Equity Residential Properties Trust (EQR) — Q4 2019 Transcript

Thank you, Marty. Good morning and thank you for joining us today. I'm going to start by giving a quick overview of our business and investment activities. And then I will turn the call over to Michael Manelis, our Chief Operating Officer for a discussion of our 2019 operating results, and 2020 revenue guidance, as well as giving you some detail on the exciting operational initiatives that we are pursuing. Then we'll pass the call over to Bob Garechana, our Chief Financial Officer who will give you color on 2020 expense and normalized funds from operations guidance and a bit about our balance sheet activities. 2019 was a very good year for Equity Residential. We saw continued strong demand delivering our well-located urban and dense suburban properties in the nine metros in which we do business. And our excellent customer service led to record levels of customer satisfaction and resident retention. A big thank you to all my colleagues at Equity Residential for delighting our customers every day and for working together as one team. As we predicted the fourth quarter 2019 reverted to the normal lower seasonal demand that is common at the end of each year. Slightly weaker conditions than projected led us to slightly underperform on same-store revenue versus our October guidance, but still perform at the top end of our expectations from the beginning of 2019. And we saw our normalized funds from operations increase in 2019 by an impressive 7.4%, exceeding our expectations as we continue to produce strong reliable growth. 2020 looks to us to be more of the same, a slow but consistently growing economy and continuing positive demographics leading to good demand and to steady revenue growth albeit at a somewhat lower overall level than in 2019. We expect the East Coast markets to continue to improve on a relative basis and overall, we expect the average revenue performance difference between the East Coast and West Coast markets to be only about 25 basis points in 2020. Except for New York, we see supply is similar to or slightly higher in our markets in 2020 versus 2019. In New York, supply across the area in which we operate has been declining in the last two years and we would expect it to fall by a further 40% in 2020. In fact in Manhattan, where we have 70% of our New York metro revenue, we see fewer than 1,000 market rate units being delivered in 2020. Also as we discussed on prior calls, we will be facing a headwind of 20 basis points or so from new rent control regulations in California and in New York. On the innovation front, we're very excited about the benefits to revenue and expense as well as the customer satisfaction that can be gained from the continued rollout of the various initiatives that Michael will discuss. These benefits will be modest in 2020 but we believe will accelerate and compound over time. Switching to investments, we had a busy 2019. As we have stated previously, increased demand for our apartment assets has led to cap rate compression between newer and older properties. This led us in turn to accelerate the sale of some of our older lower return properties and to reinvest that capital in newer properties that we think will provide considerably better long-term returns. We were particularly successful at doing this in 2019. We have reallocated $1.1 billion of capital from assets that were on average 35 years old to assets that were on average two years old and incurred no cap rate dilution in doing so. We think owning these newer higher growth assets will benefit our normalized funds from operations growth and because we expect much lower capital spending at these newer assets the level of our capitalized expenditures which is already much lower as a percentage of revenues compared to most of our peers should be lower and our unlevered internal rates of return higher going forward. The fourth quarter was a microcosm of this as we sold two older suburban Washington D.C. assets that averaged 41 years old for total proceeds of $374 million at a 4.8% cap rate and acquired $370 million in newer assets one in Central Seattle one in suburban Seattle and one in suburban Washington D.C. that were on average one-year-old at a 4.8% cap rate. We also acquired more than we sold in 2019 and have guided for the same outcome in 2020. While cap rates and IRRs are certainly lower than historical averages so is our cost of capital. The spread between the unlevered IRR we can achieve on new deals we see for sale versus our weighted average cost of capital is relatively high. We intend to finance this increase in our assets with a combination of new debt and net cash flow. Our strong balance sheet gives us ample capacity to do so, but as always, we'll be prudent in managing our balance sheet. Switching to new development, the equity capital availability story since early 2019 has somewhat improved for large established developers while smaller, local, and regional developers continue to work hard to put their equity capital stacks together. We have been pursuing a few of these opportunities with smaller developers as joint ventures. And believe that investing our capital in shovel-ready deals with sound deal structures that provide some protection to our capital is a good way to source new properties while managing the risk inherent in development. You should expect us to announce new joint venture development activity in 2020, as well as new wholly owned development deals including some lucrative density plays, where we are taking down a low density portion of an existing property and replacing it with higher density housing. We expect 2020 development starts of $500 million, $650 million, depending on construction timing and development spending in 2020 of about $300 million. We continue to believe that development makes sense in selective locations in our markets where acquiring new properties is difficult and where our existing properties trade materially over replacement cost. We have no imperative to start a certain amount of development per year. And we will always compare development opportunities to the market to acquire existing assets. And look for the best risk-adjusted return opportunity for our capital. We will also seek to keep the amount of capital we expect to spend on development in any one year, roughly equal to our annual net cash flow and expected new debt capacity. Finally, let me finish by talking about our dividend. We believe one good way to use our growing cash flow to reward our shareholders. In 2020, we plan to increase our common share dividend by 6.2%.

