ongoing interest across all age groups, including the incoming Gen Z. We are optimistic regarding the demographic trends.

One question with relation to the employment outlook, as you guys think about and plan for 2019, in general, and maybe rising uncertainty about the economy. How do you think about some of the key drivers, whether it’s employment growth, wage growth, and things like that, as you build the plan? And what type of ranges would you put around that with uncertainty, maybe a little bit higher deeper into the cycle, etcetera?

Yes, great question. So just to be fair about our process, we don’t have an algorithm where we can put 150,000 jobs per quarter, or per month, pardon me, new jobs, and come up with a revenue number. It's more that onsite teams and the end market teams talking about the hiring they are seeing and hearing about, as supplemented by what our investment teams think across our markets here in Chicago. So I don’t want to give the sense, but again there are some computers that are fitting on a number for us. And again, a lot of the job growth numbers are national and our portfolio is not national, it's in certain places. So our focus is a bit more micro than maybe your question implies.

Okay. And then, but just as you think about that micro impact, I'm sure you've looked at it that way. Is the preliminary look, and the numbers that you laid out as far as directionally markets, is that largely assuming that the employment backdrop that was in place in 2018 holds in 2019?

Yes, it roughly is. We believe Michael's comments provided some insight into this. We observe hiring taking place in all our markets, whether it's a new tech company in Boston or media-related hiring in Los Angeles. It's evident across the platform. We are assuming that we have rising wages among our resident base alongside an employment situation that is comparable to 2018.

Okay. And then separately, can you maybe just discuss what you're hearing and seeing, whether it’s your own team or just out there in the market conversations around capital availability from the lending side as well as capital interest in the assets in general?

Well, I'm going to take part of this and ask Bob to speak on the lending side. But it continues to be a strong bid across the board for our assets, and for our assets, we think in the apartment space in general. We do think that Chinese buyers have retrenched and are a little less participatory in the market. There still are significant foreign buyers, Canadian, Europeans, and like, as well as a lot of U.S. money still chasing the asset class. You kind of see that in development side, right. I mean, you see the continued development flow as people trying to get exposure to our space. And again, we think flows continue to be very strong on the equity investment side. I’m going to turn it to Bob to talk just about the debt availability part of your question.

Yes, to break that down and in line with Mark's comments, we are still observing a very healthy supply in the multifamily sector with the current lending arrangements. Overall costs have increased due to rising interest rates, but this trend remains stable compared to past history. On the development front, I echo Mark's insights as well. Banks are still lending, and while construction lending pricing has slightly decreased in terms of spread, rates have increased along with LIBOR, leading to overall costs being roughly stable or slightly higher. However, banks continue to provide loans with relatively conservative advance rates. What stands out now compared to a decade ago is the emergence of alternative capital sources like private equity debt funds, which are willing to take on slightly more risk, and we are seeing these sources actively contributing capital to the market.

As you consider the development aspect, does that suggest that developments will take longer or delay some of the potential decline in competition from this supply further into the cycle?

I guess that remains to be seen, but I will say that this capital that Bob just alluded to, that’s in the middle, that's above the bank and below the equity is very expensive. This tends to be very price capital. And it's going to make the pro forma even harder to pencil. But now as that money is coming in at the same cost as the banks, I mean, it's considerably higher, double the costs or more. So with that in mind, I think it isn’t necessarily going to extend things too much, just again, because the money is particularly expensive on a relative basis.

We'll take our next question from Drew Berman from Baird.

This is Alex to check on for Drew. Hope you guys could give us some color on the recent Boston acquisition's long-term NOI growth expectations relative to the 1101 West End asset you sold.

Sure, I can give you little color on that. So the asset is fully occupied. There is a fair amount of competition there. So our first year number in terms of revenue growth was relatively low around 1%. And then we saw rent growth more averaging as it often does for us, in the 3s, and then a few quarters here and there with expense growth for us 2.75 to 3. We generally underwrite these deals over a 10-year hold. That gives us some color there. We can certainly comment on West End, but I would say this, I don't know what the buyers pro forma looks like. I don't know what renovations they're going to do, or what other potential uses they have? So from our perspective, we saw relatively muted near-term rent growth and relatively high real estate tax increases in the near-term. But again, at some juncture, when this burns off, you can reset those units to market. And there is certainly value that I'm sure the buyer underwrote in the deal.