Thanks Mark. So today I'm going to provide a quick recap of 2019 performance, share insights into our 2020 same-store revenue guidance, discuss what we are seeing today across our markets. And end with updates on our current operating initiative. Let me start by acknowledging the dedication and hard work of our employees in 2019. For the full year, we reported 3.2% same-store revenue growth. Highlights for the year include 96.4% occupancy, which was 20 basis points higher than 2018. Every market except for San Francisco was able to grow occupancy, on a year-over-year basis. Strong achieved renewal rate increases of 4.9% for the year, which was the same as 2018. Turnover declined by nearly 200 basis points to 49.5% for the year, which is the lowest full year reported turnover in the history of our company. Strong absorption of elevated supply in many of our markets delivered slightly more pricing power than we originally expected at the beginning of 2019 and resulted in 0.3% new lease change for the year, which was a 50 basis point improvement from 2018. And finally, in addition to the areas just mentioned, the company continued its trend of record-breaking customer satisfaction and online reputation scores. This strong positive feedback from our customer and the progress being made on innovation, we shared in the release, demonstrates that we have some of the best employees in the industry, who are passionate about meeting the ever-changing needs of our prospects and residents. Looking back, it is clear that the fourth quarter of 2019 reflected a return to seasonal softness, which in some markets was greater than expected. And this was very different than the upward acceleration felt in the fourth quarter of 2018. The good news is that the portfolio demonstrated resilience. And we are starting 2020, well positioned to achieve our revenue expectation. Moving into 2020, our same-store revenue growth guidance range is between 2.3% and 3.3%. At the midpoint of 2.8%, we are 40 basis points lower than our 2019 actual results. This guidance assumes a similar occupancy of 96.4%, an improvement in new lease change of 30 basis points to a positive 0.6% for the year. And anticipated renewal rates achieved of 4.7%, which is 20 basis points less than 2019. Recall that these renewal rates will be impacted by recent rent regulations that we have discussed on prior calls. In 2020 supply will be down considerably in New York, up in Boston and L.A. and mostly comparable in our other market, year-over-year. We expect consistent demand that should aid in the absorption of this new supply. By market, New York, D.C. and Seattle are expected to deliver better revenue growth this year, while Boston, San Francisco and Southern California markets will be worse. So let me take a minute to reconcile the 40 basis point decline at the midpoint and the expected same-store revenue growth for 2020. As stated in our last call, rent control in both the California and New York markets is expected to negatively impact our overall same-store revenue results, by approximately 20 basis points this year. The remaining 20 basis points comes mostly from the incremental impact from competitive supply in our market and a view that it will be difficult in 2020 to replicate the occupancy gains we had in 2019, given the current high occupancy of the portfolio. Attaining the upper end of our guidance range of 3.3% will be mostly dependent on rate, meaning that in order to achieve this outcome we will need to have strong pricing power on new leases early in the year and through the peak leasing season. The bottom end of our revenue guidance range of 2.3% would likely result from declines in occupancy, due to softening in overall demand. Sitting here today the portfolio is 96.3% occupied the same as what it was at this time last year. Achieved renewal increases for January and February are expected to be around 4.2%. So now, let's move on to the individual markets beginning with Boston. So Boston continues to be a power center of the knowledge economy. Overall demand drivers are strong and the long-term outlook for this market remains positive. Our 2019 results of 4.0% revenue growth, includes gains in occupancy of 30 basis points, and strong growth from other income, mainly parking that will be difficult to repeat this year. Boston is expected to deliver more units as we are tracking close to 6,000 new units in 2020 compared to 1,700 in 2019. These new units will be concentrated in the CBD and Seaport and are likely to have more of a direct impact on our portfolio performance. Our expectations for the market is about 3% revenue growth, and assume occupancy remains flat at 96.2%. We anticipate less growth from renewals and new leases given the increased levels of competitive new supply. And we expect the first half of the year performance to be stronger than the second half given the strong embedded growth that we have entering the year. New York had a busy year-end with plenty of press surrounding growing tech expansion in the market and significant office leasing. This activity is fueling continued diversification of the local economy, which we view as a long-term positive. As 2019 progressed, operating fundamentals continued to improve in this market. We finished the fourth quarter with seasonal softness that resulted in a concessionary environment that was greater than we expected. However, during the month of January, operating fundamentals have improved each consecutive week, reducing concession use and improving occupancy. For 2020, we are forecasting better revenue growth, which should be a little north of 2.5%. Our guidance assumes slight improvements in occupancy and renewal rates achieved, but the majority of growth is expected to come from gains in new leases as pricing power returns to the market given the almost complete lack of new supply that Mark mentioned earlier. Overall, demand for our product remained strong with foot traffic or tours in January being up year-over-year. The portfolio is 96.7% occupied today, and we are well positioned to seize improving market conditions. Washington D.C. continued to demonstrate strength in operating performance despite the 12,000 plus deliveries that we have become accustomed to in this market. Last year, at this time, we were discussing the longest government shutdown on record. But today both Congress and the President have signed a spending bill, which includes over $50 billion in new spending. This budget clarity and increased spending is expected to positively impact the region and continue to aid the absorption of 12,000 plus additional units expected in 2020. Northern Virginia continues to be the economic driver for the region, having captured seven out of every 10 jobs created in the last 12 months in the area. Our portfolio results in D.C. validate this as same-store revenue growth in the district, which was near 1% while the Northern Virginia submarkets with approximately 50% of our revenue averaged above 3% growth in the year. Overall, the market delivered 2.3% revenue growth in 2019. Our forecast for 2020 is a little better than 2.5% revenue growth with improved results mostly driven by stronger embedded growth starting the year as operating assumptions for occupancy, new lease change and achieved renewal increases are expected to be relatively flat year-over-year. Moving over to the West Coast. Seattle finished 2019 strong with 3.4% full year revenue growth driven by 70 basis points gain in occupancy and consistent improvement in pricing power and revenue results throughout the year. We did experience concentrated supply pressure on the east side that we expect to continue into the first half of this year. Supply in the CBD, which was not particularly impactful in 2019 will return in 2020 during the back half of the year. This provides an opportunity to establish rate growth early in the year and through the peak leasing season. It's also possible that some of these units get pushed into 2021. If this were to happen, it could strengthen our anticipated results this year. Overall, we expect 2020 to deliver better revenue growth of around 4% and with similar occupancy, slight improvements to achieved renewal rates, and the majority of growth coming from gains in new leases as we capitalize on the current and near-term pricing power in the portfolio. San Francisco delivered 3.7% revenue growth in 2019, which was driven by gains made early in the year offset by declining occupancy in the second half of the year that resulted in a full year occupancy of 95.9%. As we discussed on the last call, we saw a deceleration in this market as the year progressed and that trend continued through the fourth quarter. The East Bay with approximately 40% of our 2019 new supply and approximately 20% of our San Francisco revenue was our lowest performing submarket in both the quarter and full year with revenue growth below 2%. All of our other submarkets produced growth above 3% for both the quarter and full year. New supply in 2020 will be relatively flat year-over-year with the concentration of competitive supply impacting the downtown San Francisco SoMa and South Bay submarkets the most. Overall, we expect 2020 to have lower revenue growth of around 3% as we continue to work through the impact of supply and the impact of new rent regulation. Our guidance begins with around 50 basis points of lower embedded growth than last year; occupancy at 96.4%, which is a 50 basis point improvement over 2019; similar new lease change; and a decline in achieved renewal increase. As we sit here today, leasing velocity in San Francisco is good. Rates are growing, foot traffic is up and occupancy has recovered to 96.4%, which is the same place we were at last year at this time. This market has the critical mass of tech talent. And while we expect some softness when supply is concentrated around us, the long-term drivers for this market remain very strong. Los Angeles finished the year with 3.7% revenue growth, which was driven by strong performance in the first half of the year. As noted on our prior call, deceleration occurred in the second half of the year as deliveries came online and put pricing pressure on a number of our core submarkets. For 2020, we expect Los Angeles to be our most challenged market as we continue to deal with the elevated new supply, implementations of new rent regulation and restrictions on short-term lease pricing put in place as a result of the wildfires. We expect to deliver lower same-store revenue growth in 2020 of around 2.5% with slightly lower occupancy, modest gains in new lease change that are back half-loaded and a decline in achieved renewal rate growth. As we sit here today, we are 96.2% occupied in L.A. And while our foot traffic is on par with last year, we feel pricing pressure. One of the bright spots continues to be West L.A., which is home to the changing dynamics of Los Angeles as Silicon Beach flourishes and online media content takes hold in the entertainment sector, leading to good absorption of the new product in this submarket. Our other Southern California markets, both Orange County and San Diego, are expected to deliver strong but lower same-store revenue growth in 2020, averaging around 3% with similar occupancy, slight gains in new lease change that are back half-loaded given the anticipated pricing pressure early in the year and a decline in overall renewal rate growth based on the impact of new rent regulation. In both Irvine and Downtown San Diego, we expect to feel the impacts from new supply delivered in areas that will be very competitive to our community. With both markets sitting at 97% occupancy, we are well positioned heading into a competitive environment. Moving on to operating initiatives, as you know, we have long been focused on running a best-in-class operating platform, which included development of some of the original pricing, renewal and online leasing tools widely used in the business today. As our industry undergoes another phase of significant change, we continue to identify opportunities to utilize new technology that will shape how we interact with our customers and manage our day-to-day operations going forward. Our focus is to harvest technology that best serves our customers, provides enhanced career opportunities for our employees and creates efficiencies in our platform. We are currently in the process of executing a number of initiatives that fall into three primary areas: smart home technology, sales-focused improvements, and service enhancement. And while there are many opportunities in the industry to roll out new systems, we are taking a methodical approach to implement only the tools and processes that we believe will create the best long-term benefit and value in our portfolio. So let's review some of the initiatives in these three areas. First, smart home technology. We have already installed over 2,100 units, and thus far have had success in generating a rent premium of $30 per month on these units. During 2020, we plan to install smart home technology in an additional 10,000 apartment units at an average cost of approximately $1,000 per unit. We are focusing on properties where we think this technology will yield the greatest immediate result. This technology includes smart locks, a thermostat, a light switch, water leak sensors, and a hub that connects it all. Moving to sales, our focus continues to be on improving the customer experience by leveraging technology, automation and centralization to meet their ever-changing needs. We currently have deployed Ella, our AI-enabled sales tool to over 200 communities and we will be fully deployed by the end of March. We have over 60 communities offering self-guided tours and have been receiving very positive feedback from both our customers and our employees on this new process. During 2020, we will continue to roll out the self-guided tour option for the majority of our communities, and we will be deploying a new mobile customer relationship management platform to improve efficiencies in the sales process and provide flexibility to our sales team. Finally, on the service side of the business, we are now fully deployed on our new mobile service platform, which means our service teams now use a mobile app to manage all of their work in real time. This allows us to use shared resources across assets and improve service personnel utilization by having specialists become focused on being subject matter experts. This will deliver operating expense savings through less dependence on overtime and contractor use as well as improve the customer experience through real-time notification and resolution of maintenance requests. Overall, the impact of these initiatives, are expected to deliver approximately $15 million in annual NOI contribution once fully deployed. It will take until 2021 to fully realize that contribution, but we have included approximately $5 million of net NOI benefit in our 2020 guidance. We believe these early stage initiatives will provide a foundation upon which to continue to build our platform.