Thank you, and good morning out there. And first, congratulations David, and Mark as well. Two questions for you guys. The first is just on retention. It was a question earlier in the queue. But if you guys are raising renewals at 5%, it doesn’t seem like you are holding back on the renewals, and yet, again, you are still retaining more and more tenants if that retention is improving. So do you think there are other things at work like are people just less willing to move apartments the way they were a decade ago? Or have home move outs suddenly declined? Or what do you think is going on that's allowed you to push 5% overall on a sort of 1% to 2% market, and still retain more of your tenants than lose?

So, this is Michael. I would say it's probably a little bit of everything that you just kind of alluded to. I would say from a reason for move out to buy a home. We've actually seen very little change in our portfolio. I mean year-to-date basis, we're actually down a little bit to a 11.3% of those that move out citing that reason that was compared to 11.8 last year. Put that all in is 200 fewer people this year to date moving out with that reason. I think, in the third quarter, we renewed. I think I alluded to it 500 more residents than we did in the third quarter of last year with roughly the same amount of explorations. And I think it's a little bit of everything. I think its deferring life changes. I think, honestly, we see the relationship between high customer service and retention. And we saw marked improvement in our customer service. This is something we have done and we're seeing the efforts pay off. So I think all of those things put in the blender are contributing to this retention. And to elude to the 5%, part of this too is, remember when you are pricing these renewals, so we have a lot of our transactions occurring, while pricing these renewals three months before, and where are the rents going to be and we're issuing those renewals at that point. So I think this is demonstrating the fact that in many of our markets our rents are up 3% year-over-year, and reporting these renewals and you are negotiating through this process. And a lot has to do with where these resident prior rents were in relationship to that market as well.

And then the second question is just on D.C. it's been sort of a developer's paradise the past number of years. Popular speculation is that Amazon will go to Northern Virginia. Is your view that if that happens, suddenly you and other apartment landlords will benefit, because certainly there will be an increase in demand? Or is that fear that the developers are already waiting for this and will just ramp-up on the development side? And therefore, any pickup in jobs is going to be more than offset by development?

Yes, it’s Mark, Alex. I'm not sure that anything happens instantaneously. I mean, I don’t think Amazon is going to open an office and immediately have 5,000 new employees, and then it gets to 50,000 and whatever the number is. Again, half of that obviously is going to be more gradual. Depending on where this is, there is certainly the capability for developers to build into this. But if it's near some of our well-located assets that are there already, we can certainly do this. There is no doubt.

Costa Hawkins, I know where you stand on it. But have you guys done kind of a sensitivity such that let’s say it gets repealed and every single municipality chooses rent control and vacancy control. What the impact would be on your growth profile? Would it be 100 basis points when you look at the entirety of your portfolio? Have you done that exercise? Just to think of a worst-case scenario?

It's David Neithercut here, Rich. We haven't completed all that analysis because that represents a worst-case scenario. We’re unsure about the demand in municipalities with rent control and those without it. Rent control has been a right since Costa Hawkins was implemented and even prior. We can't predict what restrictions will apply, especially for properties built before 1995, and there will be properties constructed between 2000 and 2010 that could also be affected. This is somewhat of a theoretical exercise that may not be a good use of our time. We do know our current revenue from markets with rent control and how that might change if some markets extended the timeframe. However, it’s not a productive use of our time to speculate. Nonetheless, we do recognize where we face potential risks to income if significant changes occur. That said, we believe we are in a strong position regarding the top 10 markets. While this situation isn’t ideal for California, and it could be detrimental, we have a strong team in place, we’re making significant efforts, and we’re optimistic about our prospects. Thanks, everyone. As we are now close, what I think is my 100th and final earnings call, I want to thank everybody in the REIT community for your support, the confidence and probably most importantly, your friendship over the last 25 years. I can tell you it's been a great pleasure working with all of you. For those of you, I'll see you in San Francisco in a few weeks. We look forward to thanking you in person. For those of you I will not see, please note that I will step down at the end of the year with extraordinary gratitude and with great confidence in Mark, the leadership team here at Equity, and the future of Equity Residential. So thank you very much and best regards to everybody.