Thanks Michael. This morning I'll discuss our 2020 guidance assumptions for same-store expenses and normalized funds from operations along with a couple of brief remarks on our balance sheet and capital markets activities. First, a couple of quick highlights on 2019. Our same-store revenue grew 3.2%, expenses grew 3.7% and NOI grew 3%, which is mostly in line with our expectations from the third quarter call. For normalized FFO, we delivered $0.91 per share in the quarter, which is $0.03 higher than the midpoint of our expectation. This outperformance was primarily driven by higher than anticipated NOI from higher than expected acquisition activity during the quarter, lower than anticipated overhead stemming from lower than expected employee benefit costs that also impacted same-store payroll expenses described on page 16 of the release and better than forecasted interest expense. Michael provided color on 2019 same-store revenues, so let me briefly touch upon 2019 same-store expenses. Full year same-store expenses grew 3.7% in 2019 compared to our forecast of 3.8%. Notably, real estate taxes ended the year higher than anticipated at 4.3% as we had fewer successful deals conclude during the fourth quarter than we had expected. This was offset by lower anticipated payroll expense, which grew only 80 basis points for the full year. This outperformance was due to the significant improvements in employee benefit costs like the ones impacting overhead that I just discussed. Now moving to 2020 guidance. For the full year 2020, we expect same-store expense growth between 3% and 4%. This forecast incorporates the anticipated 2020 savings from the initiatives that Michael outlined earlier. Let me walk you through the major categories and drivers of our forecasted growth. At a little over 40% of overall same-store expenses, property taxes drive a significant portion of expense growth. We currently anticipate growth between 3.75% and 4.75%, driven by the continued burn-off of the 421a tax abatements in some of our New York properties, a slight decline in forecasted year-over-year appeals activity and a relatively healthy increase anticipated in Seattle. For the full year 2019, same-store property taxes declined in Seattle as the state legislature took on more of the educational funding burden from local municipality. We've not incorporated this recurring in 2020 for our guidance. In on-site payroll, our next largest category we anticipate growth between 2.25% and 3.25% for 2020. This expense really consists of two key drivers: direct salaries, bonuses, and commissions for our on-site staff and employee benefit costs like medical insurance. We expect to see a benefit in this first driver from the operating efficiencies that Michael and his team are working on. This will mute total payroll growth for the year. As a result, nearly all of the 2.75% expected growth in payroll is coming from anticipated increases in medical insurance and other employee benefits. Finally, our last two major categories, utilities and repairs and maintenance. Each of these line items individually contributes about 13% to total expense. Each is also expected to grow between 2.5% and 3.5% in 2020. Drivers of utility growth are expected to remain the same in 2020 as they were in 2019. While we continue to benefit from relatively low commodity prices and efficient usage given our sustainability investments, we see price pressure in the service-related categories like trash and sewer particularly on the West Coast, which we expect to continue. On repairs and maintenance, we expect to see another relatively modest growth year. This line item has seen significant pressure from increases in minimum wages across nearly all the states we operate in driving up costs for contract labor. However, improvements in the utilization of our workforce, stemming from service mobility and other initiatives Michael discussed are offsetting this growth. Our guidance range for normalized FFO in 2020 is $3.59 per share to $3.69 per share. Major drivers for the change between our 2019 normalized FFO of $3.49 per share and the midpoint of $3.64 from our 2020 guidance include an $0.11 contribution from same-store NOI and our same-store properties based on the revenue and expense assumptions that Michael and I just outlined; a $0.01 year-over-year contribution from lease-up NOI with our lease-up properties generating $10 million in NOI for 2020; a $0.07 contribution from lower anticipated interest expense predominantly driven by the favorable refinancing activity we undertook in 2019 that I'll discuss in a moment; offset by $0.01 per share related to higher anticipated overhead, which we define as G&A and property management expense; and finally an additional $0.03 offset related to other items net, which mostly consists of other individually immaterial items like interest and other income. A final note on the balance sheet. Our financial position remains the strongest in the company's history and one of the strongest in the REIT industry. 2019 was a busy year on the balance sheet front having issued nearly $1.5 billion in debt including the lowest yielding 10-year unsecured bond in REIT's history; upsized and extended our revolving credit facility with incredible support from our banking partners and with market-leading terms; and finally increased the size of our commercial paper program to $1 billion. We also paid off approximately $1.8 billion in debt during the year including the early redemption of the 2020 maturity described in last night's release. These favorable financing activities are the drivers in year-over-year interest savings I discussed earlier. For 2020, we anticipate issuing between $600 million and $1 billion in debt capital terming out debt that is currently on our commercial paper program or revolving line of credit. These outstandings are mostly the results of our net investment activity in 2019 and our early retirement of 2020 maturity. We have very manageable development spend that we would anticipate being funded from free cash flow.

Good morning. Congratulations on a great 2019. I have a couple of questions regarding 2020. Can you discuss the current concession environment in markets like San Francisco or others where you've mentioned heavier supply in the first half of the year? I'm trying to connect the idea that the first half should perform better than the second half, but I'm unsure if that refers to the overall trend. It seems there are comments indicating that select markets are currently experiencing pressure from heavy supply in the first half.

Yes, good morning, Jeff. This is Michael. First, I want to mention that our portfolio generally operates as a net effective shop. While I described the environment with concessions, we did end up using a bit more than anticipated, totaling about $500,000 to $600,000 for the quarter, primarily in the New York market. In areas like San Francisco, where there's a concentration of new supply, we expect concessions to typically range from four to six weeks. We keep an eye on these concessions as a gauge of market velocity. If we see new supply in San Francisco offering up to eight weeks or longer, it suggests that their velocity is experiencing pressure, which we are responding to in the fourth quarter. Looking at the first half of the year, we have noticed that concessions in some areas of New York and certain parts of San Francisco and the East Bay are beginning to ease. They are still present at turn-around properties but stabilized assets nearby are using fewer concessions. This trend has been consistent over the past month. As demand typically grows throughout the year in a seasonal manner, we anticipate seeing less reliance on concessions moving forward. For the full year, we expect our concession usage to closely mirror that of 2019, likely with more activity in the first half rather than the latter half of the year.

Thanks. How does the $5 million net benefit to same-store NOI in 2020 from the operating initiatives break down between the revenue benefit and the expense savings? And then what's the impact on both same-store growth rates this year?

Joe, I guess, I would tell you it's about probably a 50-50 split when you look at the $5 million between revenue and expense. And on the revenue side it's probably going to equate to roughly 10 basis points of improvement across the various markets that we're doing those operating initiatives in.

Yes, Nick, thanks for that question. We don't have any more in the portfolio a lot of must-sell, if any must-sell assets. And some of the older assets are some of our best assets in places like New York and Boston. So it isn't always age but I did use that in my remarks as an indicator of quality to some extent. I don't think there's a grand reservoir we have of capital. There are a few assets in every market when you have a $40 billion portfolio that have become less competitive and we'll look to sell those, especially when cap rates are this close between value-add and brand new product and we'll look to trade out to the new products. So I don't have an exact percentage but it's a low single-digit sort of number. And then it's for us it's just opportunistic. When we see cap rates like this so close together we're going to take advantage.

Excellent. Thank you.

Thanks. So just going back to the guidance, appreciate all the building blocks you gave on – to explain why there's a modest slowdown in same-store revenue growth. Yes, I think you said, you're assuming better new lease pricing and stable occupancy. So to me that seems like a kind of bullish indicator for the business that would suggest you guys could even push pricing even more. So I guess what I'm wondering is, are you just being conservative in how you're forecasting your pricing this year? Or is there something else that's creating this dynamic that's not allowing you to push pricing even more?

Well, I guess this is Michael. So I guess I would just start by saying I think the 30 basis point expectation in growth and new lease change is demonstrating that we're experiencing or we expect to experience growth. It's really just coming off of the deceleration in the back half of 2019 and the fact that now we're expecting kind of to recover and looking at where the supply is on us we think some of that recovery is going to be more back half-loaded. So I think when you think about our guidance you've got to look at the full range that we have out there and understand that. Sure in markets like New York, if we continue to see pricing power return to us quickly and in front of the leasing season, we'll outperform that expectation. But I don't think it's prudent for us to sit here and think about all of the markets with all of the supply that we have coming at us to think that we're going to outperform those expectations early in the year.

Thank you. Maybe just a quick follow-up to the first question. Michael, did I hear it right that concessions in the Bay Area on lease-ups pushed to eight weeks free in the fourth quarter? I'm curious, if they've gotten any better or worse in January?

Yes. So I mean, I think they've stayed pretty consistent and stable. When I say weeks that's on longer-term leases. So we saw them kind of move around with the four to six on just conventional terms. And then they started offering some longer terms. And kind of we're just monitoring that. I mean, primarily now you got Oakland where you've got more assets coming online. So it's a great kind of pocket of assets for us to watch the concessionary environment and it's been fairly stable. They have not been volatile in what they've been doing but they clearly started going long and offering a little bit higher concession rates for those longer-term leases and that's what we've been watching.

John before I let Michael launch into giving you that detail which is very important I think the overall comment about New York and what we've all read about just increased demand that's coming all of these tech relocations into New York, particularly in the west side of New York, where we have a lot of assets is very encouraging to us. Now when they announce something it doesn't happen right that moment that they hire. But we see that. And in fact, our research is indicating research, we've seen is indicating there's actually more tech jobs in the New York metro area than there is in the Bay Area now. So, we're excited to be involved in that. And again, you're right we have to adjust to these rules. But the overall demand drivers in New York in the next few years feel really good to us.

Yes. Right now, we have not noticed any material change when comparing the rent-stabilized properties to the market rate units or buildings. We are not seeing any difference in turnover, and from an operational standpoint, there has not yet been anything that requires us to manage those buildings differently.

Thanks. I guess two questions. When you sort of think about New York, how does sort of the Jersey kind of Gold Coast play into sort of your outlook in terms of the rent growth that you've got in that part of the region versus maybe the city?

Yes. So, I mean for '19, it was pretty comparable, right, when you just think about the various submarkets between Manhattan, Brooklyn as well as the Hudson Waterfront. And I think going forward, we would expect kind of hopefully start to see pricing power return to Manhattan and see some market rate growth that could accelerate that beyond what we're going to see kind of from the Hudson Waterfront. But right now, they're pretty packed like really close together from a result standpoint and our expectations. But I think, you will see Manhattan start to differentiate itself over time.

You can see on Page 30 of the release there are two items that are forecasted. One is $0.01 related to the write-off of pursuit costs, and the other is another $0.01 for other miscellaneous items, including advocacy costs from previous periods. These are the two main drivers.

Thank you. I have a broad question. It appears that at the midpoint, nearly half of your FFO growth is attributed to interest savings of $0.07 a share, equating to a $27 million reduction in interest costs. Should we be concerned about this? Also, the end result indicates you are experiencing about 2.3% FFO growth from other sources, while your midpoint for same-store NOI growth is 2.5%, which seems a bit unusual. This 2.5% same-store NOI growth results in a 2.3% FFO growth when excluding interest cost savings. What are your thoughts on this?

Yes, John, I'll begin. The events of 2019 significantly affect our 2020 numbers. Last year, we made acquisitions early and sold late. This year, we have several assets planned for sale that will take place relatively early. While we are net buyers and this will drive FFO growth in the coming years, this year you are correct that some math indicates a larger impact. The fundamental growth in NOI should be around 2.5%. Your expected numbers for NFFO should be higher, but some dilution from transactions is present, which we've highlighted in the release. This transaction-related headwind will offset some benefits. Regarding interest, we are consistently able to borrow at lower rates, which is very real. I'm uncertain why that raises concerns. The company's balance sheet is robust, and our fixed-to-floating rate ratio is reasonable. We have excellent access to all types of capital, so to me, $0.07 is a solid amount, and we have successfully executed this before.

The majority of that $0.07, just so you know, is not altering the overall credit metrics. We expect the credit metrics at the end of 2020 to be quite similar to those in 2019 in all respects, remaining very healthy and strong. A significant portion of that gain is already secured by having paid off debt associated with five nano coupons, replaced by new long-term debt in the 2.5% to 3% range.

Thank you all for your time today and your interest in Equity Residential. Have a good day.